**UNITEDSTATES SECURITIES AND EXCHANGECOMMISSION****Washington, DC 20549**

**FORM 10-Q/A**

**(Amendment No. 1)**

**x****    ****QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934****for the quarterly period ended October 1, 2006**

**OR**

**o****   **** TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934****for the transition periodfrom           to           .**

**COMMISSIONFILE NUMBER:  333-135091-12**

**Palace EntertainmentHoldings, Inc.**

**(Exactname of registrant 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) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes x  No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated  filer o | Accelerated  filer o | Non-accelerated  filer x |
|---------------------------------|---------------------------|-------------------------------|

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

o  Yes  x  No

 

There were 100 shares ofcommon stock with a par value of $.01 per share outstanding as of October 1,2006.

 

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**EXPLANATORYNOTE**

ThisForm 10-Q/A Amendment No.1 amends Items 1, 2 and 4 of Part I and Item 6 of PartII of the Company’s quarterly report on Form 10-Q for the quarter ended October1, 2006, also referred to as the three and nine month periods ended September30, 2006 and 2005 for the purpose of quarterly presentation, which wasoriginally filed on November 15, 2006. The amendment is a result of the restatement of the Company’s Condensed ConsolidatedStatements of Operations and Cash Flows for the three months and nine monthsended September 30, 2005.

Subsequentto the filing of the original Form 10-Q, the Company’s management discovered anoverstatement of the non cash accretion of interest expense related to thepredecessor company’s redeemable securities, subsequently retired as of thedate of the acquisition of Festival Fun Parks, LLC on April 12, 2006, and anunderstatement of net income for the three months and nine months endingSeptember 30, 2005.

TheCompany is restating to correct this error in the previously issued CondensedConsolidated Financial Statements for the periods referenced above.

Theaccounting error is described in more detail in Note 2 to the CondensedConsolidated Financial Statements included in Item 1of Part I - FinancialStatements.

Allof the information in this Form 10-Q/A is as of November 15, 2006, the date theCompany originally filed its Form 10-Q with the Securities and ExchangeCommission, and does not reflect any subsequent information or events otherthan the restatement discussed in Note 2 to the Condensed ConsolidatedFinancial Statements appearing in this Form 10-Q/A.  For the convenience of the reader, this Form10-Q/A sets forth the originally filed Form 10-Q as amended hereby, in itsentirety.

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**TABLEOF CONTENTS**
| Safe Harbor Statement under the Private  Securities Litigation Reform Act of 1995                                     |   |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                  |   |   |
| PART I. CONDENSED FINANCIAL INFORMATION (unaudited)                                                                   |   | 4      |
| Item  1. Financial Statements                                                                                         |   | 4      |
| Condensed Consolidated Balance Sheets as of September  30, 2006 and December 31, 2005                                 |   | 4      |
| Condensed Consolidated Statements of Operations for  the three months ended September 30, 2006 and 2005 (as restated) |   | 5      |
| Condensed Consolidated Statements of Operations for  the nine months ended September 30, 2006 and 2005 (as restated)  |   | 6      |
| Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2006 and 2005 (as restated)  |   | 7      |
| Notes to Condensed Consolidated Financial Statements                                                                  |   | 8      |
| Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations                   |   | 39     |
| Item 3. Quantitative and Qualitative Disclosures About  Market Risk                                                   |   | 49     |
| Item  4. Controls and Procedures                                                                                      |   | 49     |
|                                                                                                                  |   |   |
| PART  II. OTHER INFORMATION                                                                                           |   | 50     |
| Item  1. Legal Proceedings                                                                                            |   | 51     |
| Item  1A. Risk Factors                                                                                                |   | 51     |
| Item 2. Unregistered Sales of Equity Securities and  Use of Proceeds                                                  |   | 51     |
| Item 3. Defaults Upon Senior Securities                                                                               |   | 51     |
| Item 4. Submission of Matters to a Vote of Security  Holders                                                          |   | 51     |
| Item  5. Other Information                                                                                            |   | 51     |
| Item 6.  Exhibits                                                                                                     |   | 51     |

 

2

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**CAUTIONARYNOTE REGARDINGFORWARD-LOOKING STATEMENTS AND RISK FACTORS**

**(Safe-HarborStatement Under the Private Securities Litigation Reform Act of 1995)**

This quarterly report on Form10-Q/A 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-looking statementsreflect our current expectations and are not guarantees of performance. Thesestatements are based on our management’s beliefs and assumptions, which in turnare based on currently available information. Important assumptions relating tothese forward-looking statements include, among others, assumptions regardingdemand for our water parks and family entertainment centers, expected pricinglevels, the timing and cost of planned capital expenditures, the estimatedoperational costs for each of our water parks and family entertainment centers,expected outcomes of pending litigation, competitive conditions and generaleconomic conditions. These assumptions could prove inaccurate. Forward-lookingstatements involve risks and uncertainties, which could cause actual results todiffer materially from those contained in any forward-looking statement. Manyof these factors are beyond our ability to control or predict. Such factors mayrelate to, among other things:

·                  adverseweather conditions and other natural phenomena;

·                  seasonaloperations of water parks;

·                  riskof in-park accidents and health risks;

·                  changesin consumer preferences;

·                  reductionsin consumer disposable income;

·                  ourability to compete successfully with other amusement parks and otherentertainment providers;

·                  governmentaland environmental requirements and changes in those requirements;

·                  increasesin general liability and workers compensation claims;

·                  discontinuationof our leases pursuant to termination or default provisions;

·                  acquisitionand retention of key personnel;

·                  ourlevel of indebtedness; and

·                  restrictionscontained in our debt agreements.

Youshould not place undue reliance on any forward-looking statements. Further,forward-looking statements speak only as of the date they are made, and weundertake no obligation to update them in light of new information or futureevents. These forward-looking statements reflect our current views with respectto future events and are based on assumptions and subject to risks anduncertainties that may cause actual results to differ materially from trends,plans or expectations set forth in the forward-looking statements which, as aresult, may adversely affect the value of, and our ability to make payments on,our 10 7/8% Senior Notes due 2014. These risks and uncertainties may includethose discussed in Part I, Item 2 and Part II, Item 1A of this report. Newrisks can emerge from time to time. It is not possible for us to assess all ofthese risks, nor can we assess the extent to which any factor, or combinationof factors, 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 not update anyforward-looking information to reflect actual results or changes in the factorsaffecting the forward-looking information.

 

3

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**PART I.FINANCIAL INFORMATION**

Item 1. FINANCIAL STATEMENTS

**PALACE ENTERTAINMENT HOLDINGS,INC.**

**CONDENSED CONSOLIDATED BALANCESHEETS (unaudited / in thousands except for per share amounts)AS OF SEPTEMBER 30, 2006 AND DECEMBER 31, 2005**
| ** **                                                                                  | ** ** | **Successor**                                 | ** ** | **Predecessor**                             | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                  | ** ** | **Post-Acquisition  September 30  2006** | ** ** | **Pre-Acquisition  December 31  2005** | ** ** |
| ASSETS                                                                                      |       |                                          |       |                                        |       |
|                                                                                        |       |                                          |       |                                        |       |
| CURRENT ASSETS                                                                              |       |                                          |       |                                        |       |
| Cash and cash  equivalents                                                                  |       | $                                             | 19,049     |                                        | $          | 5,240 |   |
| Inventories                                                                                 |       | 2,254                                         |       | 3,295                                       |       |
| Prepaid expenses  and other current assets                                                  |       | 7,216                                         |       | 3,901                                       |       |
|                                                                                        |       |                                          |       |                                        |       |
| Total current  assets                                                                       |       | 28,519                                        |       | 12,436                                      |       |
|                                                                                        |       |                                          |       |                                        |       |
| Property and Equipment  - Net                                                               |       | 125,067                                       |       | 112,388                                     |       |
|                                                                                        |       |                                          |       |                                        |       |
| Goodwill                                                                                    |       | 70,732                                        |       | 37,471                                      |       |
|                                                                                        |       |                                          |       |                                        |       |
| Intangible Assets - Net                                                                     |       | 20,136                                        |       | —                                      |       |
|                                                                                        |       |                                          |       |                                        |       |
| Other Assets - Net                                                                          |       | 6,343                                         |       | 3,368                                       |       |
|                                                                                        |       |                                          |       |                                        |       |
| TOTAL                                                                                       |       | $                                             | 250,797    |                                        | $          | 165,663 |   |
|                                                                                        |       |                                          |       |                                        |       |
| **LIABILITIES AND SHAREHOLDER’S  EQUITY OR MEMBER’S INTEREST**                    | ** ** | ** **                                    | ** ** | ** **                                  | ** ** |
|                                                                                        |       |                                          |       |                                        |       |
| CURRENT LIABILITIES                                                                         |       |                                          |       |                                        |       |
| Accounts Payable                                                                            |       | $                                             | 2,417      |                                        | $          | 2,706 |   |
| Accrued Interest                                                                            |       | 7,741                                         |       | 610                                         |       |
| Accrued wages  and payroll taxes                                                            |       | 2,260                                         |       | 2,485                                       |       |
| Income taxes  payable                                                                       |       | 9,504                                         |       | —                                      |       |
| Other accrued  liabilities                                                                  |       | 7,594                                         |       | 7,155                                       |       |
| Unearned revenue                                                                            |       | 956                                           |       | 1,342                                       |       |
| Current portion  of long-term debt                                                          |       | 853                                           |       | 7,870                                       |       |
|                                                                                        |       |                                          |       |                                        |       |
| Total current  liabilities                                                                  |       | 31,325                                        |       | 22,168                                      |       |
|                                                                                        |       |                                          |       |                                        |       |
| LONG-TERM DEBT - Less  current portion                                                      |       | 150,010                                       |       | 157,374                                     |       |
|                                                                                        |       |                                          |       |                                        |       |
| OTHER LONG TERM  LIABILITIES                                                                |       | 3,417                                         |       | 3,260                                       |       |
|                                                                                        |       |                                          |       |                                        |       |
| Total  Liabilities                                                                          |       | 184,752                                       |       | 182,802                                     |       |
|                                                                                        |       |                                          |       |                                        |       |
| COMMITMENTS AND  CONTINGENCIES                                                              |       |                                          |       |                                        |       |
|                                                                                        |       |                                          |       |                                        |       |
| SHAREHOLDER’S EQUITY                                                                   |       |                                          |       |                                        |       |
| Common Stock,  $.01 stated value, 1000 shares authorized, 100 shares issued and outstanding |       |                                          |       |                                        |       |
| Additional  Paid-in Capital                                                                 |       | 54,427                                        |       |                                        |       |
| Retained  Earnings                                                                          |       | 11,618                                        |       |                                        |       |
|                                                                                        |       |                                          |       |                                        |       |
| Total Shareholder’s  equity                                                            |       | 66,045                                        |       |                                        |       |
|                                                                                        |       |                                          |       |                                        |       |
| MEMBER’S INTEREST                                                                      |       |                                          |       | (17,139                                     | )          |
|                                                                                        |       |                                          |       |                                        |       |
| TOTAL                                                                                       |       | $                                             | 250,797    |                                        | $          | 165,663 |   |

 

*See Notesto Condensed Consolidated Financial Statements*

4

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**PALACEENTERTAINMENT HOLDINGS, INC.**

**CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS(unaudited / in thousands)FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (as restated)**
| ** **                                                                | ** ** | **Sucessor**                                                                 | ** ** | **Predecessor**                                                              | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **For the Three months  ended  September 30, 2006** | ** ** | **For the Three months  ended  September 30, 2005** | ** ** |
| ** **                                                                | ** ** | ** **                                                                   | ** ** | **(as restated,  See Note 2)**                                | ** ** |
|                                                                      |       |                                                                         |       |                                                                         |       |
| REVENUES - Net                                                            |       | $                                                                            | 82,220     |                                                                         | $          | 78,466 |   |
|                                                                      |       |                                                                         |       |                                                                         |       |
| OPERATING COSTS  AND EXPENSES                                             |       |                                                                         |       |                                                                         |       |
| Cost of Revenue (exclusive of depreciation and  amortization shown below) |       | 40,865                                                                       |       | 37,890                                                                       |       |
| Selling, general and administrative                                       |       | 7,558                                                                        |       | 5,837                                                                        |       |
| Gain on disposal of assets                                                |       | —                                                                       |       | (205                                                                         | )          |
| Depreciation and amortization                                             |       | 4,728                                                                        |       | 5,129                                                                        |       |
|                                                                      |       |                                                                         |       |                                                                         |       |
| Total operating costs and expenses                                        |       | 53,151                                                                       |       | 48,651                                                                       |       |
|                                                                      |       |                                                                         |       |                                                                         |       |
| OPERATING INCOME                                                          |       | 29,069                                                                       |       | 29,815                                                                       |       |
|                                                                      |       |                                                                         |       |                                                                         |       |
| OTHER EXPENSE                                                             |       |                                                                         |       |                                                                         |       |
| Interest expense - net                                                    |       | 4,216                                                                        |       | 5,734                                                                        |       |
|                                                                      |       |                                                                         |       |                                                                         |       |
| INCOME FROM  OPERATIONS                                                   |       | 24,853                                                                       |       | 24,081                                                                       |       |
|                                                                      |       |                                                                         |       |                                                                         |       |
| INCOME TAX  PROVISION                                                     |       | 9,520                                                                        |       | 73                                                                           |       |
|                                                                      |       |                                                                         |       |                                                                         |       |
| NET INCOME                                                                |       | $                                                                            | 15,333     |                                                                         | $          | 24,008 |   |

 

*See Notes to Condensed Consolidated Financial Statements*

5

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**PALACE ENTERTAINMENT HOLDINGS, INC.CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited / in thousands)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005  (as restated)**
| ** **                                                                | ** ** | **Successor**                                                            | ** ** | **Predecessor**                                                      | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **Post-Acquisition  April 13 to September 30  2006** | ** ** | **Pre-Acquisition  January 1 to April 12  2006** | ** ** | **For the Nine  months ended  September 30, 2005** | ** ** |
| ** **                                                                | ** ** | ** **                                                               | ** ** | ** **                                                           | ** ** | **(as restated,  See Note 2)** | ** ** |
|                                                                      |       |                                                                     |       |                                                                 |       |   |   |
| REVENUES - Net                                                            |       | $                                                                        | 121,682    |                                                                 | $          | 23,397 |   | $ | 139,913 |   |
|                                                                      |       |                                                                     |       |                                                                 |       |   |   |
| OPERATING COSTS  AND EXPENSES                                             |       |                                                                     |       |                                                                 |       |   |   |
| Cost of Revenue (exclusive of depreciation and  amortization shown below) |       | 70,072                                                                   |       | 26,190                                                               |       | 89,038 |   |
| Selling, general and administrative                                       |       | 13,030                                                                   |       | 4,208                                                                |       | 15,274 |   |
| Gain on disposal of assets                                                |       | —                                                                   |       | —                                                               |       | (32 | ) |
| Depreciation and amortization                                             |       | 9,028                                                                    |       | 4,478                                                                |       | 13,851 |   |
|                                                                      |       |                                                                     |       |                                                                 |       |   |   |
| Total operating costs and expenses                                        |       | 92,130                                                                   |       | 34,876                                                               |       | 118,131 |   |
|                                                                      |       |                                                                     |       |                                                                 |       |   |   |
| OPERATING INCOME  (LOSS)                                                  |       | 29,552                                                                   |       | (11,479                                                              | )          | 21,782 |   |
|                                                                      |       |                                                                     |       |                                                                 |       |   |   |
| OTHER EXPENSE                                                             |       |                                                                     |       |                                                                 |       |   |   |
| Interest expense - net                                                    |       | 8,370                                                                    |       | 6,674                                                                |       | 17,333 |   |
|                                                                      |       |                                                                     |       |                                                                 |       |   |   |
| INCOME (LOSS)  FROM OPERATIONS                                            |       | 21,182                                                                   |       | (18,153                                                              | )          | 4,449 |   |
|                                                                      |       |                                                                     |       |                                                                 |       |   |   |
| INCOME TAX  PROVISION                                                     |       | 9,564                                                                    |       | —                                                               |       | 73 |   |
|                                                                      |       |                                                                     |       |                                                                 |       |   |   |
| NET INCOME (LOSS)                                                         |       | $                                                                        | 11,618     |                                                                 | $          | (18,153 | ) | $ | 4,376 |   |

