**UNITED STATES SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

** **

**FORM 10-Q**

** **

**x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**for the quarterly period ended September 30, 2007**

** **

**OR**

** **

**o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**for the transition periodfrom           to           **

** **

**COMMISSION FILE NUMBER:  333-135091-12**

** **

**PalaceEntertainment Holdings, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **DELAWARE**                                                   | ** ** | **20-4503577**                                             |
|----------------------------------------------------------------|------------|------------------------------------------------------------|
| (State  of incorporation)                                      |       | (I.R.S.  Employer Identification No.)                      |
|                                                           |       |                                                       |
| **4590 MacArthur Boulevard, Suite 400**                        | ** ** | ** **                                                 |
| **Newport Beach, California 92660**                            | ** ** | **(949) 797-9700**                                    |
| (Address  of Principal Executive Offices, including Zip  Code) |       | (Registrant’s  Telephone Number, Including Area Code) |

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

 
| Large accelerated  filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |
|---------------------------------|--------|---------------------------|--------|-------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

 
|  |   | o Yes  x No |
|--|--------|---------------------------------|

 

There were 100shares of common stock with a par value of $0.01 per share outstanding as ofSeptember 30, 2007.

 

 

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**TABLE OFCONTENTS**

 
| Safe  Harbor Statement under the Private Securities Litigation Reform Act of 1995                                 |   |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                              |   |   |
| PART I.  CONDENSED CONSOLIDATED FINANCIAL INFORMATION                                                             |   |   |
| Item 1. Financial Statements (unaudited)                                                                          |   |   |
| Condensed Consolidated Balance Sheets as of September  30, 2007 and December 31, 2006                             |   |   |
| Condensed  Consolidated Statements of Operations for the three and nine months ended  September 30, 2007 and 2006 |   |   |
| Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2007 and 2006            |   |   |
| Notes to  Condensed Consolidated Financial Statements                                                             |   |   |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations              |   |   |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                               |   |   |
| Item 4. Controls and  Procedures                                                                                  |   |   |
|                                                                                                              |   |   |
| PART II. OTHER  INFORMATION                                                                                       |   |   |
| Item 1. Legal Proceedings                                                                                         |   |   |
| Item  1A. Risk Factors                                                                                            |   |   |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                              |   |   |
| Item 3.  Defaults Upon Senior Securities                                                                          |   |   |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                      |   |   |
| Item 5. Other Information                                                                                         |   |   |
| Item  6. Exhibits                                                                                                 |   |   |

 

 

2

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**CAUTIONARY NOTE REGARDINGFORWARD-LOOKING STATEMENTS AND RISK FACTORS**

 

**(Safe-Harbor Statement Under thePrivate Securities Litigation Reform Act of 1995)**

 

This quarterly report onForm 10-Q contains forward-looking statements. Forward-looking statements arestatements that are not historical facts, including statements about ourbeliefs and expectations or any statement that may predict, forecast, indicateor imply future results, performance, achievements or events. Forward-lookingstatements include, but are not limited to, statements generally preceded by,followed by or that include the words “believe,” “expect,” “anticipate,” “plan,”“estimate,” “intend,” “project,” “targets,” “likely,” “would,” “could” orsimilar expressions. These statements include, among others, statementsregarding our expected business outlook, anticipated financial and operatingresults, strategies, contingencies, financing plans, working capital needs,sources of liquidity, capital expenditures, amounts and timing of expendituresand contemplated transactions.

 

Forward-lookingstatements reflect our current expectations and are not guarantees ofperformance. These statements are based on our management’s beliefs andassumptions, which in turn are based on currently available information.Important assumptions relating to these forward-looking statements include,among others, assumptions regarding demand for our water parks and familyentertainment centers, expected pricing levels, the timing and cost of plannedcapital expenditures, the estimated operational costs for each of our water parksand family entertainment centers, expected outcomes of pending litigation,competitive conditions and general economic conditions. These assumptions couldprove inaccurate. Forward-looking statements involve risks and uncertainties,which could cause actual results to differ materially from those contained inany forward-looking statement. Many of these factors are beyond our ability tocontrol or predict. Such factors may relate to, among other things:

 

•                  adverse weather conditions and other natural phenomena;

 

•                  seasonal operations of water parks;

 

•                  risk of in-park accidents and health risks;

 

•                  changes in consumer preferences;

 

•                  reductions in consumer disposable income;

 

•                  our ability to compete successfully with otheramusement parks and other entertainment providers;

 

•                  governmental and environmental requirements andchanges in those requirements;

 

•                  increases in general liability and workerscompensation claims;

 

•                  discontinuation of our leases pursuant totermination or default provisions;

 

•                  acquisition and retention of key personnel;

 

•                  our level of indebtedness; and

 

•                  restrictions contained in our debt agreements.

 

You should not placeundue reliance on any forward-looking statements. Further, forward-lookingstatements speak only as of the date they are made, and we undertake noobligation to update them in light of new information or future events. Theseforward-looking statements reflect our current views with respect to futureevents and are based on assumptions and subject to risks and uncertainties thatmay cause actual results to differ materially from trends, plans orexpectations set forth in the forward-looking statements which, as a result,may adversely affect the value of, and our ability to make payments on, our 107/8% Senior Notes due 2014. These risks and uncertainties may include thosediscussed in Part I, Item 2 and Part II, Item 1A of this report. New risks canemerge from time to time. It is not possible for us to assess all of theserisks, nor can we assess the extent to which any factor, or combination offactors, may cause actual results to differ from those contained in theforward-looking statements. Given such risks and uncertainties, we urge you toread this report completely with the understanding that actual future resultsmay be materially different from what we plan or expect. The Company will notupdate any forward-looking information to reflect actual results or changes inthe factors affecting the forward-looking information.

 

3

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**PALACEENTERTAINMENT HOLDINGS, INC.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**AS OFSEPTEMBER 30, 2007 AND DECEMBER 31, 2006**

**(unaudited/ in thousands except for share and per share amounts)**

 
| ** **                                                                                  | ** ** | **September 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                  |       |                             |       |                            |       |
|                                                                                        |       |                             |       |                            |       |
| CURRENT ASSETS                                                                              |       |                             |       |                            |       |
| Cash and cash  equivalents                                                                  |       | $                                | 16,648     |                            | $          | 2,090 |   |
| Inventories                                                                                 |       | 2,672                            |       | 2,124                           |       |
| Prepaid expenses  and other current assets                                                  |       | 8,248                            |       | 5,316                           |       |
| Deferred income  taxes                                                                      |       | —                           |       | 1,171                           |       |
|                                                                                        |       |                             |       |                            |       |
| Total current  assets                                                                       |       | 27,568                           |       | 10,701                          |       |
|                                                                                        |       |                             |       |                            |       |
| Property and  equipment - net                                                               |       | 114,092                          |       | 114,150                         |       |
|                                                                                        |       |                             |       |                            |       |
| Goodwill                                                                                    |       | 86,504                           |       | 86,504                          |       |
|                                                                                        |       |                             |       |                            |       |
| Other intangible  assets - net                                                              |       | 18,359                           |       | 19,032                          |       |
|                                                                                        |       |                             |       |                            |       |
| Other assets -  net                                                                         |       | 6,424                            |       | 7,307                           |       |
|                                                                                        |       |                             |       |                            |       |
| TOTAL                                                                                       |       | $                                | 252,947    |                            | $          | 237,694 |   |
|                                                                                        |       |                             |       |                            |       |
| **LIABILITIES  AND SHAREHOLDER’S EQUITY**                                              |       |                             |       |                            |       |
|                                                                                        |       |                             |       |                            |       |
| CURRENT  LIABILITIES                                                                        |       |                             |       |                            |       |
| Accounts payable                                                                            |       | $                                | 3,256      |                            | $          | 1,791 |   |
| Accrued interest                                                                            |       | 7,596                            |       | 3,518                           |       |
| Accrued wages  and payroll taxes                                                            |       | 3,267                            |       | 2,513                           |       |
| Other accrued  liabilities                                                                  |       | 11,688                           |       | 10,170                          |       |
| Unearned revenue                                                                            |       | 2,673                            |       | 1,323                           |       |
| Current portion  of long-term debt                                                          |       | 37                               |       | 848                             |       |
|                                                                                        |       |                             |       |                            |       |
| Total current  liabilities                                                                  |       | 28,517                           |       | 20,163                          |       |
|                                                                                        |       |                             |       |                            |       |
| Long term debt -  less current portion                                                      |       | 150,073                          |       | 150,008                         |       |
| Deferred income  taxes                                                                      |       | 7,900                            |       | 2,032                           |       |
| Other long term  liabilities                                                                |       | 7,297                            |       | 7,296                           |       |
|                                                                                        |       |                             |       |                            |       |
| Total  liabilities                                                                          |       | 193,787                          |       | 179,499                         |       |
|                                                                                        |       |                             |       |                            |       |
| COMMITMENTS AND  CONTINGENCIES (NOTE 11)                                                    |       |                             |       |                            |       |
|                                                                                        |       |                             |       |                            |       |
| SHAREHOLDER’S  EQUITY                                                                  |       |                             |       |                            |       |
| Common Stock,  $.01 stated value, 1000 shares authorized, 100 shares issued and outstanding |       |                             |       |                            |       |
| Additional  paid-in capital                                                                 |       | 55,038                           |       | 54,633                          |       |
| Accumulated  earnings                                                                       |       | 4,122                            |       | 3,562                           |       |
|                                                                                        |       |                             |       |                            |       |
| Total  shareholder’s equity                                                            |       | 59,160                           |       | 58,195                          |       |
|                                                                                        |       |                             |       |                            |       |
| TOTAL                                                                                       |       | $                                | 252,947    |                            | $          | 237,694 |   |

 

*SeeNotes to Condensed Consolidated Financial Statements*

 

4

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**PALACEENTERTAINMENT HOLDINGS, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THETHREE MONTH PERIOD ENDED SEPTEMBER 30, 2007 AND 2006**

**(unaudited/ in thousands)**

 
| ** **                                                                | ** ** | **Successor**                    | ** ** | **Successor**                    | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                | ** ** | **For the three**      | ** ** | **For the three**      | ** ** |
| ** **                                                                | ** ** | **month period ended** | ** ** | **month period ended** | ** ** |
| ** **                                                                | ** ** | **September 30, 2007** | ** ** | **September 30, 2006** | ** ** |
|                                                                      |       |                             |       |                             |       |
| REVENUES - net                                                            |       | $                                | 89,158     |                             | $          | 82,220 |   |
|                                                                      |       |                             |       |                             |       |
| OPERATING COSTS  AND EXPENSES                                             |       |                             |       |                             |       |
| Cost of revenue  (exclusive of depreciation and amortization shown below) |       | 42,761                           |       | 40,865                           |       |
| Selling, general  and administrative                                      |       | 8,791                            |       | 7,558                            |       |
| Depreciation and  amortization                                            |       | 4,283                            |       | 4,728                            |       |
| Loss on disposal  of assets                                               |       | 221                              |       | —                           |       |
|                                                                      |       |                             |       |                             |       |
| Total operating  costs and expenses                                       |       | 56,056                           |       | 53,151                           |       |
|                                                                      |       |                             |       |                             |       |
| OPERATING INCOME                                                          |       | 33,102                           |       | 29,069                           |       |
|                                                                      |       |                             |       |                             |       |
| OTHER EXPENSE                                                             |       |                             |       |                             |       |
| Interest expense  - net                                                   |       | 4,230                            |       | 4,216                            |       |
| Total other  expense - net                                                |       | 4,230                            |       | 4,216                            |       |
|                                                                      |       |                             |       |                             |       |
| INCOME BEFORE  INCOME TAXES                                               |       | 28,872                           |       | 24,853                           |       |
|                                                                      |       |                             |       |                             |       |
| INCOME TAX  PROVISION                                                     |       | 11,452                           |       | 9,520                            |       |
|                                                                      |       |                             |       |                             |       |
| NET INCOME                                                                |       | $                                | 17,420     |                             | $          | 15,333 |   |

 

*See Notes to Condensed Consolidated Financial Statements*

 

5

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**PALACEENTERTAINMENT HOLDINGS, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THENINE MONTH PERIOD ENDED SEPTEMBER 30, 2007 AND 2006**

**(unaudited/ in thousands)**

 
| ** **                                                                | ** ** | **Successor**                    | ** ** | **Successor**                | ** ** | **Predecessor**              | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                | ** ** | **For the nine**       | ** ** | **For the period** | ** ** | **For the period** | ** ** |
| ** **                                                                | ** ** | **month period ended** | ** ** | **April 13 to**    | ** ** | **January 1 to**   | ** ** |
| ** **                                                                | ** ** | **September 30, 2007** | ** ** | **September 30,2006**   | ** ** | **April 12, 2006** | ** ** |
|                                                                      |       |                             |       |                         |       |                         |       |
| REVENUES - net                                                            |       | $                                | 155,695    |                         | $          | 121,682                      |       | $ | 23,397 |   |
|                                                                      |       |                             |       |                         |       |                         |       |
| OPERATING COSTS  AND EXPENSES                                             |       |                             |       |                         |       |                         |       |
| Cost of revenue  (exclusive of depreciation and amortization shown below) |       | 100,154                          |       | 70,072                       |       | 26,190                       |       |
| Selling, general  and administrative                                      |       | 20,958                           |       | 13,030                       |       | 4,208                        |       |
| Depreciation and  amortization                                            |       | 13,512                           |       | 9,028                        |       | 4,478                        |       |
| Loss on disposal  of assets                                               |       | 186                              |       | —                       |       | —                       |       |
|                                                                      |       |                             |       |                         |       |                         |       |
| Total operating  costs and expenses                                       |       | 134,810                          |       | 92,130                       |       | 34,876                       |       |
|                                                                      |       |                             |       |                         |       |                         |       |
| OPERATING INCOME  (LOSS)                                                  |       | 20,885                           |       | 29,552                       |       | (11,479                      | )          |
|                                                                      |       |                             |       |                         |       |                         |       |
| OTHER EXPENSE                                                             |       |                             |       |                         |       |                         |       |
| Interest expense  - net                                                   |       | 13,392                           |       | 8,370                        |       | 6,674                        |       |
| Total other  expense - net                                                |       | 13,392                           |       | 8,370                        |       | 6,674                        |       |
|                                                                      |       |                             |       |                         |       |                         |       |
| INCOME (LOSS)  BEFORE INCOME TAXES                                        |       | 7,493                            |       | 21,182                       |       | (18,153                      | )          |
|                                                                      |       |                             |       |                         |       |                         |       |
| INCOME TAX  PROVISION                                                     |       | 6,933                            |       | 9,564                        |       | —                       |       |
|                                                                      |       |                             |       |                         |       |                         |       |
| NET INCOME  (LOSS)                                                        |       | $                                | 560        |                         | $          | 11,618                       |       | $ | (18,153 | ) |

 

*See Notes to Condensed Consolidated Financial Statements*

 

6

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**PALACE ENTERTAINMENT HOLDINGS, INC.**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2007 AND 2006**

