UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

 

AMENDMENT NO. 1

 

x                              Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the quarterly period ended September 30, 2006.

or

o                                 Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                           to                          .

Commission File Number: 000-51444

 

Stone Arcade Acquisition Corporation

(Exact name of registrant as specified in its charter)

 

 

c/o Stone-Kaplan Investments, LLC, One Northfield Plaza, Suite 480

Northfield, IL 60093

(Address of Principal Executive Offices including zip code)

 

(847) 441-0929

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes x No o

There were 25,000,000 shares of the Registrant’s Common Stock issued and outstanding on November 10, 2006.

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-Q/A (“Form 10-Q/A”) to the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2006, initially filed with the Securities and Exchange Commission on November 13, 2006 (the “Original Filing”), reflects changes to the notes to the financial statements relating to the exercise provisions of the Company’s warrants. This Form 10-Q/A amends and restates (i) Item 1. Financial Statements.  In addition, the Original Filing has been amended to contain currently dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act (See Exhibits 31 and 32).

Except to the extent modified or updated, the foregoing items have not been amended to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. Other events occurring after the filing of the Original Filing or other disclosures necessary to reflect subsequent events have been addressed in the Company’s reports filed with the Securities and Exchange Commission subsequent to the filing of the Original Filing.

Stone Arcade Acquisition Corporation Index to Form 10-Q

TABLE OF CONTENTS

 

i

Stone Arcade Acquisition Corporation
(a development stage company)
Condensed Consolidated Balance Sheets

		September 30,			December 31,
		2006			2005
		(unaudited)
Assets
Current assets:
Cash		$	773,016		$	2,157,611
Restricted cash and equivalents, held in trust		114,574,151			111,965,034
Prepaid expenses		33,626			128,875
Total current assets		115,380,793			114,251,520
Deferred acquisition cost		1,829,382			—
Deferred income taxes		335,260			54,094
Total assets		$	117,545,435		$	114,305,614
Liabilities and Stockholders’ Equity
Current liabilities:
Accrued expenses		$	1,381,177		$	136,338
Deferred income taxes		82,357			90,521
Total current liabilities		1,463,534			226,859
Common stock, subject to possible redemption-3,998,000 shares		22,159,715			22,159,715
Interest income attributable to common stock subject to possible redemption (net of taxes of $266,050 and $97,061 at September 30, 2006 and December 31, 2005, respectively)		699,266			189,462
		22,858,981			22,349,177
Commitments and contingencies (Note E)
Stockholders’ equity:
Preferred stock $.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding		—			—
Common stock $.0001 par value, 175,000,000 shares authorized; 25,000,000 shares issued and outstanding (including 3,998,000 shares subject to possible redemption)		2,500			2,500
Additional paid-in capital		91,098,761			91,098,761
Income accumulated during the development stage		2,121,659			628,317
Total stockholders’ equity		93,222,920			91,729,578
Total liabilities and stockholders’ equity		$	117,545,435		$	114,305,614

 

See notes to condensed unaudited financial statements.

2

Stone Arcade Acquisition Corporation

(a development stage company)

Condensed Consolidated Statements of Operations

(unaudited)

								Nine Months			(April 15,  2005)			Accumulated Inception
								Ended			Through			Through
		Ended September 30,						September 30,			September 30,			September 30,
		2006			2005			2006			2005			2006
Cost and expenses:
Operating expenses		$	373,519		$	37,799		$	891,687		$	38,799		$	1,112,287
Other income:
Bank interest		10,130			7,839			58,493			7,839			82,633
Interest on restricted cash and cash equivalents, held in trust		1,385,661			422,341			3,864,094			422,341			5,300,112
Total other income		1,395,791			430,180			3,922,587			430,180			5,382,745
Income before provision for income taxes:		1,022,272			392,381			3,030,900			391,381			4,269,958
Provision (benefit) for income taxes:
Current		423,545			71,725			1,297,017			71,725			1,681,869
Deferred		(72,673		)	61,345			(269,263		)	61,345			(232,836		)
Total provision for income taxes		350,872			133,070			1,027,754			133,070			1,449,033
Net income		671,400			259,311			2,003,146			258,311			2,820,925
Deferred interest, net of taxes, attributable to common stock subject to possible redemption		(182,815		)	(55,721		)	(509,804		)	(55,721		)	(699,266		)
Net income allocable to holders of nonredeemable common stock		$	488,585		$	203,590		$	1,493,342		$	202,590		$	2,121,659
Weighted-average number of shares outstanding:
Basic		25,000,000			14,130,435			25,000,000			10,000,000			20,272,045
Diluted		29,539,007			15,131,503			28,963,964			10,548,204			23,348,428
Net income per share:
Basic		$	0.03		$	0.02		$	0.08		$	0.03		$	0.14
Diluted		$	0.02		$	0.02		$	0.07		$	0.02		$	0.12
Weighted-average number of shares outstanding exclusive of shares subject to possible redemption:
Basic		21,002,000			12,305,261			21,002,000			9,000,500			17,219,163
Diluted		25,541,007			13,306,329			24,965,964			9,548,704			20,295,546
Net income per share exclusive shares and related deferred interest subject to possible redemption:
Basic		$	0.02		$	0.02		$	0.07		$	0.02		$	0.12
Diluted		$	0.02		$	0.02		$	0.06		$	0.02		$	0.10