 

*See Notes to Condensed Consolidated Financial Statements*

6

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**PALACEENTERTAINMENT HOLDINGS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005 (asrestated)  (unaudited / in thousands)**
| ** **                                                                                                | ** ** | **Successor**                                                                                       | ** ** | **Predecessor**                                                                                 | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **Post-Acquisition  For the Period  April 13 to  September 30, 2006** | ** ** | **Pre-Acquisition  For the Period  January 1 to  April 12, 2006** | ** ** | **For the Nine  months ended  September 30,  2005** | ** ** |
| ** **                                                                                                | ** ** | ** **                                                                                          | ** ** | ** **                                                                                      | ** ** | **(as restated,  See Note 2)** | ** ** |
| ** **                                                                                                | ** ** | ** **                                                                                          | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |                                                                                                |       |                                                                                            |       |   |   |
| Net Income (loss)                                                                                         |       | $                                                                                                   | 11,618     |                                                                                            | $          | (18,153 | ) | $ | 4,376 |   |
| **Adjustments to reconcile net income / (loss) to  net cash provided by (used in) operating activities:** | ** ** | ** **                                                                                          | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
| Depreciation and amortization                                                                             |       | 9,028                                                                                               |       | 4,478                                                                                           |       | 13,851 |   |
| (Gain) on disposal of assets                                                                              |       |                                                                                                |       |                                                                                            |       | (32 | ) |
| Amortization of deferred financing costs and  discount accretion                                          |       | 364                                                                                                 |       | 796                                                                                             |       | 2,049 |   |
| Financed Interest                                                                                         |       |                                                                                                |       | 3,515                                                                                           |       | 1,870 |   |
| Share based Compensation                                                                                  |       | 667                                                                                                 |       |                                                                                            |       |   |   |
| Deferred rent expense                                                                                     |       | 218                                                                                                 |       | 36                                                                                              |       | 207 |   |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| Changes in net operating assets and liabilities:                                                          |       |                                                                                                |       |                                                                                            |       |   |   |
| Inventories                                                                                               |       | (65                                                                                                 | )          | (214                                                                                            | )          | (181 | ) |
| Prepaid expenses and other current assets                                                                 |       | (3,384                                                                                              | )          | 1,105                                                                                           |       | (2,238 | ) |
| Other assets                                                                                              |       | 1                                                                                                   |       | 8                                                                                               |       | (221 | ) |
| Accounts payable                                                                                          |       | (2,121                                                                                              | )          | 1,160                                                                                           |       | (883 | ) |
| Accrued interest                                                                                          |       | 7,655                                                                                               |       | 436                                                                                             |       | 1 |   |
| Accrued wages and payroll taxes                                                                           |       | (59                                                                                                 | )          | (167                                                                                            | )          | 582 |   |
| Income taxes payable                                                                                      |       | 9,504                                                                                               |       |                                                                                            |       |   |   |
| Other accrued liabilities                                                                                 |       | 2,849                                                                                               |       | (1,347                                                                                          | )          | 506 |   |
| Unearned Revenue                                                                                          |       | (380                                                                                                | )          | (6                                                                                              | )          | (388 | ) |
| Other long-term liabilities                                                                               |       | (120                                                                                                | )          | 22                                                                                              |       | 37 |   |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| Net cash provided (used) by operating activities                                                          |       | 35,775                                                                                              |       | (8,331                                                                                          | )          | 19,536 |   |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                | ** ** | ** **                                                                                          | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| Payment for  acquisition of FFP, net                                                                      |       | (37,599                                                                                             | )          |                                                                                            |       |   |   |
| Purchases of  property and equipment                                                                      |       | (6,178                                                                                              | )          | (3,951                                                                                          | )          | (7,810 | ) |
| Proceeds from  disposal of assets                                                                         |       |                                                                                                |       |                                                                                            |       | 348 |   |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| Net cash used in investing activities                                                                     |       | (43,777                                                                                             | )          | (3,951                                                                                          | )          | (7,462 | ) |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                | ** ** | ** **                                                                                          | ** ** | ** **                                                                                      | ** ** | ** ** | ** ** |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| Issuance of  common stock                                                                                 |       | 54,260                                                                                              |       |                                                                                            |       |   |   |
| Return of  capital                                                                                        |       | (500                                                                                                | )          |                                                                                            |       |   |   |
| Proceeds from  long-term debt                                                                             |       | 163,500                                                                                             |       | 13,100                                                                                          |       | 25,750 |   |
| Repayment of  long-term debt                                                                              |       | (189,095                                                                                            | )          | (767                                                                                            | )          | (32,569 | ) |
| Payment for cost  of financing                                                                            |       | (5,575                                                                                              | )          |                                                                                            |       | (176 | ) |
| Payments on  capital leases                                                                               |       | (655                                                                                                | )          | (118                                                                                            | )          | (866 | ) |
| Distributions to  member                                                                                  |       |                                                                                                |       | (57                                                                                             | )          | (60 | ) |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| Net cash provided (used) by financing activities                                                          |       | 21,935                                                                                              |       | 12,158                                                                                          |       | (7,921 | ) |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                                     |       | 13,933                                                                                              |       | (124                                                                                            | )          | 4,153 |   |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                                           |       | 5,116                                                                                               |       | 5,240                                                                                           |       | 2,347 |   |
|                                                                                                      |       |                                                                                                |       |                                                                                            |       |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                                                 |       | $                                                                                                   | 19,049     |                                                                                            | $          | 5,116 |   | $ | 6,500 |   |

 

7

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| **Supplemental  Disclosures of Cash Flow Information**         |   |   |   |   |   |   |   |
|----------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|
| Cash Paid For  Interest                                        |   | $      | 650    |   | $      | 1,925  |   | $ | 12,886 |   |
|                                                           |   |   |   |   |   |   |   |
| **Supplemental  Disclosures of Non Cash Investing Activities** |   |   |   |   |   |   |   |
| Property, Plant  and Equipment included in Accounts Payable    |   | $      | 70     |   | $      | — |   | $ | 26 |   |
| ** **                                                     |   |   |   |   |   |   |   |
| **Supplemental  Disclosure of Non Cash Financing Activities**  |   |   |   |   |   |   |   |
| Financed  Interest converted to long term debt                 |   |   |   | $      | 3,515  |   | $      | 1,870 |   |
|                                                           |   |   |   |   |   |   |   |
| **Supplemental Disclosures of  Other Cash Activities**         |   |   |   |   |   |   |   |

 

*Reconciliationof the April 12, 2006 acquisition of Festival Fun Parks LLC*
| Current Assets                        |   | $        | 6,020   |   |
|---------------------------------------|--------|----------|---------|--------|
| Property &  Equipment             |   | 127,859  |    |
| Intangible  Assets, Net               |   | 20,570   |    |
| Goodwill                              |   | 70,732   |    |
| Other Assets                          |   | 6,395    |    |
| Payments to  Previous Owners/Debtors  |   | (33,774  | )       |
| Current  Liabilities                  |   | (15,232  | )       |
| Other Long Term  Debt                 |   | (4,169   | )       |
| Equity  Contribution                  |   | (54,000  | )       |
| Pushed down debt  used in acquisition |   | (162,000 | )       |
|                                  |   |     |    |
| Payment for acquisition  of FFP, net  |   | $        | (37,599 | )      |

 

*(SeeFootnote 4 for Acquisition)**SeeNotes to Condensed Consolidated Financial Statements*

8

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**PALACEENTERTAINMENT HOLDINGS, INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(unaudited, $ in thousands)**

**1.**                      ORGANIZATION

**Organization**

On April 12, 2006, PalaceEntertainment Holdings, Inc. (“Company”) a Delaware corporation acquiredFestival Fun Parks, LLC (“FFP”).  TheCompany is 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 is a Delaware limited liability company formed on June 23,1998, with Palace Entertainment, Inc. (“PAL”) being the sole member prior tothe acquisition. The Company was established to purchase and operate familyentertainment centers (“FECs”) and water parks (“WPs”). At September 30, 2006and 2005, the Company owned and operated 32 FECs and WPs (“Parks”). Of the32 Parks owned at September 30, 2006, 16 are located in California, fiveare located in Florida, four are located in Texas, and two each are located inGeorgia and New York, and one each in North Carolina, New Jersey, and NewHampshire. Revenue earned from the Parks located in California representsapproximately 42%, in the aggregate, of the Company’s revenues for the ninemonths ended September 30, 2006 and 2005. Eight of the Parks are WPs featuringsuch attractions as water slides, flumes, and pools and one is a nature themepark. The other 23 FECs generally feature such attractions as miniaturegolf, batting cages, kiddy parks, go-carts, and video arcades.

For financial reportingpurposes, the Company uses a 52- or 53-week fiscal year. The fiscal periodspresented, which ended October 1, 2006 and October 2, 2005, comprised 40 weeks,or three quarters of the fiscal year. The fiscal period ends on the Sundaynearest to September 30. For simplicity of presentation, the Company refers tothe 40-week periods as ended on September 30.

2.        **RESTATEMENT**

Subsequent to theissuance of unaudited condensed consolidated financial statements for the threeand nine month period ended September 30, 2006 and 2005, the Company identifiedan accounting error that required an adjustment to interest expense in thepredecessor’s financial statements for the three and nine month periods endedSeptember 30, 2005.

The error relatesto a $4.4 million overstatement of non cash accretion of interest expense,related to the predecessor company’s redeemable securities, subsequentlyretired as of the date of acquisition of FFP on April 12, 2006, and a $4.4million understatement of net income for the three and nine months periodsended September 30, 2005. There is no tax effect due to the tax position of theCompany.

Further, there wasa typographical error on the 2005 Condensed Consolidated Statements of CashFlows for the nine month period ended September 30, 2005 within cash flowfrom Financing Activities, Repayment of long-term debt as noted below.

9

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**PALACEENTERTAINMENT HOLDINGS, INC.**

 

 
| ** **                                                                                          | ** ** | **For the three months ended  September 30, 2005** | ** ** | **For the nine months ended  September 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                                                                          | ** ** | **As  Previously  Reported**                                                     | ** ** | **Adjustment  Increase /  (Decrease)**                                     | ** ** | **As Restated** | ** ** | **As  Previously  Reported** | ** ** | **Adjustment  Increase /  (Decrease)** | ** ** | **As Restated** | ** ** |
| ** **                                                                                          | ** ** | **(Unaudited in thousands)**                                           | ** ** |
| Condensed  Consolidated Statements of Operations                                                    |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
|                                                                                                |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Increase expense — net                                                                         |       | $                                                                                | 10,139     |                                                                            | $          | (4,405 | ) | $ | 5,734 |   | $ | 21,738 |   | $ | (4,405 | ) | $ | 17,333 |   |
| Income from operations                                                                              |       | 19,676                                                                           |       | 4,405                                                                           |       | 24,081 |   | 44 |   | 4,405 |   | 4,449 |   |
| Net income (loss)                                                                                   |       | 19,603                                                                           |       | 4,405                                                                           |       | 24,008 |   | (29 | ) | 4,405 |   | 4,376 |   |
|                                                                                                |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Condensed  Consolidated Statements of Cash Flows                                                    |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
|                                                                                                |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Cash Flows from Operating Activites:                                                                |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Net income (loss)                                                                                   |       |                                                                             |       |                                                                            |       |   |   | (29 | ) | 4,405 |   | 4,376 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
|                                                                                                |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Amortization of deferred financing costs and  discount accretion                                    |       |                                                                             |       |                                                                            |       |   |   | 6,454 |   | (4,405 | ) | 2,049 |   |
|                                                                                                |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Cash Flows from Financing Activities:                                                               |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
|                                                                                                |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Repayment of long term debt                                                                         |       |                                                                             |       |                                                                            |       |   |   | (32,629 | ) | 60 |   | (32,569 | ) |
| Net cash used by financing activities                                                               |       |                                                                             |       |                                                                            |       |   |   | (7,981 | ) | 60 |   | (7,921 | ) |
| Net increase in cash and cash equivalents                                                           |       |                                                                             |       |                                                                            |       |   |   | 4,094 |   | 59 |   | 4,153 |   |
|                                                                                                |       |                                                                             |       |                                                                            |       |   |   |   |   |   |   |   |   |
|                                                                                                     |            |                                                                                  |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**3.**                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

**Basis of Presentation**

The acquisition of FFP bythe Company (See Footnote 4) was accounted for under the purchase method ofaccounting, as required by Statement of Financial Accounting Standards (“SFAS”)No.141, *Business Combinations*.  The purchase price has been “pushed-down” andallocated to the assets and liabilities of FFP. Accordingly, the post-acquisition condensed consolidated financialstatements reflect a new basis of accounting. The Company’s Condensed Consolidated Statements of Operations for theperiod January 1, 2006 to April 12, 2006 and the three and nine month periodsended September 30, 2005, the Condensed Consolidated Statements of Cash Flowsfor the period January 1, 2006 to April 12, 2006 and the nine month periodended September 30, 2005, and the Condensed Consolidated Balance Sheet as ofDecember 31, 2005 reflect the operations of the Company prior to theacquisition of the FFP.

We prepared theaccompanying condensed consolidated financial statements pursuant to the rulesand regulations of the Securities and Exchange Commission (the “SEC”) andaccounting principles generally accepted in the United States.  The information reflects all normal andrecurring adjustments that in the opinion of the Company’s management arenecessary for a fair presentation of the financial position of the Company andits results of operations for the interim periods set forth herein.

**Principlesof Consolidation**

The consolidatedfinancial statements include the accounts of the Company and its wholly ownedsubsidiaries. All significant intercompany transactions and balances have beeneliminated in consolidation.

**Cash andCash Equivalents**

The Company considers allhighly liquid instruments with an original maturity of three months or less tobe cash equivalents.

**Inventories**

Inventories, consisting ofmerchandise, uniforms and certain supplies, are valued at the lower of cost(first-in, first-out method) or market.

**Property and Equipment**

Property and equipment are stated at cost and aredepreciated 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   |       |

 

Property and equipmentinclude assets recorded under capital leases presented with the comparablecategories for owned assets. The charge to income resulting from amortizationof assets recorded under capital leases is included in depreciation expense inthe consolidated statement of operations. Leasehold improvements are amortizedover the shorter of the lease term or their useful lives.

Ordinary repairs andmaintenance are expensed as incurred; major replacements and betterments thatextend the useful life of the asset are capitalized.