**(unaudited / in thousands)**

 
| ** **                                                                                           | ** ** | **Successor**                                                                          | ** ** | **Successor**                                                                     | ** ** | **Predecessor**                                                          | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **For the nine  month period ended  September 30, 2007** | ** ** | **For the period  April 13 to September  30, 2006** | ** ** | **For the period  January 1 to  April 12,2006** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                               |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| Net income  (loss)                                                                                   |       | $                                                                                      | 560        |                                                                              | $          | 11,618                                                                   |       | $ | (18,153 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| Depreciation and  amortization                                                                       |       | 13,512                                                                                 |       | 9,028                                                                             |       | 4,478                                                                    |       |
| Loss on disposal  of assets                                                                          |       | 186                                                                                    |       |                                                                              |       | —                                                                   |       |
| Amortization of  deferred financing costs                                                            |       | 578                                                                                    |       | 364                                                                               |       | 796                                                                      |       |
| Financed interest  payments                                                                          |       | —                                                                                 |       |                                                                              |       | 3,515                                                                    |       |
| Share based  compensation                                                                            |       | 391                                                                                    |       | 667                                                                               |       | —                                                                   |       |
| Deferred rent  expense                                                                               |       | 177                                                                                    |       | 218                                                                               |       | 36                                                                       |       |
| Deferred income  taxes                                                                               |       | 5,868                                                                                  |       |                                                                              |       |                                                                     |       |
|                                                                                                 |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| Changes in net  operating assets and liabilities:                                                    |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| Inventories                                                                                          |       | (548                                                                                   | )          | (65                                                                               | )          | (214                                                                     | )          |
| Prepaid expenses  and other current assets                                                           |       | (1,760                                                                                 | )          | (3,384                                                                            | )          | 1,105                                                                    |       |
| Other assets                                                                                         |       | 306                                                                                    |       | 1                                                                                 |       | 8                                                                        |       |
| Accounts payable                                                                                     |       | 1,501                                                                                  |       | (2,121                                                                            | )          | 1,160                                                                    |       |
| Accrued interest                                                                                     |       | 4,078                                                                                  |       | 7,655                                                                             |       | 436                                                                      |       |
| Accrued wages  and payroll taxes                                                                     |       | 754                                                                                    |       | (59                                                                               | )          | (167                                                                     | )          |
| Income taxes  payable                                                                                |       |                                                                                   |       | 9,504                                                                             |       |                                                                     |       |
| Other accrued  liabilities                                                                           |       | 1,498                                                                                  |       | 2,849                                                                             |       | (1,347                                                                   | )          |
| Unearned revenue                                                                                     |       | 1,350                                                                                  |       | (380                                                                              | )          | (6                                                                       | )          |
| Other long term  liabilities                                                                         |       | (3                                                                                     | )          | (120                                                                              | )          | 22                                                                       |       |
|                                                                                                 |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| Net cash  provided by (used in) operating activities                                                 |       | 28,448                                                                                 |       | 35,775                                                                            |       | (8,331                                                                   | )          |
|                                                                                                 |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                               |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| Payment for  acquisition of Festival Fun Parks, LLC, net                                             |       |                                                                                   |       | (37,599                                                                           | )          |                                                                     |       |
| Purchases of  property and equipment                                                                 |       | (12,906                                                                                | )          | (6,178                                                                            | )          | (3,951                                                                   | )          |
| Payments for  disposal of assets                                                                     |       | (149                                                                                   | )          |                                                                              |       |                                                                     |       |
|                                                                                                 |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| Net cash used in  investing activities                                                               |       | (13,055                                                                                | )          | (43,777                                                                           | )          | (3,951                                                                   | )          |
|                                                                                                 |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                               |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| Issuance of  common stock                                                                            |       |                                                                                   |       | 54,260                                                                            |       |                                                                     |       |
| Capital  contribution                                                                                |       | 800                                                                                    |       |                                                                              |       |                                                                     |       |
| Return of  capital                                                                                   |       | (786                                                                                   | )          | (500                                                                              | )          |                                                                     |       |
| Proceeds from long  term debt                                                                        |       | 22,000                                                                                 |       | 163,500                                                                           |       | 13,100                                                                   |       |
| Payments on long  term debt                                                                          |       | (22,000                                                                                | )          | (189,095                                                                          | )          | (767                                                                     | )          |
| Payments for  cost of financing                                                                      |       | —                                                                                 |       | (5,575                                                                            | )          |                                                                     |       |
| Payments on  capital leases                                                                          |       | (849                                                                                   | )          | (655                                                                              | )          | (118                                                                     | )          |
| Distributions to  member                                                                             |       |                                                                                   |       |                                                                              |       | (57                                                                      | )          |
|                                                                                                 |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| Net cash (used  in) provided by financing activities                                                 |       | (835                                                                                   | )          | 21,935                                                                            |       | 12,158                                                                   |       |
|                                                                                                 |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                |       | 14,558                                                                                 |       | 13,933                                                                            |       | (124                                                                     | )          |
|                                                                                                 |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                      |       | 2,090                                                                                  |       | 5,116                                                                             |       | 5,240                                                                    |       |
|                                                                                                 |       |                                                                                   |       |                                                                              |       |                                                                     |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                            |       | $                                                                                      | 16,648     |                                                                              | $          | 19,049                                                                   |       | $ | 5,116 |   |

 

*See Notesto Condensed Consolidated Financial Statements*

 

7

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**PALACE ENTERTAINMENT HOLDINGS,INC.**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited, Dollars in thousands)**

 

**1.****                      ORGANIZATION**

 

On April 12, 2006, Palace Entertainment Holdings, Inc.(the “Company”), a Delaware corporation, acquired Festival Fun Parks, LLC, aDelaware limited liability company (“FFP”). During the period covered by thisreport and until the consummation of the Transaction described under SubsequentEvent Footnote 2 in the “Notes to Condensed Consolidated Financial Statements”,the Company was a 100% owned subsidiary of Palace Holdings Group, LLC (“Holdings”),which is primarily owned by MidOcean Partners, LP (“MidOcean Partners”), a NewYork and London based private equity firm. FFP was formed on June 23,1998, with Palace Entertainment, Inc., a Delaware corporation (“PAL”), beingthe sole member prior to the acquisition. The Company was established topurchase and operate family entertainment centers (“FECs”) and water parks (“WPs”).

 

At September 30, 2007, the Company owned and operated33 FECs and WPs (“Parks”). Of the 33 Parks owned at September 30, 2007, 17are located in California, five are located in Florida, four are located inTexas, and two each are located in Georgia and New York, and one each islocated in North Carolina, New Jersey, and New Hampshire. Revenue earned fromthe Parks located in California represents approximately 43% and 42%, in theaggregate, of the Company’s revenues for the nine month period ended September30, 2007 and 2006, respectively. Nine of the Parks are WPs featuring suchattractions as water slides, flumes, and pools and one is a nature theme park.The other 23 FECs generally feature such attractions as miniature golf,batting cages, children’s parks, go-carts, and video arcades.

 

For financial reportingpurposes, the Company uses a 52- or 53-week fiscal year. The fiscal periodspresented, which ended September 30, 2007 and October 1, 2006, consists of 39weeks, or three quarters of the fiscal year. The fiscal period ends on theSunday nearest to September 30. For simplicity of presentation, we referto the 39-week period as ended on September 30.

 

**2.****                       SUBSEQUENTEVENT – SALE OF COMPANY**

 

On August 23, 2007,Holdings and the Company entered into a definitive stock purchase agreement (“StockPurchase Agreement”) to sell all of the issued and outstanding shares of theCompany (the “Transaction”) to Centaur Holdings United States, Inc., a Delawarecorporation (the “Purchaser”), for an aggregate purchase price of approximately$330,000, plus cash and less the amount of the Company’s outstandingindebtedness as of July 31, 2007.

 

On October 2, 2007, theCompany entered into a Consent and Third Amendment to Credit Agreement (“ThirdAmendment”) with General Electric Capital Corporation (“GECC”) as agent andlender pursuant to the Company’s existing revolving credit facility (“CreditAgreement”), whereby (i) GECC consented to the change of control arising fromthe Transaction and (ii) the Company and GECC amended certain terms of theCredit Agreement. Under the terms of the Third Amendment, the Company and GECC,among other things, amended certain covenants and related definitions,including the definitions of “EBITDA,” “Restricted Payment,” “Sponsor” and “StatedMaturity Date,” and other material terms of the Credit Agreement. The aggregatelender commitments under the Credit Agreement were not amended.

 

The foregoing summary ofthe material provisions of the Third Amendment does not purport to be completeand is subject to and qualified in its entirety by reference to all provisionsof the Third Amendment, a copy of which was attached as Exhibit 1 to theCompany’s Current Report on Form 8-K filed October 3, 2007.

 

Pursuantto the Stock Purchase Agreement, on October 3, 2007, Holdings closed theTransaction with the Purchaser, an affiliate of Parques Reunidos, S.A.U., aSpanish corporation, which is primarily controlled and indirectlymajority-owned by funds managed or advised by Candover Partners Limited, aUnited Kingdom based private equity firm. As a result of the Transaction, thePurchaser currently owns 100% of the voting securities of the Company. Inconnection with the closing of the Transaction, the Purchaser’s nominees,Richard T. Golding (Chairman), Pedro Cortes and Cynthia P. Kellogg, wereappointed as the only directors of the Company. In addition, the Companyexercised its contractual option to terminate the employment of AlexanderWeber, Jr., as the Chief Executive Officer of the Company 

 

8

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and itswholly-owned subsidiary, Festival Fun Parks, LLC; and Mr. Weber resigned fromall other officer and director positions he held with the Company and itssubsidiaries effective immediately upon the closing of the Transaction. Pursuantto the terms of Mr. Weber’s employment agreement amendment, he will receive 12months compensation and certain other severance benefits. The Company has notyet appointed a new Chief Executive Officer.

 

In conjunction with theclosing of the Transaction, the Company terminated all contractual arrangementswith MidOcean Partners, including the professional services agreement in effectbetween the Company and MidOcean Partners as of December 1, 2006. MidOceanPartners was the primary owner of Holdings prior to the closing of theTransaction.

 

In connection with theTransaction, all  unvested membershipinterests in Holdings held by current and former members of management, as wellas unvested membership interests held members of the Board of Directors of theCompany, were automatically vested and all vested and unvested membershipinterests were acquired by the Purchaser.

 

The Company currently hasoutstanding $150,000 of 10 7/8% Senior Notes, Series B, due April 12, 2014 (the“Notes”), which are fully and unconditionally guaranteed by the Company’ssubsidiaries. Under the terms of the indenture governing the Notes, theTransaction constituted a “change of control” requiring the Company, within 30days after the closing of the Transaction, to offer to repurchase the Notesfrom the holders thereof (“Senior Noteholders”) at a purchase price equal to101% of the outstanding principal amount of the Notes, together with allaccrued but unpaid interest up to but not including the date of repurchase. OnOctober 4, 2007, the Company provided the Senior Noteholders with the requiredoffer to repurchase.

 

As of the November 1,2007, Senior Noteholders of 5.9% in aggregate principal amount of the Notestendered their Notes for repurchase. The Company repurchased those Notes for anaggregate amount of $8,820 with an effective date of November 5, 2007. ThePurchaser arranged financing for such repurchase through the Royal Bank ofScotland.

 

**3.****                      SUMMARYOF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES**

 

**Basis of Presentation**

 

The accompanying unaudited condensed consolidatedfinancial statements of the Company have been prepared in accordance withgenerally accepted accounting principles in the United States for interimfinancial information and in accordance with the rules and regulations of theSecurities and Exchange Commission (the “SEC”). The information reflects therequired adjustments that are of normal, recurring nature, and that in theopinion of our management are necessary for a fair presentation of thefinancial position of the Company, its results of operations and cash flows forthe interim period presented. They do not include all of the information andnotes required by generally accepted accounting principles in the United Statesfor annual financial statements as permitted under applicable rules andregulations. The condensed consolidated balance sheet at December 31, 2006was derived from the audited financial statements at that date but may notinclude all disclosures required by accounting principles generally accepted inthe United States.

 

These Condensed Consolidated Financial Statementsshould be read in conjunction with the Consolidated Financial Statementsincluded in the Company’s annual report on Form 10K for the fiscal year endedDecember 31, 2006.

 

The Condensed Consolidated Financial Statementsinclude the accounts of the Company and its wholly owned subsidiaries. Allintercompany transactions and balances have been eliminated in consolidation.

 

The acquisition in April 2006 of FFP by the Company(the “2006 Acquisition”) (See Footnote 4) was accounted for under the purchasemethod of accounting, as required by Statement of Financial AccountingStandards (“SFAS”) No.141 (“SFAS No. 141”), *Business Combinations*.The purchase price has been allocated to the assets and liabilities of FFPbased on their respective fair values. Accordingly, the post-2006 AcquisitionCondensed Consolidated Financial Statements reflect all the necessaryadjustments required by SFAS No. 141.

 

9

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**Property and Equipment**

 

Property and equipment is stated at cost and isdepreciated using the straight-line method over the following estimated lives:

 
| ** **                            | ** ** | **Life**      | ** ** |
|---------------------------------------|------------|---------------|------------|
| Buildings and  leasehold improvements |       | 20 - 38 years |       |
| Land  improvements                    |       | 7 - 10 years  |       |
| Equipment and  fixtures               |       | 1 - 10 years  |       |
| Rides and  attractions                |       | 5 - 15 years  |       |
| Games                                 |       | 1 - 3 years   |       |

 

Propertyand equipment include assets recorded under capital leases presented with thecomparable categories for owned assets. The charge to income resulting from amortizationof assets recorded under capital leases is included in depreciation expense inthe Condensed Consolidated Statement of Operations. Leasehold improvements areamortized over the shorter of the lease term or their useful lives.

 

Ordinary repairs and maintenance are expensed asincurred; major replacements and betterments are capitalized.

 

**Long-Lived Assets**

 

Long-lived assets are carried at cost less accumulateddepreciation. Long-lived assets are evaluated for potential impairment inaccordance with SFAS No. 144 (“SFAS No. 144”) *Accountingfor Impairment or Disposal of Long Lived Assets* at least annually orwhenever events or changes in circumstances indicate that their carryingamounts may not be recoverable. In the event that periodic assessments reflectthat the carrying amount of a long-lived asset exceeds the sum of theundiscounted cash flows (excluding interest) that are expected to result fromthe use and eventual disposition of the long-lived asset, the Companyrecognizes an impairment loss to the extent the carrying amount exceeds thefair value of the long-lived asset. The Company estimates the fair value usingavailable market information or other industry valuation techniques, such aspresent-value calculations. The Company did not record any impairment chargesfor the three or nine month periods ended September 30, 2007 and 2006. Inconjunction with the 2006 Acquisition long-lived assets were revalued at fairmarket value. (See Footnote 4)

 

**Goodwill**

 

Goodwillis tested for impairment annually, or when a possible impairment is indicated,using the fair value-based test prescribed by SFAS No. 142 (“SFAS No. 142”), *Goodwill and Other Intangible Assets*. The goodwillimpairment test prescribed by SFAS No. 142 requires the Company to identify reportingunits and to determine estimates of the fair value of the Company’s reportingunits as of the date of the test for impairment. The goodwill impairment testis a two-step process. First, the fair value of the reporting unit is comparedwith its carrying value including goodwill. If the reporting unit’s carryingvalue exceeds its fair value, an impairment loss is to be recorded to theextent that the carrying value of the goodwill exceeds its implied fair value.The second step determines the fair value of a reporting unit for the amountfor which the unit as a whole could be bought or sold in a current transactionbetween willing parties. The Company estimates the fair value of its reportingunits using discounted cash flow valuation models. The Company estimates theseamounts by evaluating historical trends, current budgets, operating plans, andindustry data. Determining the fair value of reporting units and goodwillincludes significant judgment by management and different judgments could yielddifferent results. The Company tests goodwill annually for impairment and ininterim periods if certain events occur indicating that the carrying value ofgoodwill may be impaired. The Company evaluates goodwill on a separatereporting unit basis to assess recoverability and impairment, if any, arerecognized in earnings. The Company has identified twenty reporting units. Goodwillwas allocated to the reporting units based on the final purchase priceallocation. The Company conducted the goodwill test during the second quarterof fiscal year 2007 and no goodwill impairment was identified in any of itsreporting units.

 

The Company recorded no goodwill impairment losses forthe three and nine month period ended September 30, 2007 and 2006.

 

10

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**Other Intangibles Assets**

 

Trademarks are amortizedover their estimated useful lives of 20 years and property leases are amortizedover the terms of the related leases. The amortization expense relating totrademarks for the three month period ended September 30, 2007 and 2006 was$167 and $169, respectively. The amortization expense relating to trademarksfor the nine month period ended September 30, 2007 and 2006 was $500 and $314,respectively.

 

**Other Assets**

 

Financing costs, which are included in other assets,are deferred and amortized using the straight-line method, which approximatesthe effective interest method, over the term of the respective loan agreements.At September 30, 2007 and December 31, 2006, deferred financing costs were$4,753 and $5,331, respectively, net of accumulated amortization of $1,131 and$553, respectively. All debt outstanding as of the 2006 Acquisition date wasrepaid and the related discounts were written off. Additionally, discount onloans was being amortized using the effective interest method over the term ofthe respective loan agreement. As of September 30, 2007, the Company also had$318 of restricted cash, which is included in other assets that must be usedfor capital expenditures.

 

**Stock-Based Compensation**

 

PAL, the former parent of FFP, issued stock options tothe Company’s employees in 2002. Outstanding options and the related potentialcompensation amounts were immaterial, and were terminated in April 2006 inconnection with the 2006 Acquisition. Following the 2006 Acquisition, Holdingsadopted a new stock compensation plan and the Company adopted SFAS No. 123(R) (“SFASNo. 123(R)”), “*Share-Based Payment*” to accountfor the equity incentive units granted. All awards granted, modified, orsettled after the date of adoption will be accounted for using the measurement,recognition, and attribution provisions of SFAS No.123(R). Under the fairvalue recognition provision of this statement, share based compensation costsare measured at the grant date based upon the fair value of the award. TheCompany elected to recognize the expense on a straight-line basis over therequisite period that is the vesting period. See Footnote 10 for a furtherdescription of the plan.

 

**Revenue Recognition**

 

The Company recognizes revenue net of sales tax at thepoint of sale to a customer or over the period that the customer receives thebenefit.

 

**Unearned Revenue**

 

Certain Parks sell seasontickets and annual passes. These sales are recorded as unearned revenue uponthe sale of the tickets. Revenue on season tickets and annual passes isrecognized based on usage of the tickets and passes over the period of timethey are valid.

 

CertainFECs sell play cards that do not expire and cannot be redeemed for cash. These salesare recorded as unearned revenue upon the sale of the play cards.  Therevenue on play cards is recognized based on their redemption at attractions. Basedon our historical redemption patterns, the Company determines as breakage theexpected unredeemed amount. The breakage income is recorded in revenue in theCompany’s statement of operations based on actual redemption.