 

See notes to condensed unaudited financial statements.

3

Stone Arcade Acquisition Corporation

(a development stage company)

Condensed Consolidated Statements of Cash Flows

(unaudited)

 

					Inception			Accumulated
		Nine Months			(April 15, 2005)			(Inception)
		Ended			Through			Through
		September 30, 2006			September 30, 2005			September 30, 2006
Operating activities
Net income		$	2,003,146		$	258,311		$	2,820,925
Deferred income taxes		(281,166		)	—			(335,260		)
Changes in
Interest receivable on restricted cash and cash equivalents, held in trust		24,013						(242,226		)
Prepaid expenses		95,249			(180,425		)	(33,626		)
Accrued expenses		1,192,756			61,154			1,269,241
Accrued income taxes		43,920			133,070			194,293
Net cash provided by operating activities		3,077,918			272,110			3,673,347
Investing activities
Acquisition cost paid		(1,829,382		)	—			(1,829,382		)
Purchase of U.S. government securities held in trust		(1,135,849,131		)	(111,276,341		)	(1,582,658,925		)
Maturities of U.S. government securities held in trust		1,133,216,000			—			1,468,327,000
Net cash used in investing activities		(4,462,513		)	(111,276,341		)	(116,161,307		)
Financing activities
Proceeds from public offering, net of expenses		—			113,243,061			113,235,876
Proceeds from sale of common stock to founding stockholders		—			25,000			25,000
Proceeds from notes payable to stockholders		—			200,000			200,000
Repayment of notes payable to stockholders		—			(200,000		)	(200,000		)
Proceeds from issuance of underwriters’ option		—			100			100
Net cash provided by financing activities		—			113,268,161			113,260,976
Net (decrease) increase in cash		(1,384,595		)	2,263,930			773,016
Cash-beginning of period		2,157,611			—			—
Cash-end of period		$	773,016		$	2,263,930		$	773,016

 

See notes to condensed unaudited financial statements.

4

STONE ARCADE ACQUISITION CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

Note A.    Organization and Business Operations

Stone Arcade Acquisition Corporation (the “Company”) was incorporated in Delaware on April 15, 2005. On May 25, 2006, the Company formed a wholly-owned subsidiary, KapStone Kraft Paper Corporation, or KapStone Kraft. The Company was formed to serve as a vehicle for the acquisition through a merger, capital stock exchange, asset acquisition, or other similar business combination (“Business Combination”) of an operating business in the paper, packaging, forest products and related industries. The Company has neither engaged in any operations nor generated operating revenue. The Company is considered to be in the development stage and is subject to the risks associated with activities of development stage companies. The Company has selected December 31 as its fiscal year end.

The registration statement for the Company’s initial public offering (the “Offering”) was declared effective on August 15, 2005. The Company consummated the Offering on August 19, 2005 and received net proceeds of approximately $113,236,000 of which approximately $110,854,000 was placed into a trust account (“Trust Account”). The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Offering (as described in Note C), although substantially all of the net proceeds of the Offering are intended to be generally applied toward a Business Combination. Furthermore, there is no assurance that the Company will be able to successfully effect a Business Combination. As of September 30, 2006, of the net proceeds, $114,574,151, including interest earned of $5,300,112, net of taxes, is being held in the Trust Account and invested in U.S. Government securities until the earlier of (i) the consummation of the first Business Combination or (ii) the distribution of the Trust Account as described below.  Although tax payments are made from the Trust Account as required on the interest income earned by the Trust Account, the interest income is subject to additional taxes incurred, but not yet paid as of September 30, 2006.