**Long-LivedAssets**

Long-lived assets arecarried at cost less accumulated depreciation. Long-lived assets are evaluatedfor potential impairment at least annually or whenever events or changes incircumstances indicate that their carrying amounts may not be recoverable. Inthe event that periodic assessments reflect that the carrying amount of along-lived asset exceeds the sum of the undiscounted cash flows (excludinginterest) that are expected to result from the use and eventual disposition ofthe long-lived asset, the Company recognizes an impairment loss to the extentthe carrying amount exceeds the fair value of the long-lived asset. The Companyestimates the fair value using available market information or other industryvaluation techniques, such as present-value calculations. The Company hasrecorded no impairment losses for the three and nine month periods endedSeptember 30, 2006 and 2005. In conjunction with the acquisition of FFP’s, theCompany’s long-lived assets were revalued at fair market value. (See Footnote4)

**Advertising**

The Company expenses the costs of advertising,promotion, and marketing programs as incurred. These costs were $8,869 and$8,801, respectively, during the nine months ended September 30, 2006 and 2005.These costs were $4,476 and $4,005, respectively, for the three months endedSeptember 30, 2006 and 2005.  Advertisingexpenses are reflected in selling, general and administrative expenses in the CondensedConsolidated Statements of Operations.

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**Goodwill**

Goodwill is tested forimpairment annually, or when a possible impairment is indicated, using the fairvalue-based test prescribed by SFAS No. 142, *Goodwill andOther Intangible Assets*. The goodwill impairment test prescribed bySFAS No. 142 requires the Company to identify reporting units and to determineestimates of the fair value of the Company’s reporting units as of the date ofthe test for impairment. The goodwill impairment test is a two-step process.First, the fair value of the reporting unit is compared with its carrying valueincluding goodwill. If the reporting unit’s carrying value exceeds its fairvalue, an impairment loss is to be recorded to the extent that the carrying valueof the goodwill exceeds its implied fair value. The second step determines the fairvalue of a reporting unit for the amount for which the unit as a whole could bebought or sold in a current transaction between willing parties. The Companyestimates the fair value of its reporting units using discounted cash flowvaluation models. The Company estimates these amounts by evaluating historicaltrends, current budgets, operating plans, and industry data. Determining thefair value of reporting units and goodwill includes significant judgment bymanagement and different judgments could yield different results.

Goodwill is testedannually for impairment and in interim periods if certain events occurindicating that the carrying value of goodwill may be impaired. We evaluategoodwill on a separate reporting unit basis to assess recoverability andimpairments, if any, are recognized in earnings.

The Company recorded noimpairment losses for the nine months ended September 30, 2006 and 2005.

**Intangibles**

Trademarksare amortized over their estimated useful lives of 20 years and favorable and unfavorableproperty leases are amortized over the terms of the related leases.

**FinancingCosts**

Financing costs, whichare included in other assets, are deferred and amortized using thestraight-line method, which approximates the effective interest method, overthe term of the respective loan agreements. At September 30, 2006 and December31, 2005, deferred financing costs were $5,524 and $2,934, respectively, net ofaccumulated amortization of $364 and $4,076, respectively. All debt outstandingas of the acquisition date was repaid and the related discounts were writtenoff. Additionally, discount on loans is being amortized using the effectiveinterest method over the term of the respective loan agreement.

**SelfInsurance Claims Liability**

The Company is partiallyself-insured for its workers’ compensation and general liability programs. Inconnection with these programs, the Company pays a base premium plus actuallosses incurred, not to exceed certain stop-loss limits. The Company is insuredfor losses above these limits, both per occurrence and in the aggregate. Theself-insurance claim liability is determined based on claims filed and claimsincurred but not reported. As of September 30, 2006, the Company has fiveseparate unused letters of credit totaling $4,325 to secure its obligations forworkers’ compensation and general liability claims with three insurancecarriers.

**UnearnedRevenue**

Certain Parks sell seasontickets and annual passes. These sales are recorded as unearned revenue uponthe sale of tickets. Revenue on season tickets and annual passes is recognizedbased on usage of the tickets and passes.

**DeferredRent**

Certain of the Company’sground leases require minimum annual rent increases. Rent expense is recognizedon a straight-line basis over the term of each lease. Under this method, theCompany recognized $52 and $69; and $254 and $207 for the three and nine monthperiods ended September 30, 2006 and 2005, respectively, of rent expense notcurrently due. Such amounts are included in other long-term liabilities.

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**Stock-BasedCompensation**

The former parentof the Company issued stock options to the Company’s employees in 2002.Outstanding options and the related potential compensation amounts areimmaterial, and were terminated in April 2006 in connection with the acquisitionof FFP. Following the acquisition, Holdings adopted a new stock-based compensationplan and the Company adopted SFAS No. 123(R), “*Share-BasedPayment*” to account for the incentive units granted during thequarter. All awards granted, modified, or settled after the date of adoptionwill be accounted for using the measurement, recognition, and attributionprovisions of SFAS No.123(R). Under the fair value recognition provisionof this statement, share based compensation costs are measured at the grantdate based upon the fair value of the award. The Company elected to recognizethe expense, net of forfeitures, on a straight-line basis over the requisiteperiod that is the vesting period.  SeeFootnote 12 for a further description of the plan.

**RevenueRecognition**

The Companyrecognizes revenue at the point of sale to a customer or over the period thatreceives the benefit.

**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States of America requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

**Concentration of Credit Risk**

Financialinstruments that potentially subject the Company to concentrations of creditrisk consist primarily of cash and cash equivalents. At various times duringthe nine months ended September 30, 2006 and 2005, the Company maintained cashbalances in its general cash accounts in excess of Federal Deposit InsuranceCorporation insurable limits; however, the Company places its cash with highcredit quality financial institutions.

**Seasonality**

The business ofthe Company is highly seasonal. Generally, the WPs are open for a period fromMay through September. In addition, the Parks, other than WPs, are openyear-round and generate higher revenues during the summer months.

**Fair Value of Financial Instruments**

The carryingvalues of cash and cash equivalents, accounts receivable, and accounts payableapproximate fair values due to the relatively short maturities of suchinstruments. Long-term debt is carried at amounts approximating fair valuebased on current rates offered to the Company for debt with similar collateral,if any, and maturities. Fair values for related party amounts cannot bedetermined.

**RecentAccounting Pronouncements**

In May 2005, theFASB issued SFAS No. 154, *Accounting Changes andError Corrections*. SFAS No. 154 replaces Accounting Principles Board(“APB”) Opinion No.20, *Accounting Changes*,and FASB Statement No. 3, *Reporting AccountingChanges in Interim Financial Statements*, and changes therequirements for the accounting for and reporting of a change in accountingprinciple. SFAS No. 154 applies to all voluntary changes in accountingprinciples. APB No. 20 previously required that most voluntary changes inaccounting principle be recognized by including in net income of the period ofthe change the cumulative effect of changing to the new accounting principles.SFAS No. 154 requires retrospective application to prior periods’ financialstatements of changes in accounting principle, unless it is impracticable todetermine either the period-specific effects or the cumulative effect of thechange. When it is impracticable to determine the period-specific effects of anaccounting change on one or more individual prior periods presented, SFASNo.154 requires that the new accounting principle be applied to the balances ofassets and liabilities as of the beginning of the earliest period for whichretrospective application is practicable and that a corresponding adjustment bemade to the opening balance of retained earnings (or other 

13

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appropriatecomponents of equity or net assets in the statement of financial position) forthat period rather than being reported in an income statement. When it isimpracticable to determine the cumulative effect of applying a change inaccounting principle to all prior periods, this statement requires that the newaccounting principle be applied as if it were adopted prospectively from theearliest date practicable. The Company applied the provisions of SFAS No. 154to the restatement as discussed in Note 2.

In December 2005,the Company adopted FASB Interpretation No. 47 (“FIN 47”), *Accounting for Conditional Asset RetirementObligations — an interpretation of FASB Statement No. 143*,which clarifies that the term “conditional asset retirement obligation” refersto a legal obligation to perform an asset retirement activity. This interpretationalso states that the fair value of a liability for the conditional assetobligation should be recognized when incurred. The initial adoption ofFIN 47 was not material to the Company’s financial statements.

On December 16,2004, the FASB issued SFAS No. 123 (revised 2004) (“SFAS No.123(R)”), *Share-Based Payment*, which is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation*. SFAS No. 123(R)supersedes, *Accounting for Stock Issued to Employees*(APB No. 25), and amends SFAS No. 95, *Statement of Cash Flows.*Generally, the approach in SFAS No. 123(R) is similar to the approach describedin SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their fair values. Pro forma disclosure is no longeran alternative to financial statement recognition. Non-public entities arerequired to adopt the provisions of SFAS No. 123(R) as of the beginning of thefirst annual reporting period that began after December 15, 2005. The Companyhas adopted SFAS No. 123(R) in connection with its initial issuance of equityincentive unit grants as discussed in Footnote 12, “Stock Compensation Plans.”

In July 2006, theFASB issued FASB Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes,* which prescribes a recognitionthreshold and measurement process for recording in the financial statementsuncertain tax positions taken or expected to be taken in a tax return.Additionally, FIN 48 provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosurerequirements for uncertain tax positions. The accounting provisions of FIN 48are effective for reporting periods beginning after December 15, 2006.  The Company is currently assessing the impactof the adoption of FIN 48 and its impact on the Company’s consolidatedfinancial statements.

In July 2006, theFASB issued 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.  This EITFbecomes effective for reporting periods beginning after December 15, 2006. TheCompany is currently assessing the impact of the adoption of EITF 06-3 and itsimpact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, *“Fair Value Measurements.”* SFAS No. 157 establishes aframework for measuring fair value in generally accepted accounting principles(“GAAP”), and expands disclosures about fair value measurements. This Statementis effective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. Managementhas not yet completed its evaluation of the impact of adopting SFAS No. 157.

In September 2006,the SEC issued Staff Accounting Bulletin No. 108, *“Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements”*(“SAB No. 108”). SAB No. 108establishes a single quantification framework wherein the significancemeasurement is based on both a balance sheet and an income statement approachand evaluate whether either approach results in quantifying a misstatementthat, when all relevant quantitative and qualitative factors are considered, ismaterial. If a company’s existing methods for assessing the materiality ofmisstatements are not in compliance with the provisions of SAB No. 108, theinitial application of the provisions may be adopted by restating prior periodfinancial statements under certain circumstances or otherwise by recording thecumulative effect of initially applying the provisions of SAB No. 108 asadjustments to the carrying values of assets and liabilities as of January 1,2006 with an offsetting adjustment recorded to the opening balance of retainedearnings. SAB No. 108 is effective for the first annual period ending afterNovember 15, 2006. The Company does not expect that the adoption of SAB No. 108will have a material effect on its results of operations or financial position.

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**4.****                                     ****ACQUISITION**

In accordance with adefinitive agreement dated February 21, 2006, the Company acquired FFP on April12, 2006.  The preliminary aggregatepurchase price of $212,175 was funded by the $53.5 million equity contributionby Holdings, issuance of $150,000 in aggregate principal amount of 10 7/8%Senior Notes (“Notes”) due in 2014 and a draw of $12,000 against the Company’ssenior secured revolving credit facility (“Revolver”) (See Footnote 9).  Proceeds from this debt issuance was used topayoff 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 paytransaction related fees and costs, and to fund initial working capital for theCompany.

The aggregate purchaseprice allocation is reflected on the accompanying Condensed ConsolidatedBalance sheet as of September 30, 2006. The purchase price allocation is preliminary and will continue to beadjusted as final costs, independent appraisals and accounting effects aredetermined.  The following tablesummarizes the estimated fair values of the assets acquired and liabilitiesassumed as of September 30, 2006 based upon management’s estimates and with thesupport of an independent appraiser.

| Current Assets                                                 |   | $       | 6,020   |   |
|----------------------------------------------------------------|--------|---------|---------|--------|
| Property, plant and equipment                                  |   | 127,859 |    |
| Intangibles                                                    |   | 20,570  |    |
| Other assets                                                   |   | 6,395   |    |
| Goodwill                                                       |   | 70,732  |    |
| Current Liabilities                                            |   | (15,232 | )       |
| Other long term liabilities                                    |   | (4,169  | )       |
| Allocated purchase price, including related  acquisition costs |   | $       | 212,175 |   |

 

The excess of theadjusted purchase price over the fair value of the net assets acquired orgoodwill has been assigned to our WPs and FECs in the amounts of $40,634 and$30,098 respectively.  The goodwill isnot amortized and is subject to an annual impairment test in accordance withSFAS No.142, *Goodwill and Other Intangible Assets*.  For income tax purposes, the Company expectsgoodwill and other intangible assets to be amortized.

The trademarks are being amortized using a 20-yearuseful life.  The intangible assetrelated to the below market leases and the deferred credit related to the abovemarket leases are being amortized over the related lease terms on straight-linebasis over the individual remaining lease terms.

The following consolidatedpro forma Income Statements cover the three-month period ended September 30,2005, as well as the nine-month periods ended September 30, 2006 and September30, 2005.

The pro forma adjustmentsreflect the purchase of the Company, the extinguishment of the prior debt andits replacement with the Notes and the Revolver.  The pro forma also adjusts interest expensebased upon the terms of the agreements governing the Notes and the Revolver.  The financial information below alsosubstitutes the Windward management fee with the MidOcean Partners advisory feeand adjusts for the effect of the directors/officers andrepresentations/warranties insurance policies issued in connection with thesale transaction.

We have also adjusteddepreciation/amortization for property and equipment, trademarks and leasesbased on the preliminary purchase price allocation.

15

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Palace EntertainmentHoldings Inc.

Consolidated andCondensed Proforma Income Statement

Nine Months EndedSeptember 30, 2006

(Unaudited)

|                  | ** ** | **NINE MONTHS** | ** ** |
|------------------|------------|----------------------|------------|
| REVENUES - NET   |       | $                    | 145,079    |   |
|             |       |                 |       |
| OPERATING INCOME |       | 2,839                |       |
|             |       |                 |       |
| NET INCOME       |       | $                    | 2,779      |   |

 

Palace EntertainmentHoldings Inc.