 

**Use of Estimates**

 

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

**Concentration of CreditRisk**

 

Financial instruments that potentially subject theCompany to concentrations of credit risk consist primarily of cash and cash equivalents.At various times during the nine month period ended September 30, 2007 and2006, the 

 

11

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Company maintained cash balances in its general cashaccounts in excess of Federal Deposit Insurance Corporation insurable limits;however, the Company places its cash with high credit quality financialinstitutions.

 

**Fair Value of FinancialInstruments**

 

The carrying values of cash and cash equivalents,accounts receivable, and accounts payable approximate fair values due to therelatively short maturities of such instruments. For the fair value oflong-term debt, see Footnote 8.

 

**Recent Accounting Pronouncements**

 

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of Financial AccountingStandards No. 159 (“SFAS No. 159”), *The FairValue Option for Financial Assets and Financial Liabilities*— *including an amendment of FASB Statement No. 115*.SFAS No. 159 gives the Company the irrevocable option to carry most financialassets and liabilities at fair value, with changes in fair value recognized inthe statement of operations. SFAS No. 159 is effective for the Company’s 2008fiscal year, although early adoption is permitted. The Company is currentlyassessing the potential effect of SFAS No. 159 on its consolidated financialstatements.

 

In September 2006, theFASB issued SFAS No. 157 (“SFAS No. 157”), *Fair Value Measurements.*SFASNo. 157 establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.SFAS No. 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears. The Company is in the process of evaluating the impact of adopting SFASNo. 157 on its consolidated financial statements.

 

In July 2006, the FASB issued FASB Interpretation No.48 (“FIN No. 48”), *Accounting for Uncertaintyin Income Taxes,* which prescribes a recognition threshold andmeasurement process for recording in the financial statements uncertain taxpositions taken or expected to be taken in a tax return. Additionally, FIN No.48 provides guidance on derecognition, classification, interest and penalties,accounting in interim periods and disclosure requirements for uncertain taxpositions. The Company adopted the provisions of FIN No. 48, on January 1,2007. The Company did not have any unrecognized tax benefits and there was noeffect on our financial condition or results of operations as a result ofimplementing FIN No. 48.

 

In July 2006, the FASB issued Emerging Issues TaskForce (“EITF”) 06-3, *How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation*) thatrequires disclosure of the accounting policy related to any tax assessed by agovernment authority in a revenue producing transaction (either gross or net)and the amount of such taxes in both interim and annual financial statements ifthe amounts are significant. The Company has adopted EITF 06-3 and theCondensed Consolidated financial statements conform to its requirements. TheCompany’s policy is to present the taxes collected from the customers andremitted to governmental authorities on a net basis.

 

**4.****                      ACQUISITIONS**

 

Inaccordance with a definitive agreement dated February 21, 2006, the Companyacquired FFP on April 12, 2006. The aggregate purchase price of $212,175 wasprimarily funded by the $53,500 equity contribution by Holdings, issuance of$150,000 in aggregate principal amount of 10 7/8% Senior Notes (“Notes”) due in2014 and a draw of $12,000 against the Company’s senior secured revolvingcredit facility (“Revolver”) (See Footnote 8). Proceeds from the issuance ofthe Notes was used to pay off all outstanding term debt in the amount of$173,177 as of April 12, 2006, less the remaining capital lease obligations of$1,635, to pay transaction related fees and costs, and to fund initial workingcapital for the Company.

 

Thefinal aggregate purchase price allocation is reflected on the accompanyingcondensed consolidated balance sheet as of September 30, 2007 and there was nochange in the aggregate purchase price allocation from the consolidated balancesheet at December 31, 2006. The following table summarizes the estimated fairvalues of the assets acquired and liabilities assumed as of April 12, 2006.

 

12

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| Current assets                                                 |   | $       | 7,303   |   |
|----------------------------------------------------------------|--------|---------|---------|--------|
| Property and  equipment — net                             |   | 118,963 |    |
| Goodwill                                                       |   | 86,504  |    |
| Other intangible  assets — net                            |   | 19,674  |    |
| Other assets —  net                                       |   | 6,395   |    |
| Current  liabilities                                           |   | (18,569 | )       |
| Other long term  liabilities                                   |   | (8,095  | )       |
| Allocated  purchase price, including related acquisition costs |   | $       | 212,175 |   |

 

Theexcess of the adjusted purchase price over the fair value of the net assetsacquired or goodwill has been assigned to our reporting units and has beenfinalized. The final goodwill assigned to the WP and FEC segment is $60,238 and$26,266 respectively. The final aggregate purchase price allocation andgoodwill reflected on the accompanying condensed consolidated balance sheet atSeptember 30, 2007 did not change from the amount reflected on the consolidatedbalance sheet at December 31, 2006. The goodwill is not amortized and is subjectto an annual impairment test in accordance with SFAS No.142, *Goodwill and Other Intangible Assets*. For income taxpurposes, the Company amortizes goodwill and other intangible assets. Agoodwill test was performed during the second quarter of fiscal year 2007 andno goodwill impairment was identified.

 

Thetrademarks, which are included in other intangible assets, are being amortizedusing a 20-year useful life. The intangible asset related to the propertyleases advantage and the deferred credit related to property leasesdisadvantage are being amortized over the related lease terms on straight-linebasis over the individual remaining lease terms.

 

OnMarch 8, 2007, the Company purchased certain water park assets located inSacramento, California from Premier. The Company has renamed the WP RagingWaters Sacramento. The asset purchase was recorded at its fair value for a cashamount of $950. The Company did not record any intangible assets, trademarks orother assets*.*In addition, there were no liabilitiesassumed as a result of the transaction. The majority of the assets purchasedrelates to rides and attractions and were recorded to property and equipment atfair value.

 

SeeSubsequent Event Footnote 2 in the “Notes to Condensed Consolidated Financial Statements”for information relating to the acquisition of the Company on October 3, 2007.

 

Thefollowing condensed consolidated pro forma income statement informationincludes the three and nine month periods ended September 30, 2006. The proforma adjustments reflect the purchase of FFP, the extinguishment of the priordebt and its replacement with the Notes and the Revolver. The pro-forma alsoadjusts interest expense based upon the terms of the agreements governing theNotes and the Revolver. The financial information below also substitutes theMidOcean Partners advisory fee for the Windward management fee and adjusts forthe effect of the directors/officers and representations/warranties insurancepolicies issued in connection with the sale transaction. We have adjusteddepreciation and amortization for property and equipment, trademarks and leasesbased on the purchase price allocation.

 

TheRaging Waters Sacramento WP has also been included in the 2006 pro forma incomestatement and assumes the Park has been operating since January 1, 2006.

 

Palace Entertainment Holdings Inc.Consolidated and Condensed Pro forma Income StatementThree Month Period Ended September 30, 2006(Unaudited)

 

| ** **                         | ** ** | **September 30, 2006** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
|                               |       |                             |       |
| REVENUES — NET                |       | $                                | 84,149     |   |
|                               |       |                             |       |
| INCOME FROM  CONTINUING OPERATIONS |       | $                                | 25,446     |   |
|                               |       |                             |       |
| NET INCOME                         |       | $                                | 25,446     |   |

 

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PalaceEntertainment Holdings Inc.Consolidated and Condensed Pro forma Income StatementNine Month Period Ended September 30, 2006(Unaudited)

 

| ** **                         | ** ** | **September 30, 2006** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
|                               |       |                             |       |
| REVENUES — NET                |       | $                                | 148,083    |   |
|                               |       |                             |       |
| INCOME FROM  CONTINUING OPERATIONS |       | $                                | 3,825      |   |
|                               |       |                             |       |
| NET INCOME                         |       | $                                | 3,825      |   |

 

**On a pro forma basis for the three andnine month period ended September 30, 2006, the Company had no tax expense anda 0% effective tax rate due**to the netlosses and full valuation reserves on a pro forma basis.

** **

**5.****                      PREPAIDEXPENSES AND OTHER CURRENT ASSETS**

 

Prepaid expenses and other current assets consist ofthe following:

 
| ** **             | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **             | ** ** | **2007**              | ** ** | **2006**             | ** ** |
|                   |       |                  |       |                 |       |
| Prepaid  insurance     |       | $                     | 678        |                 | $          | 1,261 |   |
| Prepaid rent           |       | 1,135                 |       | 1,090                |       |
| Accounts  receivable   |       | 3,767                 |       | 780                  |       |
| Income tax  receivable |       | 763                   |       | 560                  |       |
| Other current  assets  |       | 1,905                 |       | 1,625                |       |
|                   |       |                  |       |                 |       |
| Total                  |       | $                     | 8,248      |                 | $          | 5,316 |   |

 

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**6.****                      PROPERTYAND EQUIPMENT**

 

Property and equipment consist of the following:

 
| ** **                                      | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2007**              | ** ** | **2006**             | ** ** |
|                                            |       |                  |       |                 |       |
| Land                                            |       | $                     | 158        |                 | $          | 158 |   |
| Buildings and  leasehold improvements           |       | 58,949                |       | 56,338               |       |
| Equipment and  fixtures                         |       | 18,035                |       | 14,234               |       |
| Games                                           |       | 5,347                 |       | 3,772                |       |
| Rides and  attractions                          |       | 56,274                |       | 51,476               |       |
|                                            |       |                  |       |                 |       |
| Total                                           |       | 138,763               |       | 125,978              |       |
|                                            |       |                  |       |                 |       |
| Less accumulated  depreciation and amortization |       | 25,335                |       | 12,439               |       |
|                                            |       |                  |       |                 |       |
| Add construction  in progress                   |       | 664                   |       | 611                  |       |
|                                            |       |                  |       |                 |       |
| Total                                           |       | $                     | 114,092    |                 | $          | 114,150 |   |

 

**7.****                      OTHERINTANGIBLE ASSETS - NET**

 

Thefollowing are the gross carrying amounts and accumulated amortization of otherintangible assets as of September 30, 2007 and December 31, 2006:

 

September 30, 2007

 
| ** **                 | ** ** | **Gross Carrying** | ** ** | **Accumulated**  | ** ** | **Net Book** | ** ** |
|----------------------------|------------|-------------------------|------------|------------------|------------|-------------------|------------|
| ** **                 | ** ** | **Amount**              | ** ** | **Amortization** | ** ** | **Value**         | ** ** |
| Other intangible  assets   |       |                    |       |             |       |              |       |
| Trademarks                 |       | $13,328                 |       | $976             |       | $12,352           |       |
| Property leases  advantage |       | 6,346                   |       | 339              |       | 6,007             |       |
| Total                      |       | $19,674                 |       | $1,315           |       | $18,359           |       |

 

December 31, 2006

 
| ** **                 | ** ** | **Gross Carrying** | ** ** | **Accumulated**  | ** ** | **Net Book** | ** ** |
|----------------------------|------------|-------------------------|------------|------------------|------------|-------------------|------------|
| ** **                 | ** ** | **Amount**              | ** ** | **Amortization** | ** ** | **Value**         | ** ** |
| Other intangible  assets   |       |                    |       |             |       |              |       |
| Trademarks                 |       | $13,328                 |       | $476             |       | $12,852           |       |
| Property leases  advantage |       | 6,346                   |       | 166              |       | 6,180             |       |
| Total                      |       | $19,674                 |       | $642             |       | $19,032           |       |

 

15

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Thefuture amortization on trademarks and property leases advantage as of September30, 2007 are as follows:

 
| **Year Ending**  | ** ** | ** **     | ** ** | **Property Leases** | ** ** | ** ** | ** ** |
|-----------------------|------------|----------------|------------|--------------------------|------------|------------|------------|
| **December 31,** | ** ** | **Trademarks** | ** ** | **Advantage**            | ** ** | **Total**  | ** ** |
|                  |       |           |       |                     |       |       |       |
| 2007 (3 months)       |       | $              | 167        |                     | $          | 58         |       | $ | 225 |   |
|                  |       |           |       |                     |       |       |       |
| 2008                  |       | 666            |       | 231                      |       | $          | 897        |   |
|                  |       |           |       |                     |       |       |       |
| 2009                  |       | 666            |       | 231                      |       | $          | 897        |   |
|                  |       |           |       |                     |       |       |       |
| 2010                  |       | 666            |       | 231                      |       | $          | 897        |   |
|                  |       |           |       |                     |       |       |       |
| 2011                  |       | 666            |       | 231                      |       | $          | 897        |   |
|                  |       |           |       |                     |       |       |       |
| Thereafter            |       | 9,521          |       | 5,025                    |       | $          | 14,546     |   |
|                  |       |           |       |                     |       |       |       |
| Total                 |       | $              | 12,352     |                     | $          | 6,007      |       | $ | 18,359 |   |

 

Theamortization of trademarks is recorded to amortization expense. Theamortization of property leases advantage is recorded as additional rentexpense. The amortization of property leases disadvantage is recorded as anoffset to rent expense. The future amortization of property leases disadvantagerecorded in other long term liabilities as of September 30, 2007 is as follows:

 
| **Year Ending**  | ** ** | **Property Leases** | ** ** |
|-----------------------|------------|--------------------------|------------|
| **December 31,** | ** ** | **Disadvantages**        | ** ** |
|                  |       |                     |       |
| 2007 (3 months)       |       | $                        | (36        | ) |
|                  |       |                     |       |
| 2008                  |       | (141                     | )          |
|                  |       |                     |       |
| 2009                  |       | (141                     | )          |
|                  |       |                     |       |
| 2010                  |       | (141                     | )          |
|                  |       |                     |       |
| 2011                  |       | (141                     | )          |
|                  |       |                     |       |
| Thereafter            |       | (3,121                   | )          |
|                  |       |                     |       |
| Total                 |       | $                        | (3,721     | ) |

 

**8.****                      LONG-TERMDEBT**

 

See Subsequent Event Footnote**2in the “Notes to Condensed Consolidated Financial Statements” for informationrelating to the acquisition of the Company on October 3, 2007 and the amendmentto the Revolver entered into subsequent to September 30, 2007.

 

 

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Long-termdebt at September 30, 2007 and December 31, 2006 consists of thefollowing:

 
| ** **                                 | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **2007**              | ** ** | **2006**             | ** ** |
|                                       |       |                  |       |                 |       |
| 10 7/8% Senior  Notes (1)                  |       | $                     | 150,000    |                 | $          | 150,000 |   |
| Revolving line  of credit - GE Capital (2) |       | —                |       | —               |       |
| Capital lease  obligations (3)             |       | 110                   |       | 856                  |       |
|                                       |       |                  |       |                 |       |
| Total                                      |       | 150,110               |       | 150,856              |       |
|                                       |       |                  |       |                 |       |
| Less current  portion                      |       | 37                    |       | 848                  |       |
|                                       |       |                  |       |                 |       |
| Total long-term  debt                      |       | $                     | 150,073    |                 | $          | 150,008 |   |

 

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**(1)**                                 **10 7/8%Senior Notes**

 

Inconnection with the 2006 Acquisition, FFP issued its 10 7/8% Senior Notes,Series A, due April 12, 2014, which are fully and unconditionally guaranteed bythe Company. Interest is payable in semi-annual installments on October 15 andApril 15 of each successive year. As of September 30, 2007 and December 31,2006, the fair value of the Notes was $150,750 and $151,500, respectively. TheCompany was in compliance with its covenant requirements as of September 30,2007.

 

**(2)**                                 **Revolvingline of credit — GE Capital**

 

Underthe Revolver, the Company has a revolving line of credit up to a maximum of$40,000, maturing no later than April 12, 2012. Interest is payableperiodically at the prime rate plus a margin of 1.75% or the London Inter BankOffered Rate (“LIBOR”) plus a margin of 2.75% based upon the Company’s election.There was no outstanding balance as of September 30, 2007 and December 31, 2006.The margin can vary based on the Company’s debt to earnings ratio. Under theRevolver, the Company had certain letters of credit outstanding to secure itsworkers compensation and general liability insurance policies. Letters ofcredit outstanding at September 30, 2007 and December 31, 2006 was $3,787 and$4,325, respectively. The fair value of the outstanding balance on the Revolverapproximates its carrying value.

 

TheRevolver is secured by substantially all of the Company’s assets. The Companywas in compliance with its covenant requirements as of September 30, 2007.

 

**(3)****                                 CapitalLease Obligations**

 

Capitallease obligations secured by applicable equipment with a net book value of $615and $648 at September 30, 2007 and December 31, 2006, respectively, are payablein periodic installments.

 

**9.****                      RELATED-PARTYTRANSACTIONS**

 

See Subsequent Event Footnote 2 in the “Notes toCondensed Consolidated Financial Statements” for information relating to thetermination of the professional services agreement.