The remaining proceeds may be used to pay for business, legal and accounting due diligence on prospective business combinations and continuing general and administrative expenses. The Company, after signing a definitive agreement for a Business Combination on June 30, 2006, will submit such transaction for stockholder approval. In the event that holders of 20 percent or more of the shares issued in the Offering (the “IPO Shares”) vote against the Business Combination and seek to have their shares redeemed, the Business Combination will not be consummated. If a majority of stockholders vote in favor of the Business Combination and holders of less than 20 percent of the shares issued in the offering vote against the Business Combination and elect to have their shares redeemed, the Business Combination will be consummated.  Stockholders voting against the Business Combination will have their stock redeemed for approximately $5.54 per share, plus interest allocable to such shares, net of income taxes. The maximum number of shares subject to possible redemption is approximately 3,998,000. At September 30, 2006, the Company has classified $22,858,981 of the net proceeds from the Offering, inclusive of interest but net of taxes, as common stock subject to possible redemption in the accompanying balance sheet.

In the event that the Company does not consummate a Business Combination within 18 months from the effective date of the Offering, or 24 months from the effective date of the Offering if certain extension criteria have been satisfied (the “Acquisition Period”), the proceeds held in the Trust Account will be distributed to the Company’s public stockholders (i.e. excluding the persons who were stockholders prior to the Offering (the “Founding Stockholders”) to the extent of their initial stock holdings.) However, the Founding Stockholders will participate in any liquidation distribution with respect to any shares of common stock they acquired in connection with or following the Offering. In the event of such distribution, it is likely that the per share value of the residual assets remaining available for distribution (including Trust Account assets) will be less than the initial public offering price per share in the Offering (assuming no value is attributed to the Warrants contained in the Units in the Offering discussed in Note C).

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Note B.    Basis of Presentation, Principles of Consolidation, Use of Estimates and Reclassifications

The accompanying condensed unaudited interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (the”SEC”).  Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. The results of operations for the nine month period ended September 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006.

The condensed balance sheet at December 31, 2005 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by US GAAP for complete financial statements.

For further information, refer to the financial statements and footnotes thereto included in Stone Arcade Acquisition Corporation’s Annual Report on Form 10-K for the period from April 15, 2005 (date of inception) to December 31, 2005.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.

Note C.    Initial Public Offering

On August 19, 2005, the Company sold 20,000,000 units (“Units”) for a gross price of $6.00 per Unit. Each Unit consists of one share of the Company’s common stock, $.0001 par value, and two warrants (“Warrants”). Each Warrant entitles the holder to purchase from the Company one share of common stock at an exercise price of $5.00. Each warrant is exercisable on the later of (a) the completion of a Business Combination or (b) August 15, 2006, and expires on August 15, 2009. The Warrants are redeemable at a price of $.01 per Warrant upon 30 days notice after the Warrants become exercisable, only in the event that the last sale price of the common stock is at least $8.50 per share for any 20 trading days within a 30 trading day period ending on the third day prior to the date on which notice of redemption is given.

In connection with the Offering, the Company paid the underwriters an underwriting discount of five percent of the gross proceeds of the Offering. The Company also issued for $100 an option to the representative of the underwriters to purchase up to a total of 1,000,000 units at a price of $7.50 per unit. The units issuable upon the exercise of this option are identical to those offered in the prospectus, except that the exercise price of the warrants included in the underwriters’ purchase option is $6.25. This option is exercisable commencing on the later of the consummation of a Business Combination or one year from the date of the Offering, expires five years from the date of the Offering, and may be exercised on a cashless basis. The option may not be sold, transferred, assigned, pledged or hypothecated until August 16, 2006. However, the option may be transferred to any underwriter or selected dealer participating in the Offering and their bona fide officers or partners.

The underwriters’ purchase option and the Warrants (including the warrants underlying the underwriters’ option) will be exercisable only if at the time of exercise a current registration statement covering the underlying securities is effective or, in the opinion of counsel, not required, and if the securities are qualified for sale or exempt from qualification under the applicable state securities laws of the exercising holder.  The Company is obligated to use its best efforts to maintain an effective registration statement during the term of the option and the Warrants; however, it may be unable to do so.  Holders of the option and the Warrants are not entitled to receive a net cash settlement or other settlement in lieu of physical settlement if the common stock underlying the Warrants, or securities underlying the option, as applicable, are not covered by an effective registration statement.  Accordingly, the Warrants, which do not have a cashless exercise provision, may expire unexercised and worthless if a current registration statement covering the common stock is not effective.