Consolidated andCondensed Proforma Income Statement

Three and Nine MonthsEnded September 30, 2005

(Unaudited)

|                  | ** ** | **THREE MONTHS** | ** ** | **NINE MONTHS** | ** ** |
|------------------|------------|-----------------------|------------|----------------------|------------|
| REVENUES - NET   |       | $                     | 78,466     |                 | $          | 139,913 |   |
|             |       |                  |       |                 |       |
| OPERATING INCOME |       | 26,444                |       | 6,843                |       |
|             |       |                  |       |                 |       |
| NET INCOME       |       | $                     | 26,371     |                 | $          | 6,771 |   |

 

**On apro-forma basis for the three months period ended September 30, 2005 and thenine months period ended September 30, 2005 and 2006, the Company had no taxexpense and a 0% effective tax rate due to recording a full valuation allowanceand significant unused net operating loss carry forwards.**

**5.**                                      PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses andother current assets at September 30, 2006 and December 31, 2005, consist ofthe following:

|                      | ** ** | **September 30  2006** | ** ** | **December 31  2005** | ** ** |
|----------------------|------------|-----------------------------|------------|----------------------------|------------|
| Prepaid insurance    |       | $                           | 1,399      |                       | $          | 1,381 |   |
| Prepaid rent         |       | 1,092                       |       | 1,070                      |       |
| Accounts receivable  |       | 2,567                       |       | 331                        |       |
| Other current assets |       | 2,158                       |       | 1,119                      |       |
| Total                |       | $                           | 7,216      |                       | $          | 3,901 |   |

 

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**6.**                      PROPERTY AND EQUIPMENT

Property andequipment at September 30, 2006 and December 31, 2005, consist of thefollowing:

|                                                | ** ** | **September 30  2006** | ** ** | **December 31** 2005 | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| Land                                           |       | $                           | 158        |                      | $          | 158 |   |
| Buildings and leasehold improvements           |       | 59,490                      |       | 107,733                   |       |
| Equipment and fixtures                         |       | 16,593                      |       | 26,295                    |       |
| Games                                          |       | 4,472                       |       | 15,686                    |       |
| Rides and attractions                          |       | 52,362                      |       | 64,997                    |       |
| Total                                          |       | 133,075                     |       | 214,869                   |       |
| Less accumulated depreciation and amortization |       | 8,766                       |       | 103,523                   |       |
|                                           |       |                        |       |                      |       |
| Add construction in progress                   |       | 758                         |       | 1,042                     |       |
| Total                                          |       | $                           | 125,067    |                      | $          | 112,388 |   |

 

**7.**                      INTANGIBLE ASSETS

The goodwill was $70,732 and $37,471 for the periodending September 30, 2006 and December 31, 2005, respectively. The Company doesnot amortize goodwill which is subject to an annual impairment test pursuant toSFAS 142. For the nine months ended September 30, 2006 and September 30, 2005,there were no impairments to goodwill.

There were no other Intangible Assets as of December31, 2005.  The Company did have IntangibleAssets that were subject to amortization as of September 30, 2006.   The following are the gross carrying amountsand accumulated amortization of the intangible assets subject to amortizationas of September 30, 2006:

As of September 30, 2006

|                               | ** ** | **Gross Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Amount** | ** ** |
|-------------------------------|------------|-----------------------|------------|-------------------------------|------------|---------------------|------------|
| Amortizable intangible assets |       |                  |       |                          |       |                |       |
| Trademarks                    |       | $                     | 13,500     |                          | $          | (314                | )          | $ | 13,186 |   |
| Property Lease                |       | 7,070                 |       | (120                          | )          | 6,950               |       |
| Total                         |       | $                     | 20,570     |                          | $          | (434                | )          | $ | 20,136 |   |

 

17

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The future amortizationon Trademarks and Property Leases as of September 30, 2006 are as follows:

| Year Ending  December 31 | ** ** | **Trademarks** | ** ** | **Property  Leases** | ** ** | **Total** | ** ** |
|------------------------------------|------------|----------------|------------|----------------------|------------|-----------|------------|
| 2006 (3 months)                    |       | $              | 169        |                 | $          | 65        |       | $ | 234 |   |
|                               |       |           |       |                 |       |      |       |
| 2007                               |       | 675            |       | 258                  |       | 933       |       |
|                               |       |           |       |                 |       |      |       |
| 2008                               |       | 675            |       | 258                  |       | 933       |       |
|                               |       |           |       |                 |       |      |       |
| 2009                               |       | 675            |       | 258                  |       | 933       |       |
|                               |       |           |       |                 |       |      |       |
| 2010                               |       | 675            |       | 258                  |       | 933       |       |
|                               |       |           |       |                 |       |      |       |
| Thereafter                         |       | 10,317         |       | 5,853                |       | 16,170    |       |
|                               |       |           |       |                 |       |      |       |
| Total                              |       | $              | 13,186     |                 | $          | 6,950     |       | $ | 20,136 |   |

 

**8.**                      OTHER ACCRUED LIABILITIES

Other accrued liabilitiesat September 30, 2006 and December 31, 2005, consist of the following: 

|                                                             | ** ** | **September 30  2006** | ** ** | **December 31  2005** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| Worker’s compensation and general liability  insurance |       | $                      | 3,182      |                       | $          | 2,349 |   |
| Accrued property tax                                        |       | 1,514                  |       | 1,491                      |       |
| Accrued expenses                                            |       | 1,192                  |       | 1,371                      |       |
| Other accrued liabilities                                   |       | 1,706                  |       | 1,944                      |       |
| Total                                                       |       | $                      | 7,594      |                       | $          | 7,155 |   |

 

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**9.**                      LONG-TERM DEBT

Long-term debt atSeptember 30, 2006 and December 31, 2005 consists of the following:

|                                           | ** ** | **September 30  2006** | ** ** | **December 31  2005** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| 10 7/8% Senior Notes (1)                  |       | $                           | 150,000    |                       |       |   |
| Revolving line of credit - GE Capital (2) |       |                        |       |                       |       |
| Term loan A (3)                           |       |                        |       | $                          | 8,773      |   |
| Term loan B (3)                           |       |                        |       | 33,744                     |       |
| Term loan C (3)                           |       |                        |       | 2,500                      |       |
| Mezzanine debt (3)                        |       |                        |       | 81,929                     |       |
| Windward mezzanine debt (3)               |       |                        |       | 4,716                      |       |
| Windward senior secured (3)               |       |                        |       | 9,113                      |       |
| Revolving line of credit - Antares (3)    |       |                        |       | 22,850                     |       |
| Capital lease obligations (4)             |       | 863                         |       | 1,619                      |       |
| Total                                     |       | 150,863                     |       | 165,244                    |       |
|                                      |       |                        |       |                       |       |
| Less current portion                      |       | 853                         |       | 7,870                      |       |
| Total long-term debt                      |       | $                           | 150,010    |                       | $          | 157,374 |   |

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

In connection with the April 12, 2006 acquisition ofFFP by the Company, FFP issued its 10 7/8% Senior Notes, Series A, due April12, 2014, which are fully and unconditionally guaranteed by the Company.  Interest only installments are payable insemi-annual installments on October 15 and April 15 of each successiveyear.  The first payment was made onOctober 16, 2006. The fair market value of the Senior Notes, as of September30, 2006, was $145.8 million.

**(2)**           **Revolving line of credit —GE Capital**

Revolving line of credit up to a maximum of $40,000,maturing no later than June 30, 2014. Interest is payable periodically at the prime rate plus a margin of1.75% or the London Inter Bank Offered Rate (“LIBOR”) plus a margin of 2.75%based upon the Company’s election. During July 2006, the Company paid the outstanding balance, which had aweighted average interest rate of 9.84%, to General Electric (“GE”)Capital.  There was no balance owed to GECapital as of September 30, 2006.  Themargin can vary based on the Company’s debt to earnings ratio.  Under this revolving line of credit, theCompany had certain letters of credit outstanding to secure its workerscompensation and general liability insurance policies.  Letters of credit outstanding at September30, 2006 was $4,325.

The revolving credit facility is secured bysubstantially all of the Company’s assets.

**(3)           Other Indebtedness**

*Term Loan A*

Term loans payable, in the original amount of $35,000,payable in installments of principal of $773 on March 31, 2006, $1,000quarterly on June 30,December 31, and March 31 of each period thereafter, and $4,000 onSeptember 30 of each year through June 30, 2007. Prior toApril 2, 2003, for the period January 5, 2004 through March 7,2005, and subsequent to March 31, 2005, interest was payable periodicallyat the base rate (greater of the prime rate or the federal funds rate plus 0.5%per annum) plus a margin of 2.25%—3% per annum or at London InterBank OfferedRate (“LIBOR”) plus a margin of 3.5%—4.25% per annum, based on the Company’selection for specified periods. Effective April 2, 2003 throughJanuary 5, 2004, and March 8, 2005 through March 31, 2005,interest payable was at the base rate plus the applicable margin. The margin variedbased on the Company’s debt to earnings ratio, as defined. At April 12, 2006and December 31, 2005, the interest rate was 9.17% per annum based on theLIBOR rates in effect and 10.25% per annum, based on the base rate,respectively. These loans were paid off in connection with April 12, 2006acquisition of FFP by the Company.

19

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*Term Loan B*

Term loans payable, in the original amount of $35,000,payable in installments of principal of $69 and $75 on March 31, 2006 andSeptember 30, 2006, respectively, $88 on each quarterly period fromSeptember 30, 2006 through June 30, 2007, and $16,625 on September30, 2007, and on December 31, 2007. Prior to April 2, 2003, for theperiod January 5, 2004 through March 7, 2005, and subsequent toMarch 31, 2005, interest was payable periodically at the base rate(greater of the prime rate or the federal funds rate plus 0.5% per annum) plusa margin of 2.75%—3.5% per annum or at LIBOR plus a margin of 4%—4.75% perannum, based on the Company’s election for specific periods. EffectiveApril 2, 2003 through January 5, 2004, and March 8, 2005 throughMarch 31, 2005, interest was payable at the base rate plus the applicablemargin. The margin varied based on the Company’s debt to earnings ratio, asdefined. At April 12, 2006 and December 31, 2005, the interest rate was 9.67%per annum based on the LIBOR rate in effect and 10.75% per annum, based on thebase rate, respectively. These loans were paid off in connection with April 12,2006 acquisition of FFP by the Company.

*Term Loan C*

On April 1, 2005, the Company entered into TermNote C in the amount of $2,500, pursuant to an amendment of the creditagreement on the $110,000 credit facility described above. The note was dueDecember 31, 2007. During 2006, an additional balance was added to thisnote in the amount of $2,500 for a grand total of $5,000. Interest was payableperiodically at the base rate (greater of the prime rate or the federal fundsrate plus 0.5% per annum) plus a margin of 5.75% per annum or at LIBOR plus amargin of 7.0% per annum, based on the Company’s election for specifiedperiods. At April 12, 2006 and December 31, 2005, the interest rates were11.31% and 11.82%, respectively, based on LIBOR. These loans were paid off inconnection with April 12, 2006 acquisition of FFP by the Company.

*Revolving Line of Credit - Antares*

Revolving line of credit, up to a maximum of $40,000,maturing no later than June 30, 2007. Prior to April 2, 2003, for theperiod January 5, 2004 through March 7, 2005, and subsequent to March 31,2005, interest was payable periodically at the base rate (greater of the primerate or the federal funds rate plus 0.5% per annum) plus a margin of 2.25%—3%per annum or at LIBOR plus a margin of 3.5%—4.25% per annum, based on theCompany’s election for specified periods. Effective April 2, 2003 throughJanuary 5, 2004, and March 8, 2005 through April 12, 2006, interestwas payable at the base rate plus the applicable margin. The margin variedbased on the Company’s debt toearnings ratio, as defined. Borrowings under the line of credit are limitedbased on the Company’s debt to earnings ratio, as defined. At April 12,2006 and December 31, 2005, the interest rates were 9.04% based on theLIBOR rate and 10.25% based on the base rate respectively. During the periodfrom June 15 through August 31 of each year, the Company was requiredto repay the revolving line of credit in an amount equal to the Company’saggregate cash balance in its bank accounts less $5,000. In addition, thelenders were generally not obligated to make loans under the revolving line ofcredit during such periods. Under this revolving line of credit, the Companyhad certain letters of credit outstanding to secure its worker’s compensationand general liability insurance policies. Letters of credit outstanding atApril 12, 2006 and December 31, 2005, were $4,549 and $9,045,respectively.

The credit facility was secured by substantially allof the Company’s assets. The Company was required on an annual basis to prepaythe credit facility by an amount equal to 50%—75% of the Company’s excess cashflow, depending on the Company’s debt to earnings ratio as defined. For thethree months and twelve day period through April 12, 2006 and year endedDecember 31, 2005, no amounts were due under this requirement. Some of thelenders under the credit agreement are stockholders of the Company’s solemember PAL. These loans were paid off in connection with April 12, 2006acquisition of FFP by the Company.

20

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*Mezzanine Debt*

The Company issued 12% subordinated notes with a facevalue of $40,000 and 15% subordinated notes with a face value of $40,500.Interest payments were due quarterly; principal of $500 due on July 29,2007, $5,500 due on September 30, 2007, and the balance was due onJuly 29, 2008. For the 15% subordinated notes, the Company had the optionto pay 20% of the interest due in the form of additional notes. The Companyissued additional notes of $611 and $1,337 for paid-in-kind interest during thethree months and twelve day period through April 12, 2006 and year endedDecember 31, 2005, respectively. The principal payment amount of $5,500due on September 30, 2007, was reduced by the aggregate amount of interestthat the Company could have paid in the form of additional notes but haspaid-in cash. The two notes were issued at a discount of $2,769, which wasbeing amortized over the life of the notes at the weighted-average effectiveinterest rate of 13.34%. In addition, $4,981 in loan proceeds received in 2002were allocated to Member’s Interest for the 436,150 shares of common stock ofPAL issued to the lenders, based on an estimated value of $11.42 per commonshare of PAL, resulting in a discount to the Company, which was being amortizedover the life of the notes. The amount of discount accreted was $4,357 and$4,488 at April 12, 2006 and December 31, 2005, respectively. OnJanuary 5, 2004, additional subordinated notes payable of $807 were issuedto the lenders in connection with a previous default discussed below. The noteholders, including Windward Capital Partners, are also stockholders of theCompany’s sole member PAL. These loans were paid off in connection with April12, 2006 acquisition of FFP by the Company.

*Windward Mezzanine Debt*

On January 5, 2004, the Company issued 12% seniorsecured subordinated notes with a face value of $4,000 with Windward CapitalPartners. The Company had the option to pay 8.32% of the interest due quarterlyin the form of additional notes. In this regard, the Company issued additionalnotes of $98 and $373 during the three months and twelve day period throughApril 12, 2006 and year ended December 31, 2005, respectively. The seniorsecured subordinated notes were due on April 30, 2008. The notes weresecured by a lien on substantially all of the Company’s assets. These loanswere paid off in connection with April 12, 2006 acquisition of FFP by theCompany.

*Windward Senior Secured Notes*

The Company issued 15% subordinated notes with a facevalue of $9,054. The Company had the option to pay 7.97% of the interest duequarterly in the form of additional notes. In this regard, the Company issuedadditional notes of $211 and $805 during the three months and twelve day periodthrough April 12, 2006 and year ended December 31, 2005, respectively. Thesubordinated notes are due on July 29, 2008. These loans were paid off inconnection with April 12, 2006 acquisition of FFP by the Company.

*Senior Subordinated Additional Notes*

The Company issued 12% additional notes on March 31,2006 in the amount of $3,288 under terms identical to that of Term Loan Cdiscussed above. These loans were paid off in connection with April 12, 2006acquisition of FFP by the Company.

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**(4)****           CapitalLease Obligations**

Capital lease obligations secured by applicableequipment with a net book value of $714 and $2,838 at September 30, 2006 andDecember 31, 2005, respectively, payable in periodic installments.