 

A professional services agreement was in effectbetween the Company and MidOcean Partners as of September 30, 2007. Theagreement provided for quarterly payments of $250. These fees were paidquarterly and included in selling, general and administrative expenses in theCondensed Consolidated Statement of Operations. The term of this agreement isthrough April 12, 2016. Additionally, MidOcean Partners was entitled toreimbursement of certain expenses. As of September 30, 2007 and December 31,2006, the Company had a prepaid balance of $81 relating to the professionalservices agreement.

 

17

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**10.****               STOCKCOMPENSATION PLANS**

 

See Subsequent Event Footnote 2 in the “Notes toCondensed Consolidated Financial Statements” for information relating to Unitsdescribed below.

 

PAL, the former parent ofFFP, issued stock options to Company employees in 2002.  Outstandingoptions and the related potential compensation were immaterial and wereterminated as of April 12, 2006 in connection with the 2006 Acquisition.

 

Holdings adopted ashare-based compensation plan (the “Plan”) for certain management employees anddirectors of the Company.TheCompanyhasaccountedforthefairvalueofgrantsmadeunder the Plan in accordance with SFAS No. 123(R). Holdings issued equityincentive units (“Units”) in May 2007, March 2007 and June 2006.

 

Under the Plan, Holdingsgranted Units to selected management personnel and directors of the Company.Units are granted at the discretion of the Board of Directors. The Class BUnits vest in equal 1/20th amounts at the end of each full quarterfollowing the grant date and the Class C Units fully vest at the date of thegrant. Vesting on the Class B was subject to acceleration in the event of aliquidating event, such as, the approved sale of the Company, including by wayof merger or consolidation as well as the sale of publicly traded securities ofthe Company. The accelerated vesting was subject to the achievement ofspecified internal rate of return and return on investment hurdles based onMidOcean Partners’ initial investment. In the event those hurdles were not bemet at the time of a liquidating event, the Units would continue to vestquarterly over the rest of the original five year service period, with theexception of the B-2 Units, which were forfeitable on the date of theliquidating event if the hurdles were not met.

 

The Board of Directors atits sole discretion may repurchase the vested portion of the Units fromterminated employees under certain conditions at the fair market value of theUnits. In March 2005, the SEC issued SAB No. 107 (“SAB No. 107”), *Share Based Payments,* which provides guidance on theimplementation of SFAS No. 123(R). The Company applied the principles of SABNo. 107 in conjunction with its adoption of SFAS No. 123(R).

 

The volatility assumptionused by the Company of 28.95%, 30.23% and 41.01% for the May 2007, March 2007and June 2006 grants, respectively, was determined by weighting the volatilityof public companies with comparable business lines and product lines becausethe Company does not have historical stock prices for direct comparison. Thevolatility weighting was based on the implied volatility, the most recent1-year volatility, and the median of the rolling 4.5 year volatility for theMay 2007 grant and rolling 5 year volatility for the March 2007 and June 2006grants. The risk-free interest rate of 4.55%, 4.50% and 4.90% for the May 2007,March 2007, and June 2006 grants, respectively, that was used in the MonteCarlo Simulation model is based on the risk free rate of return that is equalto the interpolated yield of a five-year and three-year zero-coupon U.S.Treasury note as of May 1, 2007 and that is equal to the yield of a five-yearzero-coupon U.S. Treasury note as of March 2007, and June 2006, respectively.Management uses an expected dividend yield of zero for the May 2007, March 2007and June 2006 grants, in the Monte Carlo Simulation model, as it has nointention to pay any cash dividends in the foreseeable future. SFAS No. 123(R)requires management to estimate forfeitures at the time of grant and revisethose estimates in subsequent periods if actual forfeitures differ from thoseestimates. Management uses an estimated forfeiture rate based on the weightedaverage of different scenarios as historical data is not available and recordsstock-based compensation expense only for those awards that are expected tovest. A discount has also been calculated into the fair value of the Units toaccount for the market requirement inherent in the Units.

 

The compensation costthat has been charged against income for the Plan was $151 and $391 for thethree and nine month period ended September 30, 2007, respectively. Thecompensation cost that has been charged against income for the Plan was $209and $667 for the three and nine month period ended September 30, 2006,respectively. As of September 30, 2007, there was $2,564 of total unrecognizedcompensation cost related to unvested stock-based compensation that is expectedto be recognized over a weighted-average period of 4.4 years. Based on thecurrent outstanding Units, total stock-based compensation expense for the fullfiscal year 2007 is expected to be approximately $542.

 

 

18

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A summary of the Unitsgranted during the period and outstanding as of September 30, 2007 is presentedbelow:

 

***Amounts below are reported in whole numbers***

 
| ** **                                         | ** ** | **Number  of units** | ** ** | **Weighted  Average  Fair  Value** | ** ** | **Number of  units** | ** ** | **Weighted  Average  Fair Value** | ** ** | **Number  of units** | ** ** | **Weighted  Average  Fair Value** | ** ** | **Number  of units** | ** ** | **Weighted  Average  Fair Value** | ** ** |
|----------------------------------------------------|------------|---------------------------|------------|------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|
| ** **                                         | ** ** | **B1**                    | ** ** | ** **                         | ** ** | **B2**                    | ** ** | ** **                             | ** ** | **B3**                    | ** ** | ** **                             | ** ** | **C**                     | ** ** | ** **                             | ** ** |
|                                               |       |                      |       |                               |       |                      |       |                                   |       |                      |       |                                   |       |                      |       |                                   |       |
| Units outstanding  at January 1, 2007              |       | 3,673                     |       | $                                  | 482        |                      | 6,122      |                                   | $          | 308                       |       | 2,449                                  |       | $                         | 201        |                                   | 415        |   | $ | 1,000 |   |
| Granted                                            |       | 2,428                     |       | 414                                |       | 4,047                     |       | 193                                    |       | 1,619                     |       | 82                                     |       | —                    |       | —                                 |       |
| Repurchased                                        |       | (257                      | )          | 482                                |       | (428                      | )          | 308                                    |       | (171                      | )          | 201                                    |       | —                    |       | —                                 |       |
| Forfeited                                          |       | (2,314                    | )          | 482                                |       | (3,857                    | )          | 308                                    |       | (1,543                    | )          | 201                                    |       | —                    |       | —                                 |       |
| Units outstanding  at March 31, 2007               |       | 3,530                     |       | 435                                |       | 5,884                     |       | 229                                    |       | 2,354                     |       | 119                                    |       | 415                       |       | 1,000                                  |       |
| Granted                                            |       | 408                       |       | 427                                |       | 680                       |       | 185                                    |       | 272                       |       | 50                                     |       | —                    |       | —                                 |       |
| Repurchased                                        |       | (61                       | )          | 482                                |       | (102                      | )          | 308                                    |       | (41                       | )          | 201                                    |       | (31                       | )          | 1,000                                  |       |
| Forfeited                                          |       | (347                      | )          | 482                                |       | (578                      | )          | 308                                    |       | (231                      | )          | 201                                    |       | —                    |       | —                                 |       |
| Units outstanding  at June 30, 2007                |       | 3,530                     |       | 429                                |       | 5,884                     |       | 215                                    |       | 2,354                     |       | 102                                    |       | 384                       |       | 1,000                                  |       |
| Granted                                            |       | —                    |       | —                             |       | —                    |       | —                                 |       | —                    |       | —                                 |       | —                    |       | —                                 |       |
| Repurchased                                        |       | —                    |       | —                             |       | —                    |       | —                                 |       | —                    |       | —                                 |       | —                    |       | —                                 |       |
| Forfeited                                          |       | —                    |       | —                             |       | —                    |       | —                                 |       | —                    |       | —                                 |       | —                    |       | —                                 |       |
| Units outstanding  at September 30, 2007           |       | 3,530                     |       | $                                  | 429        |                      | 5,884      |                                   | $          | 215                       |       | 2,354                                  |       | $                         | 102        |                                   | 384        |   | $ | 1,000 |   |
|                                               |       |                      |       |                               |       |                      |       |                                   |       |                      |       |                                   |       |                      |       |                                   |       |
| Vested Number of  Units as of September 30, 2007   |       | 437                       |       |                               |       | 728                       |       |                                   |       | 291                       |       |                                   |       | 384                       |       |                                   |       |
|                                               |       |                      |       |                               |       |                      |       |                                   |       |                      |       |                                   |       |                      |       |                                   |       |
| Unvested Number  of Units as of September 30, 2007 |       | 3,093                     |       |                               |       | 5,156                     |       |                                   |       | 2,063                     |       |                                   |       | —                    |       |                                   |       |

 

**11.****               COMMITMENTSAND CONTINGENCIES**

 

**Lease Expense**

 

As of September 30, 2007,the Company leased the land for all 33 Parks. Of the 33 Parks, 30 leasethe land from third parties under noncancelable operating leases that expire onvarious dates through 2041. The leases for the facilities in Kingwood, Texas(MountasiaTM), Vernon, New Jersey (“Mountain Creek”) and Sacramento, California(“Raging Waters Sacramento”) contain early termination provisions allowing thelandlords to terminate the lease prior to the end of its term. The MountainCreek and Raging Waters Sacramento early termination provisions stipulate thepayment of compensation to the Company should the landlord exercise its optionfor early termination. The landlord at Kingwood has exercised the option forearly termination effective November 16, 2007. The ground leases for certainParks require the Company to pay minimum monthly or annual rentals, which areadjusted periodically based on changes in the Consumer Price Index or apercentage of sales method. The ground leases for certain of the Parks requiremonthly rentals based on a percentage of gross revenues derived from theoperations of the premises. In addition, the ground leases require the paymentof property taxes and certain leases require the payment of common areaexpenses. Certain of the leases provide the Company with options to renew forvarious periods of time. In addition, certain leases provide the Company withoptions to purchase the leased premises in accordance with the terms of thoselease agreements, and certain other leases provide the Company with the rightof first refusal in the event that the lessors decide to sell the land duringthe term of the leases.

 

In addition, the Company leases its corporate officefacilities from an unaffiliated third party under a non-cancelable operatinglease, which expires in 2009.

 

For the three month period ended September 30, 2007and 2006, rent expense charged to cost of revenue in the Condensed ConsolidatedStatement of Operations, excluding property taxes, amounted to $5,321 and$5,021, 

 

19

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respectively. For the nine month period endedSeptember 30, 2007 and 2006, rent expense charged to cost of revenue in theCondensed Consolidated Statement of Operations, excluding property taxes,amounted to $13,346 and $12,865, respectively.

 

Thefuture minimum lease payments required under noncancelable Park leases andoffice leases as of September 30, 2007, are as follows:

 
| **Year Ending**  | ** ** | ** **           | ** ** | ** **                           | ** ** |
|-----------------------|------------|----------------------|------------|--------------------------------------|------------|
| **December 31,** | ** ** | **Park Leases** | ** ** | **Corporate Office Lease** | ** ** |
|                  |       |                 |       |                                 |       |
| 2007 (3 months)       |       | $                    | 3,402      |                                 | $          | 104 |   |
| 2008                  |       | 13,360               |       | 427                                  |       |
| 2009                  |       | 13,281               |       | —                               |       |
| 2010                  |       | 13,329               |       | —                               |       |
| 2011                  |       | 13,504               |       | —                               |       |
| Thereafter            |       | 224,448              |       | —                               |       |
| Total                 |       | $                    | 281,324    |                                 | $          | 531 |   |

 

**Litigation**

 

From time to time, theCompany is involved in litigation relating to claims arising out of itsoperations in the normal course of business. As of September 30, 2007, theCompany is not a party to any legal proceedings, the adverse outcome of which,in management’s opinion, individually or in the aggregate, would have amaterially adverse effect on the Company’s consolidated financial position orresults of operations.

 

The Company receivedwritten notice in December 2004 concerning the Texas Department ofTransportation’s intention to seize, through the eminent domain process, aportion of the real property leased by the Company at its Dallas SpeedZone® FECin connection with the widening of Interstate 35 E. The Company is currently innegotiations with its landlord on a global resolution of the issue, and is closeto an agreement whereby the landlord will sell the subject portion of theproperty to the State and then pay to modify the Company’s facilities toconform to the new property line.

 

The Company and MidOceanPartners were named as defendants in a lawsuit alleging, among other things,breach of a finder’s fee agreement and tortious interference with suchagreement in connection with the 2006 Acquisition.  The plaintiff, StevenCrowley (“Crowley”), asserted five claims in his Amended Complaint datedJanuary 5, 2007.  Crowley purported to hold the Company responsible forthe alleged breach of a finder’s agreement between Crowley and VisionMaker,LLC, an entity unrelated to the Company.  The Company filed a motion todismiss the complaint and requested that Crowley not be granted leave toamend.  The motion was heard by the United States District Court for theSouthern District of New York and was granted in its entirety on September 24,2007.  The case has therefore been dismissed, and barring an appeal, thelitigation is concluded.

 

**12.****               INCOMETAXES**

 

TheCompany and its subsidiaries file a consolidated federal income tax return andvarious state income and franchise tax returns. The Company uses the estimatedeffective tax rate for the year to determine the provision for income taxes forinterim periods. The Company recorded an income tax provision of $6,933 for thenine month period ended September 30, 2007. As of September 30, 2007, theCompany has recorded a valuation allowance of $3,896. The valuation allowancewas determined based on the excess of the projected 2007 fiscal year netoperating losses that cannot be offset against the prior year’s taxable incomerecognized during the period April 13to December 31, 2006.

 

20

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TheCompany adopted the provisions of FIN No. 48, on January 1, 2007. The Companydid not have any unrecognized tax benefits and there was no effect on ourfinancial condition or results of operations as a result of implementing FINNo. 48.

 

TheCompany files income tax returns in the U.S. federal jurisdiction and variousstate jurisdictions. The Company does not believe there will be any materialchanges in our unrecognized tax positions over the next 12 months.

 

Ourpolicy is to recognize interest and penalties accrued on any unrecognized taxbenefits as a component of income tax expense. As of the date of adoption ofFIN No. 48, we did not have any accrued interest or penalties associated withany unrecognized tax benefits, nor was any interest expense recognized duringthe nine month period ended September 30, 2007. Our effective tax rate differsfrom the federal statutory rate primarily due to state taxes, non-deductibleexpenses, and the valuation allowance.

 

**13.****               SEGMENTINFORMATION DISCLOSURE**

 

The Company has operations in two business segmentsand, as a result, has adopted SFAS No. 131 (“SFAS No. 131”), *Disclosures about Segments of an Enterprise andRelated Information.* SFAS No. 131 establishes standards forreporting information about operating segments in annual financial statements.Operating segments are defined as components of an enterprise about whichseparate financial information is available and is evaluated on a regular basisby the chief operating decision maker or decision making group, in deciding howto allocate resources to an individual segment and in assessing performance ofthe segment. The Company has identified these two segments based on the natureof business.

 

The Company has tworeportable segments: FECs and WPs. FECs primarily offer miniature golf, battingcages, children’s parks, go-carts, and video arcades. WPs feature water slides,flumes, and pools as their primary attractions. The accounting policies of thesegments are the same as those described in Footnote 3. Operating income(loss) of segments does not include interest income or expense and provisionfor income taxes and also excludes corporate items, such as general andadministrative expenses and corporate depreciation expense. Identifiable assetsare those used in the Company’s operations in each segment. Corporate assetsconsist primarily of deferred financing costs, deposits, property andequipment, and cash and cash equivalents.

 

The goodwill assigned to the WPs and FECs was $60,238and $26,266, respectively.