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The holders of the option have demand and piggy-back registration rights under the Securities Act for periods of five and seven years, respectively, from the date of the prospectus with respect to registration of the securities directly and indirectly issuable upon exercise of the option. The exercise price and number of units issuable upon exercise of the option may be adjusted in certain circumstances, including issuances of a stock dividend, recapitalization, reorganization, merger or consolidation. However, the option will not be adjusted for issuances at a price below its exercise price.

The Company has estimated, based upon a Black Scholes model, that the fair value of the purchase option on the date of sale was approximately $980,000. The Company accounted for this purchase option, inclusive of the receipt of the $100 cash payment, as an expense of the Offering resulting in a charge directly to stockholders’ equity. Accordingly there was no impact in the Company’s financial position or results of operations except for the recording of the $100 proceeds from the sale.

In accordance with a commitment entered into in connection with the Offering, the Founding Stockholders have purchased 3,500,000 warrants in the public marketplace. They have further agreed that such warrants will not be sold or transferred until the completion of a Business Combination.

Note D.    Related-Party Transactions

The Company has agreed to pay Stone-Kaplan Investments, LLC, a company where certain of the Founding Stockholders serve in executive capacities, an administrative fee of $7,500 per month for office space and general and administrative services from August 15, 2005 through the date of a Business Combination. Stone-Kaplan Investments LLC has agreed to pay a portion of the aforementioned administration fee to Arcade Partners LLC, a company where certain of the Founding Stockholders serve in executive capacities. From time to time the Company retains the services of White Oak Aviation, an aviation services company solely owned by certain Founding Stockholders. For the three and nine months ended September 30, 2006, the amount paid to this entity was $34,787 and $61,537, respectively.

The Founding Stockholders have agreed with the Company and the underwriters that if the Company liquidates prior to the consummation of a Business Combination, the Founding Stockholders will be personally liable to pay debts and obligations to vendors that are owed money by the Company for services rendered or products sold to the Company to the extent such debts were not paid from the net proceeds not held in the Trust Account at that time.

Note E.    Commitments and Contingencies

The Company has engaged the representative of the underwriters to act as its investment banker in connection with a Business Combination. The Company has agreed to pay the representative a cash fee of $1,200,000 at the closing of the Business Combination for assisting the Company in structuring and negotiating the terms of the transaction.

Note F.    Common Stock Reserved for Issuance

At September 30, 2006, 43,000,000 shares of common stock were reserved for issuance upon exercise of warrants and the underwriter’s option.

Note G.    Purchase Agreement for Proposed Business Combination

On June 23, 2006, Stone, KapStone Kraft, and International Paper Company, or IP, entered into a Purchase Agreement. The Purchase Agreement provides for the acquisition of substantially all of the assets and the assumption of certain liabilities of the Kraft Papers Business, or KPB, a division of IP, consisting of an unbleached kraft paper manufacturing facility in Roanoke Rapids, North Carolina and Ride Rite® Converting, an inflatable dunnage bag manufacturer located in Fordyce, Arkansas, for a cash purchase

7

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price of $155 million plus two contingent earn-out payments of up to $35 million and $25 million, based on KPB’s annual earnings before interest, income taxes, depreciation and amortization, or EBITDA, during the five years immediately following the acquisition. The purchase price payable on the closing date will be adjusted dollar-for-dollar to the extent IP’s working capital as of such date is greater or less than $42,637,709.

KPB generated approximately $189.2 million in sales and $25.1 million in operating income for the nine months ended September 30, 2006 and approximately $222.0 million in sales and $9.5 million in operating income for the year ended December 31, 2005.

The Company intends to use its proceeds of its initial public offering, which includes $114,574,151, including interest earned, currently held in the Trust Account, together with borrowings from a $95,000,000 senior secured credit facility to be obtained in connection with the acquisition to acquire the KPB assets, to pay transaction expenses, and to pay holders of the IPO Shares who exercise their redemption rights.

The proposed acquisition is subject to, among other things, the approval of the transaction by the Company’s stockholders. There can be no assurance that the transaction will be consummated.

8

PART II. — OTHER INFORMATION

Item 6. —    EXHIBITS

(b)     Exhibits

4.7		Amended and Restated Unit Purchase Option Clarification Agreement, by and between Stone Arcade Acquisition Corporation  and Morgan Joseph & Co. Inc.
31		Rule 13a-14(a) Certification of Principal Executive Officer and Principal Financial Officer.
32		18 U.S.C Section 1350 Certification.

 

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	STONE ARCADE ACQUISITION CORPORATION
December 12, 2006	By:	/s/ Roger Stone
		Roger Stone
		Chairman of the Board and Chief Executive Officer

 

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