Aggregate future minimum payments for long-term debtsand capital lease obligations as of September 30, 2006 are as follows: 

|                                                          | ** ** | **Long-Term  Debt** | ** ** | **Capital  Leases** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|---------------------|------------|---------------------|------------|-----------|------------|
| 2006 (3 months)                                          |       | $                   | —     |                | $          | 6         |       | $ | 6 |   |
| 2007                                                     |       | —              |       | 919                 |       | 919       |       |
| 2008                                                     |       | —              |       | 4                   |       | 4         |       |
| 2009                                                     |       | —              |       | 3                   |       | 3         |       |
| 2010                                                     |       | —              |       | 2                   |       | 2         |       |
| Thereafter                                               |       | 150,000             |       | —              |       | 150,000   |       |
| Total                                                    |       | 150,000             |       | 934                 |       | 150,934   |       |
|                                                     |       |                |       |                |       |      |       |
| Less amount  representing interest on capital leases     |       | —              |       | 71                  |       | 71        |       |
| Total long-term debt                                     |       | 150,000             |       | 863                 |       | 150,863   |       |
|                                                     |       |                |       |                |       |      |       |
| Less current  portion, net of interest on capital leases |       | —              |       | 853                 |       | 853       |       |
| Total long-term  debt—noncurrent                    |       | $                   | 150,000    |                | $          | 10        |       | $ | 150,010 |   |

 

**10.          401(K) PLAN**

The Company has a401(k) plan that covers substantially all management employees who meet certaineligibility requirements as to age and length of service. Matchingcontributions to the plan are at the discretion of the Company. For the ninemonths ended September 30, 2006 and 2005, no matching contributions were madeto the plan.

**11.          RELATED-PARTY TRANSACTIONS**

A professionalservices agreement was in effect between the Company and MidOcean Partners asof September 30, 2006. The agreement provides for quarterly payments of $250.The term of this agreement is through April 12, 2016. Additionally, MidOceanPartners is entitled to reimbursement of expenses. As of  September 30, 2006, the Company had a prepaidbalance of $81 relating to the services agreement.  As of December 31, 2005, FFP had accruedexpenses of $493 related to a management agreement with Windward, the previousownership group.

**12.          STOCK COMPENSATION PLANS**

The former parent of theCompany issued stock options to Company employees in 2002.  Outstandingoptions and the related potential compensation were immaterial and wereterminated as of April 12, 2006 pursuant to the acquisition of FFP.

During the second quarterof 2006, Holdings has adopted a share-based compensation plan for certain managementemployees and directors of the Company. The Company has accounted for the fairvalue of these grants under this Plan in accordance with SFAS No. 123(R).

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Under the IncentiveEquity Unit Plan, Holdings may grant incentive units to selected managementpersonnel and directors of the Company. Four classes of units have beenauthorized in the following amounts 4,081.12 class B-1 units, 6,801.87 classB-2 units, 2,720.75 class B-3 units and 1914.93 class C units. Units aregranted at the discretion of the Board of Directors. The Class B units vest inequal 1/20th amounts at the end of each quarter following the grant dateand the Class C units fully vest at the date of the grant. Vesting on the ClassB units is accelerated in the event of a liquidating event, such as; theapproved sale of the Company, including merger or consolidation as well as thesale of publicly traded securities of the Company. The accelerated vesting issubject to the achievement of specified internal rate of return and return on investmenthurdles based on MidOcean Partners’ initial investment. Should those hurdlesnot be met at the time of the liquidating event, the shares will continue tovest quarterly over the rest of the original five year service period, with theexception of the B-2 units which will be forfeited on the date of theliquidating event if the hurdles are not met.

The Board of Directors atits sole discretion may repurchase the vested portion of terminated employees incentiveunits under certain conditions by establishing a fair market value for theunits and applying the same internal rate of return and return on investmenthurdles.

In March 2005, the SECissued SAB No. 107 *Share Based Payments,*which provides guidance on the implementation of SFAS No. 123(R). The Companyapplied the principles of SAB No. 107 in conjunction with its adoption of SFASNo. 123(R). The volatility assumption used by the Company of 41.01 percent wasdetermined by weighting the volatility of comparable public companies 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 5-year volatilities. Therisk-free interest rate of 4.9 percent that was used in the Monte CarloSimulation model is based on the risk free rate of return that is equal to theyield of a five-year zero-coupon U.S. Treasury note as of June 2006. Managementuses an expected dividend yield of zero in the Monte Carlo Simulation model, asit has no intention to pay any cash dividends in the foreseeable future. SFASNo. 123(R) requires management to estimate forfeitures at the time of grant andrevise those estimates in subsequent periods if actual forfeitures differ fromthose estimates. Management uses an estimated forfeiture rate based on theweighted average of different scenarios as historical data is not available andrecords stock-based compensation expense only for those awards that areexpected to vest. A discount has also been calculated into the fair value ofthe units to account for the market requirement inherent in the units.

The compensation costthat has been charged against income for that Plan was $209 and $667 for thethree months and nine months period ended September 30, 2006, respectively. Asof September 30, 2006, there was $3,896 of total unrecognized compensation costrelated to unvested stock-based compensation that is expected to be recognizedover a weighted-average period of 4.96 years. Based on currently outstandingoptions, total stock-based compensation expense for fiscal year 2006 isexpected to be approximately $864.

A summary of the unitsgranted during the period and outstanding as of September 30, 2006 is presentedbelow:

| **(thousands)**                                                                | ** ** | **B1** | ** ** | **B2** | ** ** | **B3** | ** ** | **C**  | ** ** |
|--------------------------------------------------------------------------------|------------|--------|------------|--------|------------|--------|------------|--------|------------|
| Outstanding as  of April 12, 2006                                              |       |   |       |   |       |   |       |   |       |
| Granted (units)                                                                |       | 3.7    |       | 6.1    |       | 2.4    |       | 0.4    |       |
| Exercised                                                                      |       |   |       |   |       |   |       |   |       |
| Forfeited                                                                      |       |   |       |   |       |   |       |   |       |
| Outstanding at  end of period (units)                                          |       | 3.7    |       | 6.1    |       | 2.4    |       | 0.4    |       |
| Equity incentive  units exercisable at period-end                              |       |   |       |   |       |   |       |   |       |
| Weighted-average fair  value of equity incentive units granted during the year |       | $      | 482        |   | $          | 308    |       | $      | 201        |   | $ | 1,000 |   |
|                                                                                |            |        |            |        |            |        |            |        |            |  |  |  |  |

As of September 30, 2006,5% of the outstanding class B units and 100% of the outstanding class C unitswere fully vested.

During the three monthsended September 30, 2006, there were no stock grants or stock based unitsgranted.

 

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**13.          COMMITMENTSAND CONTINGENCIES**

**LeaseExpense**

As of September 30, 2006,the Company leases the land for all 32 Parks. Of the 32 Parks, 30 leasethe land from third parties under noncancelable operating leases that expire onvarious dates through 2041 and two lease the land from third parties underoperating leases with a termination option by the respective landlords. Theground leases for certain of the Parks require the Company to pay minimummonthly or annual rentals, which are adjusted periodically based on changes inthe Consumer Price Index or a percentage of sales method. The ground leases forcertain of the Parks require monthly rentals based on a percentage of grossrevenues derived from the operations of the premises, as defined. In addition,the ground leases require the payment of property taxes and certain leasesrequire the payment of common area expenses. Certain of the leases provide theCompany with options to renew for various periods of time. In addition, certainof the leases provide the Company with options to purchase the leased premisesin accordance with the terms of those lease agreements, and certain otherleases provide the Company with the right of first refusal in the event thatthe lessors decide to sell the land during the term of the leases.

In addition, the Companyleases its corporate office facilities from an unaffiliated third party under anon-cancelable operating lease, which expires in 2009.

For the three monthsended September 30, 2006 and 2005, rent expense amounted to $5,021 and $5,135,respectively. For the nine months ended September 30, 2006 and 2005, rentexpense amounted to $12,865 and $12,629, respectively.  Included in other accrued liabilities atSeptember 30, 2006 and December 31, 2005, are $980 and $950, respectively, inaccrued rent expense.

The future minimumlease payments required under noncancelable Park leases and office leases as ofSeptember 30, 2006, are as follows:

| Years Ending    | ** ** | **Park**   | ** ** | **Office** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| **December 31** | ** ** | **Leases** | ** ** | **Lease**  | ** ** |
|                 |       |       |       |       |       |
| 2006 (3 months)      |       | $          | 4,946      |       | $          | 102 |   |
| 2007                 |       | 13,242     |       | 416        |       |
| 2008                 |       | 13,360     |       | 426        |       |
| 2009                 |       | 13,281     |       |       |       |
| 2010                 |       | 13,437     |       |       |       |
| Thereafter           |       | 231,228    |       |       |       |
|                 |       |       |       |       |       |
|                 |       | $          | 289,494    |       | $          | 944 |   |

 

**Lease Income**

The Company subleasesbuilding space to various tenants. Included in net rent and property taxes forthe nine months ended September 30, 2006 and 2005 is aggregate rental income of$571 and $500, respectively.  For thethree months ended September 30, 2006 and 2005, the rental income was $185 and$154, respectively.

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Future minimum leaseincome under noncancelable operating leases as of September 30, 2006, is asfollows:

| Years Ending    | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| **December 31** | ** ** | ** ** | ** ** |
| ** **           | ** ** | ** ** | ** ** |
| 2006 (3 months)      |       | $          | 105        |   |
| 2007                 |       | 291        |       |
| 2008                 |       | 50         |       |
| 2009                 |       | 50         |       |
| 2010                 |       | 0          |       |
| Thereafter           |       | 0          |       |
|                 |       |       |       |
| Total                |       | $          | 496        |   |

 

**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, 2006, 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 currentlyreviewing its options and has retained legal counsel to advise and assist itthrough this process. In addition, the city of Riverside, California iscurrently in the process of seizing a portion of roadside property at theCompany’s Castle Park FEC under the doctrine of eminent domain in connectionwith the construction of a freeway access ramp. The portion of land at issue isunimproved dirt, and the Company does not believe that any of the attractionsat this FEC will be affected.  The Company has reached a stipulation withthe landlord that will extricate it from the litigation, which will continuesolely between the City and the landlord.

The Company and MidOceanPartners have been named as defendants in a lawsuit Alleging, among otherthings, breach of a finder’s fee agreement and tortious interference with suchagreement in connection with the Acquisition by the Company.  Theagreement at issue is between two individuals and a company that are eachseparate and distinct from both the Company and MidOcean Partners.  Theplaintiff, Steven Crowley (“Crowley”) purports to hold the Company responsiblefor the alleged breach of a finder’s agreement between Crowley (and anotherindividual who is not a plaintiff) and VisionMaker, LLC (“VisionMaker”).  Crowley claims that the Company is thesuccessor in interest to VisionMaker.  Assuch, although the lawsuit seeks aggregate damages in excess of $3.2million, the Company remains hopeful that it will prevail on its motion todismiss, which is currently pending in the United States District Court for theSouthern District of New York.

**14.          INCOMETAXES**

The Company and its subsidiaries file a consolidated federal income taxreturn and various state income and franchise tax returns.   The Company uses the estimated effective taxrate for the year to determine the provision for income taxes for interimperiods.  As a result of the acquisition,the interim period begins on the acquisition date of April 13, 2006.  The Company recorded income tax expense of$9.5 million for the three months ended September 30, 2006.  For the previous period, April 13 throughJune 30, 2006, the Company recorded tax expense of $0.044 million.

As of June 30, 2006, the Company had projected a net operating loss forthe period ended December 31, 2006 and had recorded a full valuation allowancewhich offset the tax benefits from the projected losses.  Accordingly, no tax benefit was recorded asof June 30, 2006.  As a result ofoperations from the quarter ended September 30, 2006, the Company’s revisedprojections result in operating profits. Accordingly, an income  taxexpense was recorded for the quarter ended September 30, 2006.

The estimated effective tax rate differed from the federal statutorytax rate primarily due to state income taxes and nondeductible compensationexpense charged against income under the Incentive Equity Unit Plan ofHoldings.

The Company recorded income tax expense of $9.5 million for the periodApril 13, 2006 through September 30, 2006. The estimated effective tax rate was 45.1% during the period April 13,2006 through September 30, 2006.

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**15.          SEGMENTINFORMATION DISCLOSURE**

The Company has in two reportablesegments, as defined within SFAS No. 131, *Disclosuresabout Segments of an Enterprise and Related Information.* SFAS No.131 establishes standards for public business enterprises reporting informationabout operating segments in annual financial statements. Operating segments aredefined as components of an enterprise about which separate financialinformation is available and is evaluated on a regular basis by the chiefoperating decision maker or decision making group, in deciding how to allocateresources to an individual segment and in assessing performance of the segment.The Company has identified these segments based on the nature of businessconducted by each.

TheCompany has two reportable segments: FECs and WPs. FECs primarily offerminiature golf, batting cages, kiddie parks, go-carts, and video arcades. WPsfeature water slides, flumes, and pools as their primary attractions. Theaccounting policies of the segments are the same as those described inNote 3. Operating income (loss) of segments does not include interestincome or expense and provision for income taxes and also excludes corporateitems, such as general and administrative expenses and corporate depreciationexpense. Identifiable assets are those used in the Company’s operations in eachsegment. Corporate assets consist primarily of deferred financing costs,deposits, property and equipment, and cash and cash equivalents.

Goodwill for WPs and FECswas $40,634 and $30,098 respectively, as of September 30, 2006 and was $16,742and $20,729 respectively as of December 31, 2005.

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SEGMENT DATA:Three Months Ended
| **Successor**                    | ** ** | ** **   | ** ** | ** **             | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|----------------------------------|------------|--------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------|------------|
| **Three Months Ended** | ** ** | **Revenues** | ** ** | **Net**                | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **September 30, 2006** | ** ** | **Net**      | ** ** | **Income (Loss)** | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
|                             |       |         |       |                   |       |             |       |             |       |       |       |
| FEC                              |       | $            | 24,294     |                   | $          | 3,510            |       | $                | 2,603      |       | $          | 1,561 |   | $ | 121,714 |   |
| WP                               |       | 57,926       |       | 29,141                 |       | 1,626            |       | 1,150            |       | 99,593     |       |
|                             |       |         |       |                   |       |             |       |             |       |       |       |
| Total Operations                 |       | 82,220       |       | 32,651                 |       | 4,229            |       | 2,711            |       | 221,307    |       |
|                             |       |         |       |                   |       |             |       |             |       |       |       |
| Corporate                        |       |         |       | (17,318                | )          | 499              |       | 111              |       | 29,490     |       |
|                             |       |         |       |                   |       |             |       |             |       |       |       |
| Total                            |       | $            | 82,220     |                   | $          | 15,333           |       | $                | 4,728      |       | $          | 2,822 |   | $ | 250,797 |   |

 
| **Predecessor**                  | ** ** | ** **   | ** ** | ** **             | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|----------------------------------|------------|--------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------|------------|
| **Three Months Ended** | ** ** | **Revenues** | ** ** | **Net**                | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **September 30, 2005** | ** ** | **Net**      | ** ** | **Income (Loss)** | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
|                             |       |         |       |                   |       |             |       |             |       |       |       |
| FEC                              |       | $            | 24,701     |                   | $          | 4,533            |       | $                | 2,908      |       | $          | 1,154 |   | $ | 74,527 |   |
| WP                               |       | 53,765       |       | 27,081                 |       | 2,026            |       | 679              |       | 93,911     |       |
|                             |       |         |       |                   |       |             |       |             |       |       |       |
| Total Operations                 |       | 78,466       |       | 31,614                 |       | 4,934            |       | 1,833            |       | 168,438    |       |
|                             |       |         |       |                   |       |             |       |             |       |       |       |
| Corporate                        |       | —       |       | (7,606                 | )          | 195              |       | 9                |       | 3,617      |       |
|                             |       |         |       |                   |       |             |       |             |       |       |       |
| Total                            |       | $            | 78,466     |                   | $          | 24,008           |       | $                | 5,129      |       | $          | 1,842 |   | $ | 172,055 |   |