 

21

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**SEGMENT DATA:**

 

**SEGMENTDATA:**

**Successor**

**For thethree month period ended September 30, 2007**

 
| ** **                     | ** ** | ** **   | ** ** | **Segment Earnings** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------|------------|--------------|------------|---------------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | ** **   | ** ** | **Before Interest**  | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                     | ** ** | ** **   | ** ** | **Taxes,**                | ** ** | **Depreciation** | ** ** | ** **       | ** ** |
| ** **                     | ** ** | **Revenues** | ** ** | **Depreciation**          | ** ** | **and**          | ** ** | **Capital**      | ** ** |
| ** **                     | ** ** | **Net**      | ** ** | **and Amortization** | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** |
|                           |       |         |       |                      |       |             |       |             |       |
| FEC                            |       | $            | 24,624     |                      | $          | 6,096            |       | $                | 2,247      |   | $ | 1,330 |   |
| WP                             |       | 64,534       |       | 35,571                    |       | 1,641            |       | 923              |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Total operations               |       | 89,158       |       | 41,667                    |       | 3,888            |       | 2,253            |       |
| Corporate                      |       |         |       |                      |       | 395              |       | 259              |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Total                          |       | $            | 89,158     |                      |       |             | $          | 4,283            |       | $ | 2,512 |   |
|                           |       |         |       |                      |       |             |       |             |       |
| Reconciliation  to net income: |       |         |       |                      |       |             |       |             |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Corporate  expenses            |       |         |       | (4,061                    | )          |             |       |             |       |
| Interest expense  - net        |       |         |       | (4,230                    | )          |             |       |             |       |
| Depreciation and  amortization |       |         |       | (4,283                    | )          |             |       |             |       |
| Loss on disposal  of assets    |       |         |       | (221                      | )          |             |       |             |       |
| Income tax  provision          |       |         |       | (11,452                   | )          |             |       |             |       |
| Net income                     |       |         |       | $                         | 17,420     |             |       |             |       |   |

 

22

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**SEGMENTDATA:**

**Succcessor**

**For thethree month period ended September 30, 2006**

 
| ** **                     | ** ** | ** **   | ** ** | **Segment Earnings** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------|------------|--------------|------------|---------------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | ** **   | ** ** | **Before Interest**  | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                     | ** ** | ** **   | ** ** | **Taxes,**                | ** ** | **Depreciation** | ** ** | ** **       | ** ** |
| ** **                     | ** ** | **Revenues** | ** ** | **Depreciation**          | ** ** | **and**          | ** ** | **Capital**      | ** ** |
| ** **                     | ** ** | **Net**      | ** ** | **and Amortization** | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** |
|                           |       |         |       |                      |       |             |       |             |       |
| FEC                            |       | $            | 24,294     |                      | $          | 6,113            |       | $                | 2,603      |   | $ | 1,561 |   |
| WP                             |       | 57,926       |       | 30,767                    |       | 1,626            |       | 1,150            |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Total operations               |       | 82,220       |       | 36,880                    |       | 4,229            |       | 2,711            |       |
| Corporate                      |       |         |       |                      |       | 499              |       | 111              |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Total                          |       | $            | 82,220     |                      |       |             | $          | 4,728            |       | $ | 2,822 |   |
|                           |       |         |       |                      |       |             |       |             |       |
| Reconciliation  to net income: |       |         |       |                      |       |             |       |             |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Corporate  expenses            |       |         |       | (3,083                    | )          |             |       |             |       |
| Interest expense  - net        |       |         |       | (4,216                    | )          |             |       |             |       |
| Depreciation and  amortization |       |         |       | (4,728                    | )          |             |       |             |       |
| Income tax  provision          |       |         |       | (9,520                    | )          |             |       |             |       |
| Net income                     |       |         |       | $                         | 15,333     |             |       |             |       |   |

 

23

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**SEGMENTDATA:**

 

**SEGMENTDATA:**

**Successor**

**For thenine month period ended September 30, 2007**

 
| ** **                     | ** ** | ** **   | ** ** | **Segment Earnings** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------|------------|--------------|------------|---------------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | ** **   | ** ** | **Before Interest**  | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                     | ** ** | ** **   | ** ** | **Taxes,**                | ** ** | **Depreciation** | ** ** | ** **       | ** ** |
| ** **                     | ** ** | **Revenues** | ** ** | **Depreciation**          | ** ** | **and**          | ** ** | **Capital**      | ** ** |
| ** **                     | ** ** | **Net**      | ** ** | **and Amortization** | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** |
|                           |       |         |       |                      |       |             |       |             |       |
| FEC                            |       | $            | 67,763     |                      | $          | 15,593           |       | $                | 7,396      |   | $ | 5,144 |   |
| WP                             |       | 87,932       |       | 30,453                    |       | 4,944            |       | 7,367            |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Total operations               |       | 155,695      |       | 46,046                    |       | 12,340           |       | 12,511           |       |
| Corporate                      |       |         |       |                      |       | 1,172            |       | 462              |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Total                          |       | $            | 155,695    |                      |       |             | $          | 13,512           |       | $ | 12,973 |   |
|                           |       |         |       |                      |       |             |       |             |       |
| Reconciliation to  net income: |       |         |       |                      |       |             |       |             |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Corporate  expenses            |       |         |       | (11,463                   | )          |             |       |             |       |
| Interest expense  - net        |       |         |       | (13,392                   | )          |             |       |             |       |
| Depreciation and  amortization |       |         |       | (13,512                   | )          |             |       |             |       |
| Loss on disposal  of assets    |       |         |       | (186                      | )          |             |       |             |       |
| Income tax  provision          |       |         |       | (6,933                    | )          |             |       |             |       |
| Net income                     |       |         |       | $                         | 560        |             |       |             |       |   |

 

24

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**SEGMENTDATA:**

**Successor**

**For theperiod April 13 to September 30, 2006**

 
| ** **                     | ** ** | ** **   | ** ** | **Segment Earnings** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------|------------|--------------|------------|---------------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | ** **   | ** ** | **Before Interest**  | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                     | ** ** | ** **   | ** ** | **Taxes,**                | ** ** | **Depreciation** | ** ** | ** **       | ** ** |
| ** **                     | ** ** | **Revenues** | ** ** | **Depreciation**          | ** ** | **and**          | ** ** | **Capital**      | ** ** |
| ** **                     | ** ** | **Net**      | ** ** | **and Amortization** | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** |
|                           |       |         |       |                      |       |             |       |             |       |
| FEC                            |       | $            | 46,447     |                      | $          | 12,430           |       | $                | 5,289      |   | $ | 2,862 |   |
| WP                             |       | 75,235       |       | 31,677                    |       | 2,871            |       | 3,193            |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Total operations               |       | 121,682      |       | 44,107                    |       | 8,160            |       | 6,055            |       |
| Corporate                      |       |         |       |                      |       | 868              |       | 123              |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Total                          |       | $            | 121,682    |                      |       |             | $          | 9,028            |       | $ | 6,178 |   |
|                           |       |         |       |                      |       |             |       |             |       |
| Reconciliation  to net income: |       |         |       |                      |       |             |       |             |       |
|                           |       |         |       |                      |       |             |       |             |       |
| Corporate  expenses            |       |         |       | (5,527                    | )          |             |       |             |       |
| Interest expense  - net        |       |         |       | (8,370                    | )          |             |       |             |       |
| Depreciation and  amortization |       |         |       | (9,028                    | )          |             |       |             |       |
| Gain on disposal  of assets    |       |         |       | 0                         |       |             |       |             |       |
| Income tax  provision          |       |         |       | (9,564                    | )          |             |       |             |       |
| Net income                     |       |         |       | $                         | 11,618     |             |       |             |       |   |

 

25

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**SEGMENTDATA:**

**Predecessor**

**For theperiod January 1 to April 12, 2006**

 
| ** **                     | ** ** | ** **   | ** ** | **Segment Earnings (Loss)** | ** ** | ** **       | ** ** | ** **       | ** ** |
|--------------------------------|------------|--------------|------------|---------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                     | ** ** | ** **   | ** ** | **Before Interest**              | ** ** | ** **       | ** ** | ** **       | ** ** |
| ** **                     | ** ** | ** **   | ** ** | **Taxes,**                            | ** ** | **Depreciation** | ** ** | ** **       | ** ** |
| ** **                     | ** ** | **Revenues** | ** ** | **Depreciation**                      | ** ** | **and**          | ** ** | **Capital**      | ** ** |
| ** **                     | ** ** | **Net**      | ** ** | **and Amortization**             | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** |
|                           |       |         |       |                                  |       |             |       |             |       |
| FEC                            |       | $            | 19,268     |                                  | $          | 1,723            |       | $                | 1,790      |   | $ | 1,104 |   |
| WP                             |       | 4,129        |       | (5,881                                | )          | 2,280            |       | 2,801            |       |
|                           |       |         |       |                                  |       |             |       |             |       |
| Total operations               |       | 23,397       |       | (4,158                                | )          | 4,070            |       | 3,905            |       |
| Corporate                      |       |         |       |                                  |       | 408              |       | 47               |       |
|                           |       |         |       |                                  |       |             |       |             |       |
| Total                          |       | $            | 23,397     |                                  |       |             | $          | 4,478            |       | $ | 3,952 |   |
|                           |       |         |       |                                  |       |             |       |             |       |
| Reconciliation  to net loss:   |       |         |       |                                  |       |             |       |             |       |
|                           |       |         |       |                                  |       |             |       |             |       |
| Corporate  expenses            |       |         |       | (2,843                                | )          |             |       |             |       |
| Interest expense  - net        |       |         |       | (6,674                                | )          |             |       |             |       |
| Depreciation and  amortization |       |         |       | (4,478                                | )          |             |       |             |       |
| Gain on disposal  of assets    |       |         |       | —                                |       |             |       |             |       |
| Income tax  provision          |       |         |       | —                                |       |             |       |             |       |
| Net loss                       |       |         |       | $                                     | (18,153    | )                |       |             |       |   |

 

26

----

 

**14.****               SEPARATEFINANCIAL INFORMATION OF SUSIDIARY GUARANTORS OF INDEBTEDNESS**

 

As described in Footnotes 4 and 8, FFP issued $150,000in aggregate principal amount of 10 7/8% Senior Notes, Series A, due in 2014. TheNotes are guaranteed on a senior unsecured basis by the Company and certain ofthe Company’s subsidiaries. All guarantees are full and unconditional and jointand several.

 

The following disclosures reflect the Company’scondensed consolidated financial information for the periods presented. TheCondensed Consolidated financial information for the Company and the Company’sguarantor subsidiaries for the periods presented as outlined below have beenprepared from the books and records maintained by the Company and the guarantorsubsidiaries. The condensed financial information may not necessarily beindicative of the results of operations or financial position had the Companyand the guarantor subsidiaries operated as independent entities. As a result ofthis activity there will be an amount due to / due from related companies;however, all intercompany amounts included in the subsidiary records areeliminated in consolidation.

 

27

----

 

**Successor**

**PalaceEntertainment Holdings, Inc.**

**CondensedConsolidated Balance Sheet as of September 30, 2007 ( in thousands)**

 
| ** **                                     | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| **ASSETS**                                     |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                           |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CURRENT ASSETS                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cash and cash  equivalents                     |       | $            | —     |                         | $          | 16,440                                |       | $                | 208        |                       | $          | — |   | $ | 16,648 |   |
| Inventories                                    |       | —       |       | 1,364                        |       | 1,308                                 |       | —           |       | 2,672                      |       |
| Prepaid expenses  and other current assets     |       | —       |       | 5,304                        |       | 2,944                                 |       | —           |       | 8,248                      |       |
| Deferred income  taxes                         |       | —       |       | —                       |       | —                                |       | —           |       | —                     |       |
| Total current  assets                          |       | —       |       | 23,108                       |       | 4,460                                 |       | —           |       | 27,568                     |       |
|                                           |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Property and  equipment - net                  |       | —       |       | 55,447                       |       | 58,645                                |       | —           |       | 114,092                    |       |
| Goodwill                                       |       | —       |       | 53,778                       |       | 32,726                                |       | —           |       | 86,504                     |       |
| Other intangible  assets - net                 |       | —       |       | 11,326                       |       | 7,033                                 |       | —           |       | 18,359                     |       |
| Other assets -  net                            |       | —       |       | 6,244                        |       | 180                                   |       | —           |       | 6,424                      |       |
| Due from  subsidiaries                         |       | —       |       | 91,595                       |       | —                                |       | (91,595          | )          | —                     |       |
| Investment in  subsidiaries                    |       | 59,160       |       | 8,012                        |       | —                                |       | (67,172          | )          | —                     |       |
| TOTAL                                          |       | $            | 59,160     |                         | $          | 249,510                               |       | $                | 103,044    |                       | $          | (158,767 | ) | $ | 252,947 |   |
|                                           |       |         |       |                         |       |                                  |       |             |       |                       |       |
| **LIABILITIES  AND SHAREHOLDER’S EQUITY** |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                           |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CURRENT  LIABILITIES                           |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Accounts payable                               |       | $            | —     |                         | $          | 3,256                                 |       | $                | —     |                       | $          | — |   | $ | 3,256 |   |
| Accrued interest                               |       | —       |       | 7,596                        |       | —                                |       | —           |       | 7,596                      |       |
| Accrued wages  and payroll taxes               |       | —       |       | 3,267                        |       | —                                |       | —           |       | 3,267                      |       |
| Other accrued  liabilities                     |       | —       |       | 11,688                       |       | —                                |       |             |       | 11,688                     |       |
| Unearned revenue                               |       | —       |       | 818                          |       | 1,855                                 |       | —           |       | 2,673                      |       |
| Current portion  of long term debt             |       | —       |       | 35                           |       | 2                                     |       | —           |       | 37                         |       |
| Total current  liabilities                     |       | —       |       | 26,660                       |       | 1,857                                 |       | —           |       | 28,517                     |       |
|                                           |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Long term debt -  less current portion         |       | —       |       | 150,073                      |       | —                                |       | —           |       | 150,073                    |       |
| Deferred income  taxes                         |       | —       |       | 7,900                        |       | —                                |       | —           |       | 7,900                      |       |
| Other long term  liabilities                   |       | —       |       | 5,717                        |       | 1,580                                 |       | —           |       | 7,297                      |       |
| Total  liabilities                             |       | —       |       | 190,350                      |       | 3,437                                 |       | —           |       | 193,787                    |       |
|                                           |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Due to parent                                  |       | —       |       | —                       |       | 91,595                                |       | (91,595          | )          | —                     |       |
| Shareholder’s  equity                     |       | 59,160       |       | 59,160                       |       | 8,012                                 |       | (67,172          | )          | 59,160                     |       |
| TOTAL                                          |       | $            | 59,160     |                         | $          | 249,510                               |       | $                | 103,044    |                       | $          | (158,767 | ) | $ | 252,947 |   |

 

28

----

 

**Successor**

**PalaceEntertainment Holdings, Inc.**

**CondensedConsolidated Balance Sheet as of December 31, 2006 ( in thousands)**

 
| ** **                                     | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|------------------------------------------------|------------|--------------|------------|-------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
|                                           |       |         |       |                    |       |                                  |       |             |       |                       |       |
| **ASSETS**                                     |       |         |       |                    |       |                                  |       |             |       |                       |       |
|                                           |       |         |       |                    |       |                                  |       |             |       |                       |       |
| CURRENT ASSETS                                 |       |         |       |                    |       |                                  |       |             |       |                       |       |
| Cash and cash  equivalents                     |       | $            | —     |                    | $          | 1,966                                 |       | $                | 124        |                       | $          | — |   | $ | 2,090 |   |
| Inventories                                    |       | —       |       | 896                     |       | 1,228                                 |       |             |       | 2,124                      |       |
| Prepaid expenses  and other current assets     |       | —       |       | 4,538                   |       | 778                                   |       |             |       | 5,316                      |       |
| Deferred income  taxes                         |       | —       |       | 1,171                   |       | 0                                     |       |             |       | 1,171                      |       |
| Total current  assets                          |       | —       |       | 8,571                   |       | 2,130                                 |       | —           |       | 10,701                     |       |
|                                           |       |         |       |                    |       |                                  |       |             |       |                       |       |
| Property and  equipment - net                  |       | —       |       | 54,309                  |       | 59,841                                |       |             |       | 114,150                    |       |
| Goodwill                                       |       | —       |       | 86,504                  |       | —                                |       |             |       | 86,504                     |       |
| Other intangible  assets - net                 |       | —       |       | 11,734                  |       | 7,298                                 |       |             |       | 19,032                     |       |
| Other assets -  net                            |       | —       |       | 7,163                   |       | 144                                   |       |             |       | 7,307                      |       |
| Due from  subsidiaries                         |       |         |       | 57,340                  |       |                                  |       | (57,340          | )          |                       |       |
| Investment in  subsidiaries                    |       | 58,195       |       | 9,523                   |       |                                  |       | (67,718          | )          | —                     |       |
| TOTAL                                          |       | $            | 58,195     |                    | $          | 235,144                               |       | $                | 69,413     |                       | $          | (125,058 | ) | $ | 237,694 |   |
|                                           |       |         |       |                    |       |                                  |       |             |       |                       |       |
| **LIABILITIES  AND SHAREHOLDER’S EQUITY** |       |         |       |                    |       |                                  |       |             |       |                       |       |
|                                           |       |         |       |                    |       |                                  |       |             |       |                       |       |
| CURRENT  LIABILITIES                           |       |         |       |                    |       |                                  |       |             |       |                       |       |
| Accounts payable                               |       | $            | —     |                    | $          | 1,791                                 |       | $                | —     |                       | $          | — |   | $ | 1,791 |   |
| Accrued interest                               |       | —       |       | 3,518                   |       | —                                |       |             |       | 3,518                      |       |
| Accrued wages  and payroll taxes               |       | —       |       | 2,513                   |       | —                                |       |             |       | 2,513                      |       |
| Other accrued  liabilities                     |       | —       |       | 9,640                   |       | 530                                   |       |             |       | 10,170                     |       |
| Unearned revenue                               |       | —       |       | 141                     |       | 1,182                                 |       |             |       | 1,323                      |       |
| Current portion  of long term debt             |       | —       |       | 11                      |       | 837                                   |       |             |       | 848                        |       |
| Total current  liabilities                     |       | —       |       | 17,614                  |       | 2,549                                 |       | —           |       | 20,163                     |       |
|                                           |       |         |       |                    |       |                                  |       |             |       |                       |       |
| Long term debt -  less current portion         |       | —       |       | 150,007                 |       | 1                                     |       |             |       | 150,008                    |       |
| Deferred income  taxes                         |       | —       |       | 2,032                   |       | 0                                     |       |             |       | 2,032                      |       |
| Due to parent                                  |       | —       |       |                    |       | 57,340                                |       | (57,340          | )          | —                     |       |
| Other long term  liabilities                   |       | —       |       | 7,296                   |       | 0                                     |       |             |       | 7,296                      |       |
| Total  liabilities                             |       | —       |       | 176,949                 |       | 59,890                                |       | (57,340          | )          | 179,499                    |       |
|                                           |       |         |       |                    |       |                                  |       |             |       |                       |       |
| Shareholder’s  equity                     |       | 58,195       |       | 58,195                  |       | 9,523                                 |       | (67,718          | )          | 58,195                     |       |
| TOTAL                                          |       | $            | 58,195     |                    | $          | 235,144                               |       | $                | 69,413     |                       | $          | (125,058 | ) | $ | 237,694 |   |

 

29

----

 

Successor

PalaceEntertainment Holdings, Inc.