 

27

----

SEGMENT DATA:Nine Months Ended
| ** **                                                  | ** ** | ** **   | ** ** | ** **             | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|--------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------|------------|
| **Successor**                                               | ** ** | **Revenues** | ** ** | **Net**                | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **April 13 to September 30, 2006** | ** ** | **Net**      | ** ** | **Income (Loss)** | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
| ** **                                                  | ** ** | ** **   | ** ** | ** **             | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| FEC                                                         |       | $            | 46,447     |                   | $          | 7,141            |       | $                | 5,289      |       | $          | 2,862 |   | $ | 121,714 |   |
| WP                                                          |       | 75,235       |       | 28,806                 |       | 2,871            |       | 3,193            |       | 99,593     |       |
|                                                        |       |         |       |                   |       |             |       |             |       |       |       |
| Total Operations                                            |       | 121,682      |       | 35,947                 |       | 8,160            |       | 6,055            |       | 221,307    |       |
|                                                        |       |         |       |                   |       |             |       |             |       |       |       |
| Corporate                                                   |       | —       |       | (24,329                | )          | 868              |       | 123              |       | 29,490     |       |
|                                                        |       |         |       |                   |       |             |       |             |       |       |       |
| Total                                                       |       | $            | 121,682    |                   | $          | 11,618           |       | $                | 9,028      |       | $          | 6,178 |   | $ | 250,797 |   |

 
| ** **                                               | ** ** | ** **   | ** ** | ** ** | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|--------------|------------|------------|------------|------------------|------------|------------------|------------|------------|------------|
| **Predecessor**                                          | ** ** | **Revenues** | ** ** | **Net**    | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **January 1 to April 12, 2006** | ** ** | **Net**      | ** ** | **Loss**   | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
| ** **                                               | ** ** | ** **   | ** ** | ** ** | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| FEC                                                      |       | $            | 19,268     |       | $          | (67              | )          | $                | 1,790      |       | $          | 1,104 |   | $ | 117,618 |   |
| WP                                                       |       | 4,129        |       | (8,161     | )          | 2,280            |       | 2,800            |       | 106,418    |       |
|                                                     |       |         |       |       |       |             |       |             |       |       |       |
| Total Operations                                         |       | 23,397       |       | (8,228     | )          | 4,070            |       | 3,904            |       | 224,036    |       |
|                                                     |       |         |       |       |       |             |       |             |       |       |       |
| Corporate                                                |       | —       |       | (9,925     | )          | 408              |       | 47               |       | 10,129     |       |
|                                                     |       |         |       |       |       |             |       |             |       |       |       |
| Total                                                    |       | $            | 23,397     |       | $          | (18,153          | )          | $                | 4,478      |       | $          | 3,951 |   | $ | 234,165 |   |

 
| ** **                                                        | ** ** | ** **   | ** ** | ** **             | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|--------------|------------|------------------------|------------|------------------|------------|------------------|------------|------------|------------|
| **Predecessor**                                                   | ** ** | **Revenues** | ** ** | **Net**                | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **Nine Months Ended September 30, 2005** | ** ** | **Net**      | ** ** | **Income (Loss)** | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
| ** **                                                        | ** ** | ** **   | ** ** | ** **             | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| FEC                                                               |       | $            | 64,698     |                   | $          | 8,726            |       | $                | 6,860      |       | $          | 4,574 |   | $ | 74,527 |   |
| WP                                                                |       | 75,215       |       | 20,014                 |       | 6,473            |       | 3,179            |       | 93,911     |       |
|                                                              |       |         |       |                   |       |             |       |             |       |       |       |
| Total Operations                                                  |       | 139,913      |       | 28,740                 |       | 13,333           |       | 7,753            |       | 168,438    |       |
|                                                              |       |         |       |                   |       |             |       |             |       |       |       |
| Corporate                                                         |       | —       |       | (24,364                | )          | 518              |       | 57               |       | 3,617      |       |
|                                                              |       |         |       |                   |       |             |       |             |       |       |       |
| Total                                                             |       | $            | 139,913    |                   | $          | (4,376           | )          | $                | 13,851     |       | $          | 7,810 |   | $ | 172,055 |   |

 

28

----

** **

**16.**                               SEPARATEFINANCIAL INFORMATION OF SUBSIDIARY GUARANTORS OF INDEBTEDNESS

As described in Footnotes4 and 9 above, FFP issued $150,000 in 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.  Thefollowing disclosures reflect the Company’s condensed consolidating financialinformation for the periods presented. The condensed consolidating financial information for the Company andthe Company’s guarantor subsidiaries for the periods presented as outlinedbelow have been prepared from the books and records maintained by the Companyand the guarantor subsidiaries.  Thecondensed financial information may not necessarily be indicative of theresults of operations or financial position had the Company and the guarantorsubsidiaries operated as independent entities. Certain intercompany amounts included in the subsidiary records areeliminated in consolidation.  As a resultof this activity, an amount due to / due from related companies will exist atany time.

SuccessorPalace Entertainment Holdings, IncCondensed Consolidated Balance Sheet As Of September 30, 2006(unaudited / in thousands)
| ** **                                 | ** ** | ** **   | ** ** | **Festival**       | ** ** | **Combined  Guarantor** | ** ** | ** **       | ** ** | **Holdings**     | ** ** |
|--------------------------------------------|------------|--------------|------------|--------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|
| ** **                                 | ** ** | **Holdings** | ** ** | **Fun Parks** | ** ** | **Subsidiaries**        | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                       |       |         |       |               |       |                    |       |             |       |             |       |
| ASSETS                                     |       |         |       |               |       |                    |       |             |       |             |       |
| CURRENT ASSETS                             |       |         |       |               |       |                    |       |             |       |             |       |
| Cash and cash  equivalents                 |       | $            |       |               | $          | 18,844                  |       | $                | 205        |             | $          |   |   | $ | 19,049 |   |
| Inventories                                |       |         |       | 925                |       | 1,329                   |       |             |       | 2,254            |       |
| Prepaid Expenses  and Other Current Assets |       |         |       | 5,123              |       | 2,093                   |       |             |       | 7,216            |       |
| Total Current  Assets                      |       |         |       | 24,892             |       | 3,627                   |       |             |       | 28,519           |       |
|                                       |       |         |       |               |       |                    |       |             |       |             |       |
| PROPERTY AND  EQUIPMENT-NET                |       |         |       | 59,484             |       | 65,583                  |       |             |       | 125,067          |       |
| GOODWILL                                   |       |         |       | 55,694             |       | 15,038                  |       |             |       | 70,732           |       |
| INATNGIBLES                                |       |         |       | 11,999             |       | 8,137                   |       |             |       | 20,136           |       |
| OTHER ASSETS-NET                           |       |         |       | 6,199              |       | 144                     |       |             |       | 6,343            |       |
| DUE FROM SUBSIDIARIES                      |       |         |       | 48,064             |       |                    |       | (48,064          | )          |             |       |
| INVESTMENT IN  SUBSIDIARIES                |       | 66,045       |       | 42,378             |       |                    |       | (108,423         | )          |             |       |
| TOTAL                                      |       | $            | 66,045     |               | $          | 248,710                 |       | $                | 92,529     |             | $          | (156,487 | ) | $ | 250,797 |   |
|                                       |       |         |       |               |       |                    |       |             |       |             |       |
| LIABILITIES AND MEMBERS  INTEREST          |       |         |       |               |       |                    |       |             |       |             |       |
| CURRENT LIABILITIES                        |       |         |       |               |       |                    |       |             |       |             |       |
| Accounts Payable                           |       | $            |       |               | $          | 2,417                   |       | $                | —     |             | $          |   |   | $ | 2,417 |   |
| Accrued Interest                           |       |         |       | 7,741              |       | —                  |       |             |       | 7,741            |       |
| Accrued Wages  and Payroll Taxes           |       |         |       | 2,241              |       | 19                      |       |             |       | 2,260            |       |
| Income Taxes  Payable                      |       |         |       | 9,504              |       | 0                       |       |             |       | 9,504            |       |
| Other accrued  liabilities                 |       |         |       | 7,286              |       | 308                     |       |             |       | 7,594            |       |
| Unearned Revenue                           |       |         |       | 35                 |       | 921                     |       |             |       | 956              |       |
| Current portion  of long term debt         |       |         |       | 14                 |       | 839                     |       |             |       | 853              |       |
| Total Current  Liabilities                 |       |         |       | 29,238             |       | 2,087                   |       |             |       | 31,325           |       |
|                                       |       |         |       |               |       |                    |       |             |       |             |       |
| LONG TERM DEBT-Less  Current Portion       |       |         |       | 150,010            |       | —                  |       |             |       | 150,010          |       |
| DUE TO PARENT                              |       |         |       |               |       | 48,064                  |       | (48,064          | )          |             |       |
| OTHER LONG TERM  LIABILITIES               |       |         |       | 3,417              |       |                    |       |             |       | 3,417            |       |
| Total  Liabilities                         |       |         |       | 182,665            |       | 50,151                  |       | (48,064          | )          | 184,752          |       |
| SHAREHOLDER’S EQUITY                  |       | 66,045       |       | 66,045             |       | 42,378                  |       | (108,423         | )          | 66,045           |       |
| TOTAL                                      |       | $            | 66,045     |               | $          | 248,710                 |       | $                | 92,529     |             | $          | (156,487 | ) | $ | 250,797 |   |

 

29

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PredecessorFestival Fun Parks LLCCondensed Consolidated Balance Sheet As Of December 31, 2005(unaudited / in thousands)
| ** **                                | ** ** | **Festival**       | ** ** | **Combined  Guarantor** | ** ** | ** **       | ** ** | **FFP**          | ** ** |
|-------------------------------------------|------------|--------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|
| ** **                                | ** ** | **Fun Parks** | ** ** | **Subsidiaries**        | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                      |       |               |       |                    |       |             |       |             |       |
| ASSETS                                    |       |               |       |                    |       |             |       |             |       |
| CURRENT ASSETS                            |       |               |       |                    |       |             |       |             |       |
| Cash and cash equivalents                 |       | $                  | 5,125      |                    | $          | 115              |       |             |       | $ | 5,240 |   |
| Inventories                               |       | 2,858              |       | 437                     |       |             |       | 3,295            |       |
| Prepaid Expenses and Other Current Assets |       | 2,878              |       | 1,023                   |       |             |       | 3,901            |       |
| Total Current Assets                      |       | 10,861             |       | 1,575                   |       |             |       | 12,436           |       |
|                                      |       |               |       |                    |       |             |       |             |       |
| PROPERTY AND  EQUIPMENT-NET               |       | 61,778             |       | 50,610                  |       |             |       | 112,388          |       |
| GOODWILL                                  |       | 22,432             |       | 15,039                  |       |             |       | 37,471           |       |
| OTHER ASSETS-NET                          |       | 3,225              |       | 143                     |       |             |       | 3,368            |       |
| INVESTMENT IN  AND DUE FROM SUBSIDIARIES  |       | 64,477             |       |                    |       | (64,477          | )          |             |       |
| TOTAL                                     |       | 162,773            |       | $                       | 67,367     |             | $          | (64,477          | )          | $ | 165,663 |   |
|                                      |       |               |       |                    |       |             |       |             |       |
| LIABILITIES AND  MEMBERS INTEREST         |       |               |       |                    |       |             |       |             |       |
| CURRENT  LIABILITIES                      |       |               |       |                    |       |             |       |             |       |
| Accounts Payable                          |       | $                  | 2,705      |                    | —     |             |       |             | $          | 2,705 |   |
| Accrued Interest                          |       | 610                |       | —                  |       | —           |       | 610              |       |
| Accrued Wages and Payroll Taxes           |       | 2,485              |       | —                  |       |             |       | 2,485            |       |
| Income Taxes Payable                      |       | —             |       |                    |       |             |       | —           |       |
| Other accrued liabilities                 |       | 7,156              |       | —                  |       |             |       | 7,156            |       |
| Unearned Revenue                          |       | 92                 |       | 1,250                   |       |             |       | 1,342            |       |
| Current portion of long term debt         |       | 7,106              |       | 764                     |       |             |       | 7,870            |       |
| Total Current Liabilities                 |       | 20,154             |       | 2,014                   |       |             |       | 22,168           |       |
|                                      |       |               |       |                    |       |             |       |             |       |
| LONG TERM  DEBT-Less Current Portion      |       | 156,535            |       | 839                     |       |             |       | 157,374          |       |
| OTHER LONG TERM  LIABILITIES              |       | 3,223              |       | 37                      |       |             |       | 3,260            |       |
| Total  Liabilities                        |       | 179,912            |       | 2,890                   |       |             |       | 182,802          |       |
|                                      |       |               |       |                    |       |             |       |             |       |
| DUE TO/FROM  SUBSIDIARIES                 |       | (36,003            | )          | 56,397                  |       | (20,394          | )          |             |       |
| MEMBER’S  INTEREST                   |       | 18,864             |       | 8,080                   |       | (44,083          | )          | (17,139          | )          |
| TOTAL                                     |       | $                  | 162,773    |                    | $          | 67,367           |       | $                | (64,477    | ) | $ | 165,663 |   |

 

30

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SuccessorPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Operations For The Three Months EndedSeptember 30, 2006(unaudited / in thousands)
| ** **                                                                   | ** ** | ** **   | ** ** | **Festival**       | ** ** | **Combined  Guarantor** | ** ** | ** **       | ** ** | **Holdings**     | ** ** |
|------------------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Holdings** | ** ** | **Fun Parks** | ** ** | **Subsidiaries**        | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Revenues, net                                                                |       | $            | —     |               | $          | 40,529                  |       | $                | 41,691     |             | $          | — |   | $ | 82,220 |   |
| Operating Costs  and Expenses                                                |       |         |       |               |       |                    |       |             |       |             |       |
| Cost of Revenue (exclusive of depreciation and amortization  as 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            |       |
| Total Operating Expenses                                                     |       |         |       | 29,869             |       | 23,282                  |       |             |       | 53,151           |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Operating Income                                                             |       |         |       | 10,660             |       | 18,409                  |       | —           |       | 29,069           |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Equity in Earnings of Subsidiaries                                           |       | 15,333       |       | 18,409             |       | —                  |       | (33,742          | )          | —           |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Other Expense                                                                |       |         |       |               |       |                    |       |             |       |             |       |
| Interest and Other Expense, net                                              |       | —       |       | 4,216              |       | —                  |       | —           |       | 4,216            |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Income (Loss) from Continuing Operations                                     |       | 15,333       |       | 24,853             |       | 18,409                  |       | (33,742          | )          | 24,853           |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Income Tax Provision                                                         |       |         |       | 9,520              |       | —                  |       | —           |       | 9,520            |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Net Income  (Loss)                                                           |       | $            | 15,333     |               | $          | 15,333                  |       | $                | 18,409     |             | $          | (33,742 | ) | $ | 15,333 |   |

 

31

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PredecessorFestival Fun Parks LLCCondensed Consolidated Statement of Operations For The Three Months EndedSeptember 30, 2005(unaudited / in thousands)
| ** **                                                                   | ** ** | **Festival**       | ** ** | **Combined  Guarantor** | ** ** | ** **       | ** ** | **FFP**          | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Fun Parks** | ** ** | **Subsidiaries**        | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Revenues, net                                                                |       | $                  | 38,186     |                    | $          | 40,280           |       |             |       | $ | 78,466 |   |
| Operating Costs  and Expenses                                                |       |               |       |                    |       |             |       |             |       |
| Cost of Revenue (exclusive of depreciation and  amortization as shown below) |       | 18,329             |       | 19,561                  |       |             |       | 37,890           |       |
| Selling, General and Administrative                                          |       | 5,543              |       | 294                     |       |             |       | 5,837            |       |
| Depreciation and Amortization                                                |       | 2,207              |       | 2,922                   |       |             |       | 5,129            |       |
| Gain/Loss on disposal of assets                                              |       | (205               | )          |                    |       |             |       | (205             | )          |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Total Operating Expenses                                                     |       | 25,874             |       | 22,777                  |       | —           |       | 48,651           |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Operating Income                                                             |       | 12,312             |       | 17,503                  |       | —           |       | 29,815           |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Equity in Earnings of Subsidiaries                                           |       | 17,503             |       | —                  |       | (17,503          | )          | —           |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Other Expense                                                                |       |               |       |                    |       |             |       |             |       |
| Interest and Other Expense, net                                              |       | 5,734              |       | —                  |       | —           |       | 5,734            |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Income (Loss) from Operations                                                |       | 24,081             |       | 17,503                  |       | (17,503          | )          | 24,081           |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Income Tax Provision                                                         |       | 73                 |       |                    |       |             |       | 73               |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Net Income  (Loss)                                                           |       | $                  | 24,008     |                    | $          | 17,503           |       | $                | (17,503    | ) | $ | 24,008 |   |
|                                                                              |            |                    |            |                         |            |                  |            |                  |            |  |  |  |  |

 

32

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SuccessorPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Operations For The Period Ended April 13 toSeptember 30, 2006(unaudited / in thousands)
| ** **                                                                   | ** ** | ** **   | ** ** | **Festival**       | ** ** | **Combined  Guarantor** | ** ** | ** **       | ** ** | **Holdings**     | ** ** |
|------------------------------------------------------------------------------|------------|--------------|------------|--------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Holdings** | ** ** | **Fun Parks** | ** ** | **Subsidiaries**        | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Revenues, net                                                                |       | $            | —     |               | $          | 65,238                  |       | $                | 56,444     |             |       |   | $ | 121,682 |   |
| Operating Costs  and Expenses                                                |       |         |       |               |       |                    |       |             |       |             |       |
| Cost of Revenue (exclusive of depreciation and  amortization as 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            |       |
| Total Operating Expenses                                                     |       |         |       | 54,708             |       | 37,422                  |       |             |       | 92,130           |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Operating Income                                                             |       |         |       | 10,530             |       | 19,022                  |       |             |       | 29,552           |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Equity in Earnings of Subsidiaries                                           |       | 11,618       |       | 19,022             |       |                    |       | (30,640          | )          |             |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Other Expense                                                                |       |         |       |               |       |                    |       |             |       |             |       |
| Interest and Other Expense, net                                              |       |         |       | 8,370              |       |                    |       |             |       | 8,370            |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Income (Loss) from Continuing Operations                                     |       | 11,618       |       | 21,182             |       | 19,022                  |       | (30,640          | )          | 21,182           |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Income Tax Provision                                                         |       |         |       | 9,564              |       |                    |       |             |       | 9,564            |       |
|                                                                         |       |         |       |               |       |                    |       |             |       |             |       |
| Net Income  (Loss)                                                           |       | $            | 11,618     |               | $          | 11,618                  |       | $                | 19,022     |             | $          | (30,640 | ) | $ | 11,618 |   |
|                                                                              |            |              |            |                    |            |                         |            |                  |            |                  |            |  |  |  |  |  |

 

33

----

PredecessorFestival Fun Parks LLCCondensed Consolidated Statement of Operations For The Period Ended January 1to April 12, 2006(unaudited / in thousands)
| ** **                                                                   | ** ** | **Festival**       | ** ** | **Combined  Guarantor** | ** ** | ** **       | ** ** | **FFP**          | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Fun Parks** | ** ** | **Subsidiaries**        | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Revenues, net                                                                |       | $                  | 17,818     |                    | $          | 5,579            |       |             |       | $ | 23,397 |   |
| Operating Costs  and Expenses                                                |       |               |       |                    |       |             |       |             |       |
| Cost of Revenue (exclusive of depreciation and  amortization as 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            |       |
| Total Operating Expenses                                                     |       | 24,124             |       | 10,752                  |       |             |       | 34,876           |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Operating Loss                                                               |       | (6,306             | )          | (5,173                  | )          |             |       | (11,479          | )          |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Equity in Earnings of Subsidiaries                                           |       | (5,173             | )          |                    |       | 5,173            |       |             |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Other Expense                                                                |       |               |       |                    |       |             |       |             |       |
| Interest and Other Expense, net                                              |       | 6,674              |       |                    |       |             |       | 6,674            |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| (Loss) Income from Continuing Operations                                     |       | (18,153            | )          | (5,173                  | )          | 5,173            |       | (18,153          | )          |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Income Tax Provision                                                         |       | —             |       | —                  |       | —           |       | —           |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Net (Loss)  Income                                                           |       | $                  | (18,153    | )                       | $          | (5,173           | )          | $                | 5,173      |   | $ | (18,153 | ) |
|                                                                              |            |                    |            |                         |            |                  |            |                  |            |  |  |  |  |

 

34

----

PredecessorFestival Fun Parks LLCCondensed Consolidated Statement of Operations For The Nine Months EndedSeptember 30, 2005(unaudited / in thousands)
| ** **                                                                   | ** ** | **Festival**       | ** ** | **Combined  Guarantor** | ** ** | ** **       | ** ** | **FFP**          | ** ** |
|------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                   | ** ** | **Fun Parks** | ** ** | **Subsidiaries**        | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Revenues, net                                                                |       | $                  | 80,257     |                    | $          | 59,656           |       |             |       | $ | 139,913 |   |
| Operating Costs  and Expenses                                                |       | 0                  |       |                    |       |             |       |             |       |
| Cost of Revenue (exclusive of depreciation and  amortization as shown below) |       | 53,475             |       | 35,563                  |       |             |       | 89,038           |       |
| Selling, General and Administrative                                          |       | 9,732              |       | 5,542                   |       |             |       | 15,274           |       |
| Depreciation and Amortization                                                |       | 7,232              |       | 6,619                   |       |             |       | 13,851           |       |
| Gain/Loss on disposal of assets                                              |       | (32                | )          | 0                       |       |             |       | (32              | )          |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Total Operating Expenses                                                     |       | 70,407             |       | 47,724                  |       |             |       | 118,131          |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Operating Income                                                             |       | 9,850              |       | 11,932                  |       | —           |       | 21,782           |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Equity in Earnings of Subsidiaries                                           |       | 11,932             |       | —                  |       | (11,932          | )          | 0                |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Other Expense                                                                |       |               |       |                    |       |             |       |             |       |
| Interest and Other Expense, net                                              |       | 17,333             |       | —                  |       | —           |       | 17,333           |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Income (Loss) from Operations                                                |       | 4,449              |       | 11,932                  |       | (11,932          | )          | 4,449            |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Income Tax Provision                                                         |       | 73                 |       | —                  |       | —           |       | 73               |       |
|                                                                         |       |               |       |                    |       |             |       |             |       |
| Net Income  (Loss)                                                           |       | $                  | 4,376      |                    | $          | 11,932           |       | $                | (11,932    | ) | $ | 4,376 |   |
|                                                                              |            |                    |            |                         |            |                  |            |                  |            |  |  |  |  |

 

35

----

PredecessorFESTIVAL FUN PARKS LLCCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE PERIOD JANUARY 1 TO APRIL12, 2006(unaudited / in thousands)
| ** **                                                                       | ** ** | **Festival  Fun Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **FFP  Consolidated** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|-----------------------|------------|
|                                                                             |       |                         |       |                                  |       |             |       |                  |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                           |       |                         |       |                                  |       |             |       |                  |       |
| Net Income (loss)                                                                |       | $                            | (18,153    | )                                     | $          | (5,173           | )          | $                     | 5,173      |   | $ | (18,153 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                         |       |                                  |       |             |       |                  |       |
| Depreciation and amortization                                                    |       | 2,825                        |       | 1,653                                 |       |             |       | 4,478                 |       |
| Equity in Earnings of Subsidiaries                                               |       | 5,173                        |       |                                  |       | (5,173           | )          | —                |       |
| Amortization of deferred financing costs and  discount accretion                 |       | 796                          |       | —                                |       |             |       | 796                   |       |
| Financed Interest Payments                                                       |       | 3,515                        |       | —                                |       |             |       | 3,515                 |       |
| Share based Compensation                                                         |       | —                       |       | —                                |       | —           |       | —                |       |
| Deferred rent expense                                                            |       | 36                           |       | —                                |       |             |       | 36                    |       |
|                                                                             |       |                         |       |                                  |       |             |       |                  |       |
| Changes in net operating assets and liabilities:                                 |       |                         |       |                                  |       |             |       |                  |       |
| Inventories                                                                      |       | 470                          |       | (684                                  | )          |             |       | (214                  | )          |
| Prepaid expenses and other current assets                                        |       | 433                          |       | 672                                   |       |             |       | 1,105                 |       |
| Other assets                                                                     |       | 8                            |       | —                                |       |             |       | 8                     |       |
| Accounts payable                                                                 |       | 1,160                        |       | —                                |       |             |       | 1,160                 |       |
| Accrued interest                                                                 |       | 436                          |       | —                                |       |             |       | 436                   |       |
| Accrued wages and payroll taxes                                                  |       | (182                         | )          | 15                                    |       |             |       | (167                  | )          |
| Income taxes payable                                                             |       | —                       |       | —                                |       |             |       | —                |       |
| Other accrued liabilities                                                        |       | (1,857                       | )          | 510                                   |       |             |       | (1,347                | )          |
| Unearned Revenue                                                                 |       | (163                         | )          | 157                                   |       |             |       | (6                    | )          |
| Other long-term liabilities                                                      |       | 22                           |       | —                                |       |             |       | 22                    |       |
|                                                                             |       |                         |       |                                  |       |             |       |                  |       |
| Net cash provided used by operating activities                                   |       | (5,481                       | )          | (2,850                                | )          | —           |       | (8,331                | )          |
|                                                                             |       |                         |       |                                  |       |             |       |                  |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                           |       |                         |       |                                  |       |             |       |                  |       |
|                                                                             |       |                         |       |                                  |       |             |       |                  |       |
| Payment for  acquisition of FFP, net                                             |       |                         |       |                                  |       |             |       |                  |       |
| 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                                                        |       |                         |       |                                  |       |             |       |                  |       |
| Return of  capital                                                               |       |                         |       |                                  |       |             |       |                  |       |
| Porceeds from  long-term debt                                                    |       | 13,100                       |       |                                  |       |             |       | 13,100                |       |
| Repayment of  long-term debt                                                     |       | (767                         | )          |                                  |       |             |       | (767                  | )          |
| Payment for cost  of financing                                                   |       |                         |       |                                  |       |             |       |                  |       |
| Advances to  related company                                                     |       | (5,558                       | )          |                                  |       | 5,558            |       |                  |       |
| Advances from  related company                                                   |       |                         |       | 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                                 |       | 0                |       | 12,158                |       |
|                                                                             |       |                         |       |                                  |       |             |       |                  |       |
| NET (DECREASE)  INCREASE 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 |   |

 

36

----

SuccessorPALACE ENTERTAINMENT HOLDINGS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE PERIOD APRIL 13 TO SEPTEMBER 30, 2006(unaudited / in thousands)
| ** **                                                                       | ** ** | **Holdings** | ** ** | **Festival  Fun Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
|                                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                           |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net Income                                                                       |       | $            | 11,618     |                         | $          | 11,618                                |       | $                | 19,022     |                       | $          | (30,640 | ) | $ | 11,618 |   |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Depreciation and amortization                                                    |       |         |       | 6,686                        |       | 2,342                                 |       |             |       | 9,028                      |       |
| Equity in Earnings of Subsidiaries                                               |       | 11,618       |       |                         |       |                                  |       | (11,618          | )          |                       |       |
| Amortization of deferred financing costs and  discount accretion                 |       |         |       | 364                          |       |                                  |       |             |       | 364                        |       |
| Financed Interest Payments                                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Share based Compensation                                                         |       |         |       | 667                          |       |                                  |       |             |       | 667                        |       |
| Deferred rent expense                                                            |       |         |       | 218                          |       |                                  |       |             |       | 218                        |       |
|                                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Changes in net operating assets and liabilities:                                 |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Inventories                                                                      |       |         |       | 143                          |       | (208                                  | )          |             |       | (65                        | )          |
| Prepaid expenses and other current assets                                        |       |         |       | (1,643                       | )          | (1,741                                | )          |             |       | (3,384                     | )          |
| Other assets                                                                     |       |         |       | 1                            |       |                                  |       |             |       | 1                          |       |
| Accounts payable                                                                 |       |         |       | (2,121                       | )          |                                  |       |             |       | (2,121                     | )          |
| Accrued interest                                                                 |       |         |       | 7,655                        |       |                                  |       |             |       | 7,655                      |       |
| Accrued wages and payroll taxes                                                  |       |         |       | (63                          | )          | 4                                     |       |             |       | (59                        | )          |
| Income taxes payable                                                             |       |         |       | 9,504                        |       | 0                                     |       |             |       | 9,504                      |       |
| Other accrued liabilities                                                        |       |         |       | 3,051                        |       | (202                                  | )          |             |       | 2,849                      |       |
| Unearned Revenue                                                                 |       |         |       | (208                         | )          | (172                                  | )          |             |       | (380                       | )          |
| Other long-term liabilities                                                      |       |         |       | (195                         | )          | 75                                    |       |             |       | (120                       | )          |
|                                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| 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                     |       |
| Return of  capital                                                               |       | (500         | )          |                         |       |                                  |       |             |       | (500                       | )          |
| Porceeds from  long-term debt                                                    |       | 163,500      |       |                         |       |                                  |       |             |       | 163,500                    |       |
| Repayment of  long-term debt                                                     |       |         |       | (189,095                     | )          |                                  |       |             |       | (189,095                   | )          |
| Payment for cost  of financing                                                   |       | (5,575       | )          |                         |       |                                  |       |             |       | (5,575                     | )          |
| Advances to  related company                                                     |       | (197,322     | )          | (8,095                       | )          |                                  |       | 205,417          |       |                       |       |
| Advances from  related company                                                   |       |         |       | 178,596                      |       | (15,437                               | )          | (163,159         | )          |                       |       |
| Payments on  capital leases                                                      |       |         |       | 183                          |       | (838                                  | )          |             |       | (655                       | )          |
| Distributions to  member                                                         |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash provided (used) by 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 |   |

 