CondensedConsolidated Statement of Operations for the Three Month Period Ended September30, 2007 ( in thousands)

 
| ** **                                                                | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| REVENUES - net                                                            |       | $            | —     |                         | $          | 42,969                                |       | $                | 46,189     |                       | $          | — |   | $ | 89,158 |   |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING COSTS  AND EXPENSES                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cost of revenue (exclusive of depreciation and amortization  shown below) |       | —       |       | 24,050                       |       | 18,711                                |       | —           |       | 42,761                     |       |
| Selling, general  and administrative                                      |       | —       |       | 6,164                        |       | 2,627                                 |       | —           |       | 8,791                      |       |
| Depreciation and  amortization                                            |       | —       |       | 2,655                        |       | 1,628                                 |       | —           |       | 4,283                      |       |
| Loss on disposal  of assets                                               |       | —       |       | 221                          |       | 0                                     |       | —           |       | 221                        |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Total operating  costs and expenses                                       |       | —       |       | 33,090                       |       | 22,966                                |       | —           |       | 56,056                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING INCOME                                                          |       | —       |       | 9,879                        |       | 23,223                                |       | —           |       | 33,102                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Equity income in  earnings of subsidiaries                                |       | 17,420       |       | 23,223                       |       | —                                |       | (40,643          | )          | —                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OTHER EXPENSE                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Interest expense  - net                                                   |       | —       |       | 4,230                        |       | —                                |       | —           |       | 4,230                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income before  income taxes                                               |       | 17,420       |       | 28,872                       |       | 23,223                                |       | (40,643          | )          | 28,872                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income tax  provision                                                     |       | —       |       | 11,452                       |       | —                                |       | —           |       | 11,452                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net income                                                                |       | $            | 17,420     |                         | $          | 17,420                                |       | $                | 23,223     |                       | $          | (40,643 | ) | $ | 17,420 |   |

 

30

----

 

Successor

PalaceEntertainment Holdings, Inc.

CondensedConsolidated Statement of Operations for the Three Month Period Ended September30, 2006 ( in thousands)

 
| ** **                                                                | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| REVENUES - net                                                            |       | $            | —     |                         | $          | 40,529                                |       | $                | 41,691     |                       | $          | — |   | $ | 82,220 |   |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING COSTS  AND EXPENSES                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cost of revenue (exclusive of depreciation and amortization  shown below) |       |         |       | 22,418                       |       | 18,447                                |       |             |       | 40,865                     |       |
| Selling, general  and administrative                                      |       |         |       | 4,804                        |       | 2,754                                 |       |             |       | 7,558                      |       |
| Depreciation and  amortization                                            |       |         |       | 2,647                        |       | 2,081                                 |       |             |       | 4,728                      |       |
| Gain on disposal  of assets                                               |       |         |       |                         |       | 0                                     |       |             |       |                       |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Total operating  costs and expenses                                       |       | —       |       | 29,869                       |       | 23,282                                |       | —           |       | 53,151                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING INCOME                                                          |       | —       |       | 10,660                       |       | 18,409                                |       | —           |       | 29,069                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Equity income in  earnings of subsidiaries                                |       | 15,333       |       | 18,409                       |       | 0                                     |       | (33,742          | )          | —                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OTHER EXPENSE                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Interest expense  - net                                                   |       | —       |       | 4,216                        |       | 0                                     |       | —           |       | 4,216                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income before  income taxes                                               |       | 15,333       |       | 24,853                       |       | 18,409                                |       | (33,742          | )          | 24,853                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income tax  provision                                                     |       | —       |       | 9,520                        |       | 0                                     |       | —           |       | 9,520                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net income                                                                |       | $            | 15,333     |                         | $          | 15,333                                |       | $                | 18,409     |                       | $          | (33,742 | ) | $ | 15,333 |   |

 

31

----

 

Successor

PalaceEntertainment Holdings, Inc.

Condensed ConsolidatedStatement of Operations for the Nine Month Period Ended September 30, 2007 ( inthousands)

 
| ** **                                                                | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| REVENUES - net                                                            |       | $            | —     |                         | $          | 89,027                                |       | $                | 66,668     |                       | $          | — |   | $ | 155,695 |   |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING COSTS  AND EXPENSES                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cost of revenue (exclusive of depreciation and amortization  shown below) |       | —       |       | 61,947                       |       | 38,207                                |       | —           |       | 100,154                    |       |
| Selling, general  and administrative                                      |       | —       |       | 15,626                       |       | 5,332                                 |       | —           |       | 20,958                     |       |
| Depreciation and  amortization                                            |       | —       |       | 8,454                        |       | 5,058                                 |       | —           |       | 13,512                     |       |
| Loss on disposal  of assets                                               |       | —       |       | 186                          |       | —                                |       | —           |       | 186                        |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Total operating  costs and expenses                                       |       | —       |       | 86,213                       |       | 48,597                                |       | —           |       | 134,810                    |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING INCOME                                                          |       | —       |       | 2,814                        |       | 18,071                                |       | —           |       | 20,885                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Equity income in  earnings of subsidiaries                                |       | 560          |       | 18,071                       |       | —                                |       | (18,631          | )          | —                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OTHER EXPENSE                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Interest expense  - net                                                   |       | —       |       | 13,392                       |       | —                                |       | —           |       | 13,392                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income before  income taxes                                               |       | 560          |       | 7,493                        |       | 18,071                                |       | (18,631          | )          | 7,493                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income tax  provision                                                     |       | —       |       | 6,933                        |       | —                                |       | —           |       | 6,933                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net income                                                                |       | $            | 560        |                         | $          | 560                                   |       | $                | 18,071     |                       | $          | (18,631 | ) | $ | 560 |   |

 

32

----

 

Successor

PalaceEntertainment Holdings, Inc.

CondensedConsolidated Statement of Operations for the Period Ended April 13 to September30, 2006 (in thousands)

 
| ** **                                                                | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| REVENUES - net                                                            |       | $            | —     |                         | $          | 65,238                                |       | $                | 56,444     |                       | $          | — |   | $ | 121,682 |   |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING COSTS  AND EXPENSES                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cost of revenue (exclusive of depreciation and amortization  shown below) |       |         |       | 39,412                       |       | 30,660                                |       |             |       | 70,072                     |       |
| Selling, general  and administrative                                      |       |         |       | 8,610                        |       | 4,420                                 |       |             |       | 13,030                     |       |
| Depreciation and  amortization                                            |       |         |       | 6,686                        |       | 2,342                                 |       |             |       | 9,028                      |       |
| Gain on disposal  of assets                                               |       |         |       |                         |       | 0                                     |       |             |       |                       |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Total operating  costs and expenses                                       |       | —       |       | 54,708                       |       | 37,422                                |       | —           |       | 92,130                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING INCOME                                                          |       | —       |       | 10,530                       |       | 19,022                                |       | —           |       | 29,552                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Equity income in  earnings of subsidiaries                                |       | 11,618       |       | 19,022                       |       | 0                                     |       | (30,640          | )          | —                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OTHER EXPENSE                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Interest expense  - net                                                   |       | —       |       | 8,370                        |       | 0                                     |       | —           |       | 8,370                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income before  income taxes                                               |       | 11,618       |       | 21,182                       |       | 19,022                                |       | (30,640          | )          | 21,182                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income tax  provision                                                     |       | —       |       | 9,564                        |       | 0                                     |       | —           |       | 9,564                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net income                                                                |       | $            | 11,618     |                         | $          | 11,618                                |       | $                | 19,022     |                       | $          | (30,640 | ) | $ | 11,618 |   |

 

33

----

 

Predecessor

PalaceEntertainment Holdings, Inc.

CondensedConsolidated Statement of Operations for the Period Ended January 1 to April12, 2006 (in thousands)

 
| ** **                                                                | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **FFP  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|-----------------------|------------|
| REVENUES - net                                                            |       | $                            | 17,818     |                                  | $          | 5,579            |       | $                     | —     |   | $ | 23,397 |   |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| OPERATING COSTS  AND EXPENSES                                             |       |                         |       |                                  |       |             |       |                  |       |
| Cost of revenue (exclusive of depreciation and amortization  shown below) |       | 18,148                       |       | 8,042                                 |       |             |       | 26,190                |       |
| Selling, general  and administrative                                      |       | 3,151                        |       | 1,057                                 |       |             |       | 4,208                 |       |
| Depreciation and  amortization                                            |       | 2,825                        |       | 1,653                                 |       |             |       | 4,478                 |       |
| Gain on disposal  of assets                                               |       |                         |       |                                  |       |             |       |                  |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Total operating  costs and expenses                                       |       | 24,124                       |       | 10,752                                |       | —           |       | 34,876                |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| OPERATING LOSS                                                            |       | (6,306                       | )          | (5,173                                | )          | —           |       | (11,479               | )          |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Equity loss in  earnings of subsidiaries                                  |       | (5,173                       | )          | 0                                     |       | 5,173            |       | —                |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| OTHER EXPENSE                                                             |       |                         |       |                                  |       |             |       |                  |       |
| Interest expense  - net                                                   |       | 6,674                        |       | 0                                     |       | —           |       | 6,674                 |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Loss before  income taxes                                                 |       | (18,153                      | )          | (5,173                                | )          | 5,173            |       | (18,153               | )          |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Income tax  provision                                                     |       | 0                            |       | 0                                     |       | —           |       |                  |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Net loss                                                                  |       | $                            | (18,153    | )                                     | $          | (5,173           | )          | $                     | 5,173      |   | $ | (18,153 | ) |

 

34

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SUCCESSOR

PalaceEntertainment Holdings, Inc.

CondensedConsolidated Statement of Cash Flows for the Nine Month Period Ended September30, 2007 ( in thousands)

 
| ** **                                           | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash  provided by operating activities           |       | —       |       | 7,457                        |       | 20,991                                |       | —           |       | 28,448                     |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**           |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Purchases of  property and equipment                 |       |         |       | (9,052                       | )          | (3,854                                | )          |             |       | (12,906                    | )          |
| Payments for  disposal of assets                     |       |         |       | (149                         | )          |                                  |       |             |       | (149                       | )          |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash used in  investing activities               |       | —       |       | (9,201                       | )          | (3,854                                | )          | —           |       | (13,055                    | )          |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**           |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Capital  contribution                                |       | 800          |       | —                       |       | —                                |       | —           |       | 800                        |       |
| Return of capital                                    |       | (786         | )          | —                       |       | —                                |       | —           |       | (786                       | )          |
| Proceeds from  issuance of long term debt            |       | 22,000       |       | —                       |       | —                                |       | —           |       | 22,000                     |       |
| Payments on long  term debt                          |       | (22,000      | )          | —                       |       | —                                |       | —           |       | (22,000                    | )          |
| Advances to  related party                           |       | (14          | )          |                         |       | (17,053                               | )          | 17,067           |       | —                     |       |
| Advances from  related party                         |       | —       |       | 17,067                       |       | —                                |       | (17,067          | )          | —                     |       |
| Payments on  capital leases                          |       | —       |       | (849                         | )          | —                                |       | —           |       | (849                       | )          |
| Distributions to  member                             |       | —       |       | —                       |       | —                                |       | —           |       | —                     |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash  provided by (used in) financing activities |       | —       |       | 16,218                       |       | (17,053                               | )          | —           |       | (835                       | )          |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS           |       | —       |       | 14,474                       |       | 84                                    |       | —           |       | 14,558                     |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD      |       |         |       | 1,966                        |       | 124                                   |       |             |       | 2,090                      |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD            |       |         |       | $                            | 16,440     |                                  | $          | 208              |       |                       |       | $ | 16,648 |   |
|                                                      |            |              |            |                              |            |                                       |            |                  |            |                            |            |  |  |  |

 

35

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SUCCESSOR

PalaceEntertainment Holdings, Inc.

CondensedConsolidated Statement of Cash Flows for the Period Ended April 13 to September30, 2006 ( in thousands)

 
| ** **                                           | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash  provided by operating activities           |       | 23,236       |       | 35,677                       |       | 19,120                                |       | (42,258          | )          | 35,775                     |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:               |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Payment for  acquisition of FFP, net                 |       | (37,599      | )          |                         |       |                                  |       |             |       | (37,599                    | )          |
| Purchases of  property and equipment                 |       |         |       | (3,397                       | )          | (2,781                                | )          |             |       | (6,178                     | )          |
| Proceeds from  disposal of assets                    |       |         |       | —                       |       |                                  |       |             |       |                       |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash used in  investing activities               |       | (37,599      | )          | (3,397                       | )          | (2,781                                | )          | —           |       | (43,777                    | )          |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:               |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Issuance of  common stock                            |       | 54,260       |       |                         |       |                                  |       |             |       | 54,260                     |       |
| Capital  contribution                                |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Return of  capital                                   |       | (500         | )          |                         |       |                                  |       |             |       | (500                       | )          |
| Proceeds from  issuance of long term debt            |       | 163,500      |       |                         |       |                                  |       |             |       | 163,500                    |       |
| Payments on long  term debt                          |       |         |       | (189,095                     | )          |                                  |       |             |       | (189,095                   | )          |
| Payments for  cost of financing                      |       | (5,575       | )          |                         |       |                                  |       |             |       | (5,575                     | )          |
| Advances to  related party                           |       | (197,322     | )          | (8,095                       | )          | —                                |       | 205,417          |       |                       |       |
| Advances from  related party                         |       |         |       | 178,596                      |       | (15,437                               | )          | (163,159         | )          |                       |       |
| Payments on  capital leases                          |       |         |       | 183                          |       | (838                                  | )          |             |       | (655                       | )          |
| Distributions to  member                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash  provided by (used in) financing activities |       | 14,363       |       | (18,411                      | )          | (16,275                               | )          | 42,258           |       | 21,935                     |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS           |       | —       |       | 13,869                       |       | 64                                    |       | —           |       | 13,933                     |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD      |       |         |       | 4,975                        |       | 141                                   |       |             |       | 5,116                      |       |
|                                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD            |       |         |       | $                            | 18,844     |                                  | $          | 205              |       |                       |       | $ | 19,049 |   |
|                                                      |            |              |            |                              |            |                                       |            |                  |            |                            |            |  |  |  |

 

36

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Predecessor

PalaceEntertainment Holdings, Inc.

CondensedConsolidated Statement of Cash Flows For The Period Ended January 1 to April12, 2006 ( in thousands)

 
| ** **                                            | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **FFP  Consolidated** | ** ** |
|-------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|-----------------------|------------|
| Net cash used in  operating activities                |       | (5,481                       | )          | (2,850                                | )          |             |       | (8,331                | )          |
|                                                  |       |                         |       |                                  |       |             |       |                  |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                |       |                         |       |                                  |       |             |       |                  |       |
|                                                  |       |                         |       |                                  |       |             |       |                  |       |
| Purchases of  property and equipment                  |       | (1,269                       | )          | (2,682                                | )          |             |       | (3,951                | )          |
| Proceeds from  disposal of assets                     |       |                         |       |                                  |       |             |       |                  |       |
|                                                  |       |                         |       |                                  |       |             |       |                  |       |
| Net cash used in  investing activities                |       | (1,269                       | )          | (2,682                                | )          | —           |       | (3,951                | )          |
|                                                  |       |                         |       |                                  |       |             |       |                  |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                |       |                         |       |                                  |       |             |       |                  |       |
|                                                  |       |                         |       |                                  |       |             |       |                  |       |
| Issuance of  common stock                             |       |                         |       |                                  |       |             |       |                  |       |
| Capital  contribution                                 |       |                         |       |                                  |       |             |       |                  |       |
| Return of  capital                                    |       |                         |       |                                  |       |             |       |                  |       |
| Proceeds from  issuance of long term debt             |       | 13,100                       |       |                                  |       |             |       | 13,100                |       |
| Payments on long  term debt                           |       | (767                         | )          |                                  |       |             |       | (767                  | )          |
| Payments for  cost of financing                       |       |                         |       |                                  |       |             |       |                  |       |
| Advances to  related party                            |       | (5,558                       | )          | —                                |       | 5,558            |       |                  |       |
| Advances from  related party                          |       |                         |       | 5,558                                 |       | (5,558           | )          |                  |       |
| Payments on  capital leases                           |       | (118                         | )          | —                                |       |             |       | (118                  | )          |
| Distributions to  member                              |       | (57                          | )          |                                  |       |             |       | (57                   | )          |
|                                                  |       |                         |       |                                  |       |             |       |                  |       |
| Net cash  provided by financing activities            |       | 6,600                        |       | 5,558                                 |       | —           |       | 12,158                |       |
|                                                  |       |                         |       |                                  |       |             |       |                  |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS |       | (150                         | )          | 26                                    |       | —           |       | (124                  | )          |
|                                                  |       |                         |       |                                  |       |             |       |                  |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD       |       | 5,125                        |       | 115                                   |       |             |       | 5,240                 |       |
|                                                  |       |                         |       |                                  |       |             |       |                  |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD             |       | $                            | 4,975      |                                  | $          | 141              |       |                  |       | $ | 5,116 |   |
|                                                       |            |                              |            |                                       |            |                  |            |                       |            |  |  |  |

 

37

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

OVERVIEW

 

We are one of the largestoperators of WPs and FECs in the United States, based on the number of Parksoperated. As of September 30, 2007, we operated a geographically diverseportfolio of 33 Parks in eight states with an attendance that we estimate to bein excess of 10 million guests in 2007. Each of our Parks is awell-established business with a long operating history, with our WPs and ourFECs having been in operation for an average of over 24 years and19 years, respectively. We operate our Parks under several establishedbrand names such as Wet ’N Wild®, Splish SplashÔ,Raging Waters®, Malibu Grand Prix®, MountasiaÔ,SpeedZone®, Big Kahuna’s®, Silver Springs® and Boomers!®.

 

Our typical WP offers 15to 25 rides and attractions including variable depth pools, water slides, wavepools, action and “lazy” rivers, tube rides and water-themed adventure areas,as well as interactive children’s play areas. We generate revenue in our WPsfrom general admission ticket sales, the sales of food, beverages, souveniritems, strollers, locker rentals and parking.

 

With locations inCalifornia, Florida, Georgia, New York and Texas, our FECs offer a variety ofattractions, including some or all of the following: miniature golf courses,go-karts, bumper boats, thrill rides, state-of-the-art arcade games, redemptiongames, batting cages, rock walls, laser tag and children’s rides. Two of ourFECs offer dragster racing on six racing tracks. Our FECs typically do notcharge a general admission fee; guests only pay for those games they wish toutilize. Additionally, under certain promotions, we offer bundled pricing andgroup packages. Our FECs generate revenues from attractions and the sales offood, beverages and merchandise.

 

Attendance at our Parksis the key driver of our revenues and profitability. Adverse weather conditionssignificantly reduce our guests’ attendance. In addition, our Parks also aresubject to changing consumer tastes, preferences and demands, which directlyaffect attendance and revenue per guest. In general, we compete indirectly withall phases of the entertainment and recreation industry within our primarymarkets, including movie theaters, bowling alleys, skating rinks, sportingevents, restaurants, zoos, museums, carnivals, aquariums, resorts, natural andhistorical attractions and playgrounds.

 

In order to anticipateand adapt to changing consumer preferences and maintain and increase attendance,we must invest in new rides, amusements, arcade games and attractions.

 

Our operating costs andexpenses consist of the following: cost of revenue, which primarily includescosts of products sold like food and beverage, arcade redemption prizes andmerchandise; salaries and benefits, which include the costs of our park levelfull-time and part time employees; operating and maintenance, which includesoutside services, supplies, spare parts, and utilities; rent (a portion ofwhich are percentage rents) and property taxes, which includes all park levelrent and property tax expenses (offset by rental income earned from thesublease of building space and/or land); selling, general and administrativeexpenses, which includes all corporate overhead including corporate salaries,office rent, insurance costs and fees to outside professional serviceproviders, other operating costs which include all advertising, promotion andmarketing program expenses (including television, radio and print advertising);and depreciation and amortization, which is primarily related to our leaseholdimprovements, equipment and trademarks. All of our facilities are on leasedproperty. Certain of our expenses are relatively fixed, and costs for full-timeemployees, outside services, maintenance, utilities, insurance, depreciationand amortization and occupancy costs do not vary significantly with attendance.We add significant numbers of seasonal employees during the warmer months ofthe year, primarily from Memorial Day to Labor Day. Our seasonal workforceconsists of high-school aged young adults and teachers who work on an hourlybasis during our operating season for our WPs and year-round with peak summeremployment for our FECs. A significant number of our hourly personnel at our facilitiesare paid at rates related to the federal minimum wage. Under federal and statechild labor laws, we are regulated in the number of hours, the times and thetypes of jobs that youths up to the age of 18 are permitted to work.

 

Our nine WPs and one naturepark have gated entrances, which allow us to track admissions and per capitaspending for these Parks. We generally do not track attendance and per capitaspending for our 23 non-gated FECs.

 

38

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Our business is highlyseasonal. Typically, our WPs operate on an approximate 110-day operatingseason, generally from Memorial Day through Labor Day, and though our FECs areopen year-round, there is also significantly greater attendance at our FECsduring this period and other periods when children are out of school. More than75% of our revenues are generated during the second and third calendar quartersof each year. We believe that the spending at our FECs varies widely among ourcustomers based on age and other demographic factors, and the location andnature of the attractions of the park.

 

Our business isconcentrated geographically and by the size of our Parks. Seventeen of ourParks are located in California and accounted for 43%****ofour revenue for the nine month period ended September 30, 2007.

 

The period April 13, 2006to September 30, 2006 reflects the results of operations by the Companyfollowing the acquisition of FFP while the period January 1 to April 12, 2006reflect the operations of FFP pre-acquisition.  Therefore, the periods arenot comparable.  However, for the purpose of comparing the operations forthe three and nine months ended September 30, 2007 and 2006, thepre-acquisition and post-acquisition periods in 2006 have been combined in thediscussions below:

 

**Comparisonof Three Month Period Ended September 30, 2007 and 2006**

 

Our combined net incomewas $17.4 million and $15.3 million for the three month period ended September30, 2007 and 2006, respectively. The following table sets forth statement ofoperations data and other data for the periods indicated: 

 
| ** **                              | ** ** | **For the three months ended September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                                                   | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)**                                       | ** ** |
| ** **                              |       |                                                                       |       |   |   |
| **Statement of operations:**  |       |                                                                       |       |   |   |
| ** **                              |       |                                                                       |       |   |   |
| **Revenues**                            |       |                                                                       |       |   |   |
| FECs                                    |       | $                                                                          | 24,624     |   | $ | 24,294 |   |
| WPs                                     |       | 64,534                                                                     |       | 57,926 |   |
| Total revenues                          |       | 89,158                                                                     |       | 82,220 |   |
|                                    |       |                                                                       |       |   |   |
| **Operating  costs and expenses**       |       |                                                                       |       |   |   |
| Cost of revenues                        |       | 42,761                                                                     |       | 40,865 |   |
| % of revenues                           |       | 48.0                                                                       | %          | 49.7 | % |
| Selling, general  and administrative    |       | 8,791                                                                      |       | 7,558 |   |
| % of revenues                           |       | 9.9                                                                        | %          | 9.2 | % |
| Depreciation and  amortization          |       | 4,283                                                                      |       | 4,728 |   |
| Loss on disposal  of assets             |       | 221                                                                        |       | 0 |   |
| **Total  operating costs and expenses** |       | 56,056                                                                     |       | 53,151 |   |
| Operating income                        |       | 33,102                                                                     |       | 29,069 |   |
| Interest  expense, net                  |       | 4,230                                                                      |       | 4,216 |   |
| **Net  income before income taxes**     |       | 28,872                                                                     |       | 24,853 |   |
| **Income  tax provision**               |       | 11,452                                                                     |       | 9,520 |   |
|                                    |       |                                                                       |       |   |   |
| **Net  income**                         |       | $                                                                          | 17,420     |   | $ | 15,333 |   |

 

 

39

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We have two reportable segments, FECs and WPs. The accounting policiesof the segments are the same as those described in critical accounting policiesbelow. Net income of the segments does not include interest income or expenseand provision for income taxes. The following table sets forth certainstatement of operations data by segment and other data for the periodsindicated:

 
| ** **                          | ** ** | **For the three months ended September 30,** | ** ** | **For the three months ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **WPs**                                                                    | ** ** | **FECs**                                                                   | ** ** |
| ** **                          | ** ** | **2007**                                                                   | ** ** | **2006**                                                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues, net                       |       | $                                                                          | 64,534     |                                                                       | $          | 57,926 |   | $ | 24,624 |   | $ | 24,294 |   |
| Segment level  income (1)           |       | 35,571                                                                     |       | 30,767                                                                     |       | 6,096 |   | 6,113 |   |
| Segment level  capital expenditures |       | 923                                                                        |       | 1,150                                                                      |       | 1,330 |   | 1,561 |   |
|                                     |            |                                                                            |            |                                                                            |            |  |  |  |  |  |  |  |  |

 

----

(1)             See*Footnote 13, Segment Information Disclosure,*inthe “Notes to the Condensed Consolidated Financial Statements” for thereconciliation between segment-level earnings and the Company’s net income.

 
| ** **              | ** ** | **For the three months ended September 30,** | ** ** |
|-------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                                                   | ** ** | **2006** | ** ** |
|                    |       |                                                                       |       |   |   |
| **WP  operating data:** |       |                                                                       |       |   |   |
|                    |       |                                                                       |       |   |   |
| WP Attendance           |       | 2,085,352                                                                  |       | 1,923,474 |   |
|                    |       |                                                                       |       |   |   |
| Revenue per  guest      |       | $                                                                          | 30.95      |   | $ | 30.12 |   |
|                         |            |                                                                            |            |  |  |  |  |

 

**Three month period ended September 30, 2007 and2006**

 

*Revenue.*Revenue for the three month period ended September 30, 2007totaled $89.2 million compared to $82.2 million for the three monthperiod ended September 30, 2006, an increase of $6.9 million or 8.4%. FECrevenues increased $0.3 million or 1.4% over the same period in 2006. Goodweather in the Texas, New York and Georgia locations in particular combinedwith pricing initiatives and last year’s initiatives to improve the parkappearances and the quality of the guest service contributed to this revenueincrease. WP revenue increased by $6.6 million or 11.4% over the same period in2006. The WP revenue increase includes $2.0 million of revenue for RagingWaters Sacramento which is a new park that began operations in the second quarterof 2007. The additional revenue increase at the WPs is also attributed topricing initiatives, heavier season pass revenue and increased attendance.

 

*Costof revenue.*Our park level operating expenses totaled $42.8million for the three month period ended September 30, 2007 compared to $40.9million for the same period in 2006, an increase of $1.9 million or 4.6%.Operating expenses as a percentage of revenue decreased to 48.0% in 2007compared to 49.7% in 2006. The primary drivers in each expense category were asfollows:

 

•                  Cost of products sold increased $0.3million or 4.6% for the three month period ended September 30, 2007 compared tothe same period in 2006 primarily due to revenue driven incremental food,beverage and merchandise costs.

 

•                  Salaries and benefits increased $0.7million or 4.2% for the three month period ended September 30, 2007 compared tothe same period in 2006. The primary cause of the increase was due to the newlyacquired park, Raging Waters Sacramento. With revenue increasing 8.4%, theCompany has controlled and leveraged labor during this period by reducingoverall hours and improving productivity. This was accomplished despite minimumwage increases.

 

•                  Operating and maintenance costs wereincreased $0.4 million or 3.4% for the three month period ended September 30,2007 compared to the same period in 2006. The primary cause of the increase wasdue to the newly acquired park, Raging Waters Sacramento.

 

•                  Rent and property taxes increased$0.4 million or 6.8% for the three month period ended September 30, 2007compared to the same period in 2006 as a result of the addition of the newpark, Raging Waters Sacramento. The increase is also due to an increase inrevenue, as several of the rent agreements have rent expense based on apercentage of revenue.

 

*Selling,general and administrative expenses.*Selling, general andadministrative expenses totaled $8.8 million for the three month period endedSeptember 30, 2007 compared to $7.6 million for the same period in 2006, anincrease of $1.2 million or 

 

40

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16.3%. The primary causeswere a $0.7 million increase in M&A costs relating to the acquisitionnoted in Subsequent Event Footnote 2 in the “Notes to Condensed ConsolidatedFinancial Statements”, a $0.4 million increase in bonuses due to an expectationof a better year than 2006, and a $0.1 million increase in professional auditand legal fees attributable to being a public company.

 

*Depreciationand amortization.*Depreciationand amortization expenses totaled $4.3 million for the three month period endedSeptember 30, 2007 as compared to $4.7 million during the same period in 2006,a decrease of $0.4 million or 9.4%. This decrease is due primarily to assetsthat have been fully depreciated.

 

*Interestexpense, net*. Interestexpense, net was comparable for the three month period ended September30, 2007 to the same period in 2006.

 

*Incometax provision.*The Company recorded an income tax provisionof $11.5 million for the three month period ended September 30, 2007 comparedto $9.5 million for the three month period ended September 30, 2006. Theprimary difference was a valuation allowance of $1.6 million that was includedin the income tax provision in 2007. The valuation allowance was determinedbased on the excess of the projected 2007 fiscal year net operating losses thatcannot be offset against the prior year’s taxable income recognized during thestub period April 13to December 31, 2006.

 

**Comparisonof Nine Months Ended September 30, 2007 and 2006**

 

Our combined net incomewas $0.6 million for the nine month period ended September 30, 2007 and ourcombined net loss was $6.5 million for the nine month period ended September30, 2006. The following table sets forth statement of operations data and otherdata for the periods indicated: 

 
| ** **                              | ** ** | **For the nine month period  ended September 30,** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                                                         | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)**                                             | ** ** |
|                                    |       |                                                                             |       |   |   |
| **Statement  of operations:**           |       |                                                                             |       |   |   |
|                                    |       |                                                                             |       |   |   |
| **Revenues**                            |       |                                                                             |       |   |   |
| FECs                                    |       | $                                                                                | 67,763     |   | $ | 65,715 |   |
| WPs                                     |       | 87,932                                                                           |       | 79,364 |   |
| Total revenues                          |       | 155,695                                                                          |       | 145,079 |   |
|                                    |       |                                                                             |       |   |   |
| **Operating  costs and expenses**       |       |                                                                             |       |   |   |
| Cost of revenues                        |       | 100,154                                                                          |       | 96,262 |   |
| % of revenues                           |       | 64.3                                                                             | %          | 66.4 | % |
| Selling, general  and administrative    |       | 20,958                                                                           |       | 17,238 |   |
| % of revenues                           |       | 13.5                                                                             | %          | 11.9 | % |
| Depreciation and  amortization          |       | 13,512                                                                           |       | 13,506 |   |
| Loss on disposal  of assets             |       | 186                                                                              |       | 0 |   |
| **Total  operating costs and expenses** |       | 134,810                                                                          |       | 127,006 |   |
| Operating income                        |       | 20,885                                                                           |       | 18,073 |   |
| Interest  expense, net                  |       | 13,392                                                                           |       | 15,044 |   |
| **Net  income before income taxes**     |       | 7,493                                                                            |       | 3,028 |   |
| **Income  tax provision**               |       | 6,933                                                                            |       | 9,564 |   |
|                                    |       |                                                                             |       |   |   |
| **Net  income (loss)**                  |       | $                                                                                | 560        |   | $ | (6,535 | ) |

 

 

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We have two reportable segments, FECs and WPs. The accounting policiesof the segments are the same as those described in critical accounting policiesbelow. Net Income (loss) of the segments does not include interest income orexpense and provision for income taxes. The following table sets forth certainstatement of operations data by segment and other data for the periodsindicated:

 
| ** **                          | ** ** | **For the nine month period  ended September 30,** | ** ** | **For the nine month period  ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **WPs**                                                                          | ** ** | **FECs**                                                                         | ** ** |
| ** **                          | ** ** | **2007**                                                                         | ** ** | **2006**                                                                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues, net                       |       | 87,932                                                                           |       | 79,364                                                                           |       | 67,763 |   | 65,715 |   |
| Segment level  income (1)           |       | 30,453                                                                           |       | 25,794                                                                           |       | 15,593 |   | 14,153 |   |
| Segment level  capital expenditures |       | 7,367                                                                            |       | 5,993                                                                            |       | 5,144 |   | 3,965 |   |

 

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(1)             *See Footnote 13, Segment Information Disclosure,*in the “Notesto the Condensed Consolidated Financial Statements” for the reconciliationbetween segment-level earnings and the Company’s net income.

 
| ** **              | ** ** | **For the nine month period  ended September 30,** | ** ** |
|-------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                                                         | ** ** | **2006** | ** ** |
|                    |       |                                                                             |       |   |   |
| **WP  operating data:** |       |                                                                             |       |   |   |
|                    |       |                                                                             |       |   |   |
| WP Attendance           |       | 2,935,943                                                                        |       | 2,756,638 |   |
|                    |       |                                                                             |       |   |   |
| Revenue per  guest      |       | $                                                                                | 29.95      |   | $ | 28.79 |   |
|                         |            |                                                                                  |            |  |  |  |  |

 

**Nine months ended June 30, 2007 and 2006**

 

*Revenue.*Revenue for the nine month period ended September 30, 2007totaled $155.7 million compared to $145.1 million for the nine monthperiod ended September 30, 2006, an increase of $10.6 million or 7.3%. FECrevenues increased $2.0 million or 3.1% over the same period in 2006. This wasachieved despite unfavorable weather in Texas that adversely effected four FEClocations. Good weather in California and the southeast locations combined withpricing initiatives, increased capital spending, and last year’s initiatives toimprove the park appearances and the quality of the guest service contributedto this revenue increase. WP revenue increased by $8.6 million or 10.8% overthe same period in 2006. WP revenue includes $3.0 million of revenue for RagingWaters Sacramento which is a newly acquired park that began operations in thesecond quarter of 2007. The additional revenue increase at the WPs is alsoattributed to pricing initiatives, heavier season pass revenue, and the increasein attendance.

 

*Costof revenue.*Our park level operating expenses totaled $100.2million for the nine month period ended September 30, 2007 compared to $96.3million for the same period in 2006, an increase of $3.9 million or 4.0%.Operating expenses as a percentage of revenue decreased to 64.3% in 2007compared to 66.4% in 2006. The primary drivers in each expense category were asfollows:

 

•                  Cost of products sold increased $0.7million or 6.6% for the nine month period ended September 30, 2007 compared tothe same period in 2006 primarily due to revenue driven incremental food,beverage and merchandise costs.

 

•                  Salaries and benefits increased $1.4million or 3.3% for the nine month period ended September 30, 2007 compared tothe same period in 2006. The primary cause of the increase was due to the newlyacquired park, Raging Waters Sacramento. With revenue increasing 7.3%, theCompany has controlled and leveraged labor during this period by reducingoverall hours and improving productivity. This was accomplished despite minimumwage increases.

 

•                  Operating and maintenance costsincreased $1.1 million or 3.8% for the nine month period ended September 30,2007 compared to the same period in 2006. The primary factor driving thischange was increased revenue and a $0.8 million increase in the generalliability self insurance reserve.

 

•                  Rent and property taxes increased$0.6 million or 3.9% for the nine month period ended September 30, 2007compared to the same period in 2006 as a result of the addition of the newpark, Raging Waters Sacramento. The increase is also due to an increase inrevenue, as several of the rent agreements have rent expense based on apercentage of revenue.

 

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*Selling,general and administrative expenses.*Selling, general andadministrative expenses totaled $21.0 million for the nine month period endedSeptember 30, 2007 compared to $17.2 million for the same period in 2006, anincrease of $3.7 million or 21.6%. The increase was primarily driven by a$1.0 million increase in severance related costs associated with thecorporate reorganization at the beginning of 2007, an increase in bonuses dueto an expectation of a better year in 2007 than 2006, an increase inprofessional audit and legal fees attributable to being a public company, andan increase in M&A costs relating to the acquisition noted in SubsequentEvent Footnote 2 in the “Notes to Condensed Consolidated Financial Statements”.

 

*Depreciationand amortization.*Depreciationand amortization expenses were comparable for the nine month period endedSeptember 30, 2007 to the same period in 2006.

 

*Interestexpense, net*. Interestexpense, net totaled $13.4 million for the nine month period endedSeptember 30, 2007 compared to $15.0 millionduring the same period in 2006, a decrease of $1.7 million or 11.0%. Thedecrease in interest expense was primarily due to the lower debt levels andlower interest rates that resulted from the new capital structure implementedat the time of the 2006 Acquisition. The debt extinguishment fees relating tothe loans repaid as of the 2006 Acquisition date were recorded to goodwill.

 

*Incometax provision.*The Company recorded an income tax provisionof $6.9 million for the nine month period ended September 30, 2007 compared to$9.6 million for the same period in 2006. The income tax provision includes$3.9 million in valuation allowance. The valuation allowance was determinedbased on the excess of the projected 2007 fiscal year net operating losses thatcannot be offset against the prior year’s taxable income recognized during thestub period April 13to December 31, 2006.

 

**Liquidityand capital resources**

 

During the nine monthperiod ended September 30, 2007, net cash provided by operating activities was $28.4million and $27.4 million during the same period in 2006. Because our businessis seasonal and involves significant levels of cash transactions, factorsimpacting our net operating cash flows are the same as those impacting ourcash-based revenues and expenses discussed above.

 

Net cash used ininvesting activities was $13.0 million and $47.7 million for the nine monthperiod ended September 30, 2007 and 2006, respectively. In 2006, there was thepayment for the 2006 Acquisition of FFP.

 

Net cash used infinancing activities for the nine month period ended September 30, 2007 was$0.8 million compared to net cash provided by financing activities of $34.1million during the same period in 2006. The net cash used in 2007 was primarilydriven by payments made on capital leases. In 2006, the primary proceeds wererelated to the issuance of common stock relating to the 2006 Acquisition ofFFP.

 

In connection with the2006 Acquisition, we incurred substantial amounts of debt, including amountsoutstanding under the Notes and our Revolver. Interest payments on thisindebtedness significantly reduce our cash flow from operations. However, as aresult of the refinancing of our debt in connection with the 2006 Acquisitionfrom the proceeds of equity contribution and the issuance of the Notes, ourannual interest expense has significantly decreased and we are no longersubject to annual debt amortization payments. As of September 30, 2007, $150million of Notes are outstanding and the principal is due April 12, 2014. Therewas an interest payment made on the Notes on April 16, 2007 with respect to thenine month period ending, September 30, 2007. See Subsequent Event Footnote 2in the “Notes to Condensed Consolidated Financial Statements” for informationregarding the Notes.

 

Our Revolver consists ofa $40.0 million revolving credit facility. Due to the seasonal nature of ourbusiness, we are dependent upon our revolving credit facility to fundoff-season expenses with seasonal borrowings typically peaking during our fiscalsecond quarter. Our ability to borrow under the revolving credit facility isdependent upon compliance with certain conditions, including satisfying certainfinancial ratios and the absence of any material adverse change. As ofSeptember 30, 2007, there was no outstanding balance on our revolving creditfacility and $3.8 million of issued but undrawn letters of credit.

 

43

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The degree to which weare leveraged could adversely affect our liquidity. Our liquidity could also beadversely affected by unfavorable weather, accidents or the occurrence of anevent or condition, including negative publicity or significant localcompetitive events that significantly reduce paid attendance and, therefore,revenue at any of our Parks. In addition, our anticipated cash flows could bematerially adversely affected by the occurrence of certain of the risksdescribed in “Risk Factors.” In that case, we would need to seek additionalfinancing.

 

We believe, based onhistorical and anticipated operating results, that cash flows from operations,available cash and available amounts under the Revolver will be adequate tomeet our future liquidity needs, including anticipated requirements for workingcapital, capital expenditures and scheduled debt requirements for at least thenext twelve months.

 

**Offbalance sheet arrangements**

 

We have no off-balancesheet arrangements.

 

**ContractualObligations**

 

See Subsequent EventFootnote 2 in the “Notes to Condensed Consolidated Financial Statements”regarding the contractual obligations.

 

The following tablesummarizes the timing of our required payments due under various contractualobligations as of September 30, 2007:

 
| ** **                         | ** ** | **Less than**                   | ** ** | **One Year**            | ** ** | **Three Years to** | ** ** | ** **     | ** ** | ** ** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------|------------|------------|------------|
| ** **                         | ** ** | **One Year**                    | ** ** | **to Three Years** | ** ** | **Five Years**          | ** ** | **Thereafter** | ** ** | **Total**  | ** ** |
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| As of September  30, 2007:         |       |                                 |       |                         |       |                         |       |           |       |       |       |
| Long term debt  including interest |       | $                                    | 16,312     |                         | $          | 32,624                       |       | $              | 32,624     |       | $          | 182,624 |   | $ | 264,184 |   |
| Capital lease  obligations         |       | 37                                   |       | 73                           |       | —                       |       | —         |       | 110        |       |
| Park and office  leases(1)         |       | 3,506                                |       | 27,068                       |       | 26,833                       |       | 224,448        |       | 281,855    |       |
| Total                              |       | $                                    | 19,855     |                         | $          | 59,765                       |       | $              | 59,457     |       | $          | 407,072 |   | $ | 546,149 |   |

 

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 (1)          Does not include annualrent escalations associated with the consumer price index or any percentagerent in excess of minimum levels.

 

**Recentlyissued accounting pronouncements**

 

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 159 (“SFAS No. 159”), *TheFair Value Option for Financial Assets and Financial Liabilities*— *including an amendment of FASB Statement No. 115*.SFAS No. 159 gives the Company the irrevocable option to carry most financialassets and liabilities at fair value, with changes in fair value recognized inthe statement of operations. SFAS No. 159 is effective for the Company’s 2008fiscal year, although early adoption is permitted. The Company is currentlyassessing the potential effect of SFAS No. 159 on its consolidated financialstatements.

 

In September 2006, theFASB issued SFAS No. 157 (“SFAS No. 157”), *Fair Value Measurements.*SFAS No. 157 establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. SFAS No. 157 is effective for financial statements issued forfiscal years beginning after November 15, 2007, and interim periods withinthose fiscal years. The Company is in the process of evaluating the impact ofadopting SFAS No. 157 on its consolidated financial statements.

 

44

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In July 2006, the FASB issued FASB Interpretation No.48 (“FIN No. 48”), *Accounting for Uncertaintyin Income Taxes,* which prescribes a recognition threshold andmeasurement process for recording in the financial statements uncertain taxpositions taken or expected to be taken in a tax return. Additionally, FIN No.48 provides guidance on derecognition, classification, interest and penalties,accounting in interim periods and disclosure requirements for uncertain tax positions.The Company adopted the provisions of FIN No. 48, on January 1, 2007. TheCompany did not have any unrecognized tax benefits and there was no effect onour financial condition or results of operations as a result of implementingFIN No. 48.

 

In July 2006, the FASB issued Emerging Issues TaskForce (“EITF”) 06-3, *How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation*) thatrequires disclosure of the accounting policy related to any tax assessed by agovernment authority in a revenue producing transaction (either gross or net)and the amount of such taxes in both interim and annual financial statements ifthe amounts are significant. The Company has adopted EITF 06-3 and theCondensed Consolidated financial statements conform to its requirements. TheCompany’s policy is to present the taxes collected from the customers andremitted to governmental authorities on a net basis.

 

**Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*InterestRates.*Our market risks relate primarily to changes ininterest rates. Our Revolver carries floating interest rates that are tied tothe LIBOR rate and the Prime rate and therefore, the consolidated financialstatements will be exposed to changes in interest rates. A 1.0% interest rateincrease would increase interest expenses between $0 and $0.4 million annually,depending on the average carrying balance of the facility which could vary from$0 to $40 million. We historically have not engaged in interest rate hedgingactivities.

 

*CurrencyExchange Rates.*We are not exposed to currency exchange raterisks.

 

**Item 4.CONTROLS AND PROCEDURES**

 

The Company’s management,with the participation of the Company’s Chief Financial Officer, has evaluatedthe effectiveness of the Company’s disclosure controls and procedures as ofSeptember 30, 2007. Based on that evaluation, the Company’s Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective as of September 30, 2007. The Company is required to comply withSection 404 of the Sarbanes-Oxley Act of 2002, as amended, as of December 31,2007, and has initiated efforts to further ensure the adequacy andeffectiveness of its internal controls. There were no material changes in theCompany’s internal control over financial reporting during the third quarter.

 

**PART II.OTHER INFORMATION**

 

**Item 1.LEGAL PROCEEDINGS**

 

From time to time, theCompany is involved in litigation relating to claims arising out of itsoperations in the normal course of business. As of September 30, 2007, theCompany is not a party to any legal proceedings, the adverse outcome of which,in management’s opinion, individually or in the aggregate, would have a materiallyadverse effect on the Company’s consolidated financial position or results ofoperations.

 

The Company receivedwritten notice in December 2004 concerning the Texas Department ofTransportation’s intention to seize, through the eminent domain process, aportion of the real property leased by the Company at its Dallas SpeedZone® FECin connection with the widening of Interstate 35 E. The Company is currently innegotiations with its landlord on a global resolution of the issue, and isclose to an agreement whereby the landlord will sell the subject portion of theproperty to the State and then pay to modify the Company’s facilities toconform to the new property line.

 

The Company and MidOceanPartners were named as defendants in a lawsuit alleging, among other things,breach of a finder’s fee agreement and tortious interference with suchagreement in connection with the 2006 Acquisition.  The plaintiff, StevenCrowley (“Crowley”), asserted five claims in his Amended Complaint datedJanuary 5, 2007.  Crowley purported to hold the Company responsible forthe alleged breach of a finder’s agreement between Crowley and VisionMaker,LLC, an entity unrelated to the Company.  The Company filed a motion todismiss the complaint 

 

45

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and requested thatCrowley not be granted leave to amend.  The motion was heard by the UnitedStates District Court for the Southern District of New York and was granted inits entirety on September 24, 2007.  The case has therefore been dismissed,and barring an appeal, the litigation is concluded.

 

**Item 1A.RISK FACTORS**

 

**Risksrelated to our business**

 

There have been nomaterial changes from the Risk Factors disclosed under the heading in Part I,Item 1A of our Annual Report on Form 10-K for the quarter ended September 30,2007. See Subsequent Event Footnote 2 in the “Notes to Condensed ConsolidatedFinancial Statements”.

 

**Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

On March 1, 2007,Alexander Weber, Jr., Chief Executive Officer, purchased 500 membership units(Class A) of Holdings for $500,000 in cash. Such Units were issued pursuant tothe exemption from registration contained in Section 4(2) of the Securities Actas they were sold to a sophisticated and accredited individual.

 

On April 12, 2007, theCompany repurchased 350 membership units (Class A) of Holdings from John A.Cora, the former President and Chief Executive Officer of the Company, for$350,000 in cash. The Company also repurchased 300 membership units (Class A)of Holdings from Dan S. Martinez, the former Chief Operating Officer of theCompany, for $300,000 in cash. The remaining repurchases of membership unitsfor $136,000 in cash were from several former employees where the aggregatetotal was less than 1% of the total outstanding limited liability companyinterests of Holdings.

 

On May 30, 2007, CynthiaP. Kellogg, Chief Financial Officer, purchased 300 membership units (Class A)of Holdings for $300,000 in cash. Such Units were issued pursuant to theexemption from registration contained in Section 4(2) of the Securities Act asthey were sold to a sophisticated and accredited individual.

 

See Subsequent EventFootnote 2 in the “Notes to Condensed Consolidated Financial Statements”relating to the sale of all of the issued and outstanding shares of the Companyto Centaur Holdings United States, Inc.

 

**Item 3.DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**Item 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**Item 5.OTHER INFORMATION**

 

None.

 

**Item 6.EXHIBITS**

 

See Exhibit Index

 

46

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|        |   | Palace Entertainment  Holdings, Inc.                                  |
|--------|--------|-----------------------------------------------------------------------|
|   |   |                                                                  |
|   |   | /s/ Cynthia P. Kellogg                                                |
|   |   | By: Cynthia P. Kellogg                                                |
|   |   | Chief Financial Officer                                               |
|   |   | (Principal Financial and Accounting Officer and   Authorized Officer) |
|   |   |                                                                  |
|   |   | Dated: November 9, 2007                                               |

 

47

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                          |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Stock Purchase  Agreement dated as of August 23, 2007, among Palace Holdings Group, LLC,  Palace Entertainment Holdings, Inc. and Centaur Holdings United States, Inc.  (incorporated by reference to the Current Report on Form 8-K filed August 24,  2007, File No.****333-135091-12).                                                                                                                                       |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.2                 |       | Consent and Third  Amendment to Credit Agreement dated as of October 2, 2007, by and among the  Company, Festival Fun Parks, LLC and the other Borrowers signatory thereto,  the other Credit Parties signatory thereto, and General Electric Capital  Corporation, as a Lender and as Agent for the Lenders. (incorporated by  reference to the Current Report on Form 8-K filed October 3, 2007, File No.****333-135091-12). |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 31.1                 |       | Rule  13a-14(a)/15d-14(a) Certification by the Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                              |
|                 |       |                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 32.1                 |       | Section 1350  Certification of Periodic Report by the Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002†                                                                                                                                                                                                                                                                                 |

 

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†              This certification will not bedeemed “filed” for purposes of Section 18 of the Securities Exchange Act of1934 (15 U.S.C. 78r), or otherwise subject to the liability of that section.Such certification will not be deemed to be incorporated by reference into anyfiling under the Securities Act or Securities Exchange Act, except to theextent that the Company specifically incorporates it by reference.

 

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