37

----

PredecessorFestival Fun Parks LLCConsolidated Statement of Cash Flows for the Nine Months Ended September 30,2005(unaudited / in thousands)
| ** **                                                       | ** ** | **Festival  Fun Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Elimination** | ** ** | **FFP  Consolidated** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|-----------------|------------|-----------------------|------------|
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                        | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| ** **                                                       |       | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            |       |
| **Net  Profit/(Loss)**                                           |       | $                            | 4,376      |                                  | $          | 11,932          |       | $                     | (11,932    | ) | $ | 4,376 |   |
| Depreciation and Amortization                                    |       | 7,233                        |       | 6,618                                 |       | —          |       | 13,851                |       |
| Equity in Earnings of Subsidiaries                               |       | 27,654                       |       | —                                |       | (27,654         | )          | —                |       |
| Gain/loss on disposition                                         |       | (32                          | )          | —                                |       |            |       | (32                   | )          |
| Amortization of deferred financing costs and  discount accretion |       | 2,049                        |       | —                                |       |            |       | 2,049                 |       |
| Financed Interest payments                                       |       | 1,870                        |       | —                                |       |            |       | 1,870                 |       |
| Deferred Rent expense                                            |       | 207                          |       | 37                                    |       |            |       | 244                   |       |
|                                                             | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| **Changes  in Net Operating Assets and Liabilities:**            | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| Inventories                                                      |       | 486                          |       | (667                                  | )          |            |       | (181                  | )          |
| Prepaid Expenses and Other Current Assets                        |       | (1,352                       | )          | (886                                  | )          |            |       | (2,238                | )          |
| Other Assets                                                     |       | (156                         | )          | (65                                   | )          |            |       | (221                  | )          |
| Accounts Payable                                                 |       | (883                         | )          | —                                |       |            |       | (883                  | )          |
| Accrued Interest                                                 |       | 1                            |       | —                                |       |            |       | 1                     |       |
| Accrued Wages and Payroll Taxes                                  |       | 478                          |       | 104                                   |       |            |       | 582                   |       |
| Income Taxes Payable                                             |       | —                       |       | —                                |       |            |       | —                |       |
| Unearned Revenue                                                 |       | 917                          |       | (1,305                                | )          |            |       | (388                  | )          |
| Long Term liabilities                                            |       | (1,067                       | )          | 1,067                                 |       |            |       | —                |       |
| Other Long Term Labilities                                       |       | 188                          |       | 318                                   |       |            |       | 506                   |       |
|                                                             | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| Net Cash Provided by Operating Activities                        |       | 41,969                       |       | 17,153                                |       | (39,586         | )          | 19,536                |       |
|                                                             | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                        | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
|                                                             | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| Purchase of Property and Equipment                               |       | (3,548                       | )          | (4,262                                | )          |            |       | (7,810                | )          |
| Proceeds from disposal of assets                                 |       | 348                          |       | —                                |       |            |       | 348                   |       |
|                                                             | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| Net Cash used in Investing Activities                            |       | (3,200                       | )          | (4,262                                | )          | —          |       | (7,462                | )          |
|                                                             | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                        | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| Proceeds from Issuance of debt                                   |       | 25,750                       |       |                                  |       |            |       | 25,750                |       |
| Repayment of long-term debt                                      |       | (26,670                      | )          | (5,899                                | )          |            |       | (32,569               | )          |
| Payments for cost of financing                                   |       | (176                         | )          |                                  |       |            |       | (176                  | )          |
| Payments on capital leases                                       |       | (769                         | )          | (97                                   | )          |            |       | (866                  | )          |
| Advances to related company                                      |       | (32,898                      | )          | (33,468                               | )          | 66,366          |       |                  |       |
| Advances from related company                                    |       |                         |       | 26,780                                |       | (26,780         | )          |                  |       |
| Distributions to member                                          |       | (60                          | )          |                                  |       |            |       | (60                   | )          |
| Net Cash Provided by or (Used in) Financing  Activities          |       | (34,823                      | )          | (12,684                               | )          | 39,586          |       | (7,921                | )          |
|                                                             | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| **NET  INCREASE (DECREASE) IN CASH**                             |       | 3,946                        |       | 207                                   |       |            |       | 4,153                 |       |
| ** **                                                       | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| **CASH  AND EQUIVALENTS - BEGINNING OF PERIOD**                  |       | 2,215                        |       | 132                                   |       | —          |       | 2,347                 |       |
| ** **                                                       | ** ** | ** **                   | ** ** | ** **                            | ** ** | ** **      | ** ** | ** **            | ** ** |
| **CASH AND EQUIVALENTS - END OF  PERIOD**                        |       | $                            | 6,161      |                                  | $          | 339             |       | $                     |       |   | $ | 6,500 |   |

 

38

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

**Restatement**

Subsequent to the filing of the original Form 10-Q for the quarter endedSeptember 30, 2006, management discovered that non cash accretion of interestexpense related to the predecessor company’s redeemable securities,subsequently retired as of the date of acquisition of FFP on April 12, 2006, wasoverstated for the three and nine months ending September 30, 2005.

The condensed consolidated statements of operations and cash flows forthe three and nine month periods ended September 30, 2005, have been restated.The restatement relating to interest expense was the result of a certainaccounting error relating to the predecessor financial information, as morefully discussed in Note 2 to the unaudited condensed consolidated financialstatements.  The financial informationset forth in the following Management’s Discussion and Analysis gives effect tothe restatement.

**Overview**

We are one of the largest operatorsof water parks (“WPs”) and family entertainment centers (“FECs”) in the UnitedStates, based on the number of Parks operated. As of September 30, 2006, weoperated a geographically diverse portfolio of 32 Parks in eight states with anattendance that we estimate to be in excess of 10 million guests in 2005.Each of our Parks is a well-established business with a long operating history,with our WPs and our FECs having been in operation for an average of over23 years and 17 years, respectively. We operate our Parks underseveral established brand names such as Wet ’N Wild®, Splish SplashÔ, Raging Waters®, Malibu Grand Prix®, MountasiaÔ, SpeedZone®, Big Kahuna’s®, Silver Springs® andBoomers!®.

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

With locations in California,Florida, Georgia, New York and Texas, our FECs offer a variety of attractions,including some or all of the following: miniature golf courses, go-karts,bumper boats, thrill rides, state-of-the-art arcade games, redemption games,batting cages, rock walls, laser tag and kiddie rides. Two of our FECs offerdragster racing on six racing tracks. Our FECs typically do not charge ageneral admission fee; guests only pay for those games they wish to utilize.Additionally, under certain promotions, we offer bundled pricing and grouppackages. Our FECs generate revenues from attractions and the sales of food,beverages and merchandise.

Attendance at our Parks is thekey 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 anticipate and adaptto changing consumer preferences and maintain and increase attendance, we mustinvest in new rides, amusements, arcade games and attractions. Such investmentsrequire capital availability and spending on our part, and we estimate that asignificant new ride at one of our WPs may cost between $500,000 to$1.5 million. For the nine months ended September 30, 2006, and year endedDecember 31, 2005 we spent $4.9 million and $2.6 million, respectively, on newrides and attractions.

Our operating costs and expensesconsist of the following: cost of revenue, which primarily includes costs ofproducts sold like food and beverage, arcade redemption prizes and merchandise;salaries and benefits, which include the costs of our park level fulltime andpart time employees; operating and maintenance, which include outside services,supplies, spare parts, and utilities; rent (a portion of which are percentagerents) and property taxes, which includes all park level rent and property taxexpenses (offset by rental income earned from the sublease of building spaceand/or land); selling, general and administrative expenses, which includes allcorporate overhead including corporate salaries, office rent, insurance costsand fees to outside professional service providers, other operating costs whichinclude all advertising, promotion and marketing program expenses (includingtelevision, radio and print advertising); and depreciation and amortization,which is primarily related to our leasehold

39

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improvements, equipment andtrademarks. All of our facilities are on leased property. Certain of ourexpenses are relatively fixed, and costs for full-time employees, outsideservices, maintenance, utilities, insurance, depreciation and amortization andoccupancy costs do not vary significantly with attendance. We add significantnumbers of seasonal employees during the warmer months of the year, primarilyfrom Memorial Day to Labor Day. Our workforce consists of high-school agedyoung adults and teachers who work on an hourly basis during our operatingseason for our WPs and year-round with peak summer employment for our FECs. Asignificant number of our hourly personnel at our facilities are paid at ratesrelated to the federal minimum wage. Under federal and state child labor laws,we are regulated in the number of hours, the times and the types of jobs thatyouths up to the age of 18 are permitted to work.

Our eight WPs and one nature parkhave 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.

Our business is highly seasonal.Typically, our WPs operate on an approximate 110-day operating season,generally from Memorial Day through Labor Day, and though our FECs are openyear-round, there is also significantly greater attendance at our FECs duringthis period and other periods when children are out of school. In 2006, our WPwith the longest operating period was open for 141 days while our parkwith the shortest operating period was open for 79 days. As a result, morethan 75% of our revenues are generated during the second and third calendarquarters of each year. We believe that the spending at our FECs varies widelyamong our customers based on age and other demographic factors, and thelocation and nature of the attractions of the park.

Our business is concentratedgeographically and by the size of our Parks. Sixteen of our Parks are locatedin California and accounted for 42%****of our revenuefor the nine months ended September 30, 2006 and September 30, 2005.

Our strategic initiatives afterthe acquisition of FFP by the Company and related transactions includeimplementing several near-term expense reduction initiatives.  We have implemented a regional organizationalstructure to better leverage our full time WP employees on a year-round basisthat we believe will reduce our park level management expenses. Additionally,we continue to evaluate the potential benefits of relocating corporate officesto a less expensive location, or sublet a portion thereof, which we expect willreduce corporate office rent expense. General and administrative expenses willcontinue to increase from additional headcounts in finance and additional auditand legal fees as a result of our becoming a reporting company in connectionwith the registration of our 10 7/8% Senior Notes due 2014 (“Notes”).  In addition, we have dedicated corporatepersonnel to focus on realizing our merchandising, sponsorships and improvedoperating initiatives. We are increasing spending on marketing, includingconcerts and other events to increase attendance.

In connection with theacquisition of FFP by the Company, we incurred certain one-time transactionaland restructuring expenses. These include but are not limited to expensesassociated with consulting service agreements with members of existingmanagement, severance costs and moving expenses.

40

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**Comparison of Three Months EndedSeptember 30, 2006 and 2005**

Our combined net income was $15.3 million and $24 millionfor the three months ended September 30, 2006 and 2005, respectively. Thefollowing table sets forth statement of operations data and other data for theperiods indicated:

 
| ** **                          | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|
| **Statement  of operations:**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Revenues**                        |       |       |       |       |       |
| FECs                                |       | $          | 24,294     |       | $          | 24,701 |   |
| WPs                                 |       | 57,926     |       | 53,765     |       |
| Total revenues                      |       | 82,220     |       | 78,466     |       |
|                                |       |       |       |       |       |
| **Operating  costs and expenses**   |       |       |       |       |       |
| ** **                          |       |       |       |       |       |
| Cost of revenue                     |       | 40,865     |       | 37,890     |       |
|                                |       |       |       |       |       |
| % of Revenues                       |       | 49.70      | %          | 48.20      | %          |
|                                |       |       |       |       |       |
| Gain on disposal of assets          |       | —     |       | 205        |       |
|                                |       |       |       |       |       |
| Selling, general and administrative |       | 7,558      |       | 5,837      |       |
|                                |       |       |       |       |       |
| % of Revenues                       |       | 9.20       | %          | 7.40       | %          |
|                                |       |       |       |       |       |
| Depreciation and amortization       |       | 4,728      |       | 5,129      |       |
| Total operating costs and expenses  |       | 53,151     |       | 48,651     |       |
|                                |       |       |       |       |       |
| Operating Income                    |       | 29,069     |       | 29,815     |       |
|                                |       |       |       |       |       |
| Interest and  other expense, net    |       | 4,216      |       | 5,734      |       |
|                                |       |       |       |       |       |
| Income tax  expense                 |       | 9,520      |       | 73         |       |
|                                |       |       |       |       |       |
| Net Income                          |       | $          | 15,333     |       | $          | 24,008 |   |

 

We have two reportable segments,FECs and WPs. The accounting policies of the segments are the same as thosedescribed in critical accounting policies below. Net Income of the segmentsdoes not include interest income or expense and provision for income taxes. Thefollowing table sets forth certain statement of operations data by segment andother data for the periods indicated:
| ** **                          | ** ** | **Three months ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                          | ** ** | **WPs**                                                  | ** ** | **FECs** | ** ** |
| ** **                          | ** ** | **Combined**                                             | ** ** | ** ** | ** ** | **Combined** | ** ** | ** ** | ** ** |
| **($ in thousands)**      | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues, net                       |       | $                                                        | 57,926     |   | $ | 53,765 |   | $ | 24,294 |   | $ | 24,701 |   |
| Segment-level  EBITDA               |       | 30,766                                                   |       | 29,131 |   | 6,113 |   | 7,438 |   |
| Segment-level capital  expenditures |       | 1,150                                                    |       | 679 |   | 1,561 |   | 1,154 |   |
|                                     |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |

 

41

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The following is areconciliation of EBITDA to Net Income for the Three Months Ended September 30,2006 and September 30, 2005:

|                             | ** ** | **Three Months Ending** | ** ** | **Three Months Ending** | ** ** |
|-----------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                  | ** ** | **September 30, 2006**  | ** ** | **September 30, 2005**  | ** ** |
| WPs EBITDA                  |       | $                                 | 30,766     |                              | $          | 29,131 |   |
| FECs EBITDA                 |       | 6,113                             |       | 7,438                             |       |
| Total Segment  EBITDA       |       | 36,879                            |       | 36,569                            |       |
|                        |       |                              |       |                              |       |
| Depreciation                |       | 4,728                             |       | 5,129                             |       |
| Income tax  expense         |       | 9,520                             |       | 73                                |       |
| Gain on disposal  of assets |       | 0                                 |       | (205                              | )          |
| Interest                    |       | 4,216                             |       | 5,734                             |       |
| Corporate  G&A          |       | 3,082                             |       | 1,830                             |       |
| Total Expenses              |       | 21,546                            |       | 12,561                            |       |
|                        |       |                              |       |                              |       |
| Net Income                  |       | $                                 | 15,333     |                              | $          | 24,008 |   |

 
| ** **                       | ** ** | **Three months ended September 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                       | ** ** | **Combined**                                             | ** ** | ** ** | ** ** |
| **WP operating data:** | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
|                             |       |                                                     |       |   |   |
| WP attendance                    |       | 1,923,474                                                |       | 1,886,538 |   |
|                             |       |                                                     |       |   |   |
| Revenue per guest                |       | $                                                        | 30.11      |   | $ | 28.50 |   |
|                                  |            |                                                          |            |  |  |  |  |

 

*Revenue.*  Revenuefor the three months ended September 30, 2006 totaled $82.2 millioncompared to $78.4 million for the same period in 2005, an increase of $3.8million or 4.8%.  Despite inclementweather at the east coast WPs locations during the last week in August andthrough the Labor Day Weekend that resulted in several days of both closed andlimited operations, we still increased attendance 2% over 2005 driven by improvedservice levels and the overall park appearance. The strong 5.6% increase in revenue per guest also contributed to theoverall 7.7% revenue increase at the WPs during the period.   Revenues at the FECs were down 1.6%primarily due to hot weather in California in July and early August thatadversely impacted attendance but benefited our two WP locations in thatregion.

*Cost ofrevenue.*  Our park level operating expenses totaled$40.8 million for the three months ended September 30, 2006 compared to $37.8million for the same period in 2005, an increase of $3 million or 8%. Theincrease in operating expenses continued to be impacted by management’s plannedincreased spending on catch-up maintenance and other one-time expenditures atthe WPs and FECs.  We believe that theCompany’s performance should continue to benefit from these expenditures overthe next several quarters. The primary drivers in each expense category were asfollows:

·                  Cost of products sold increased $0.2 million or3.4% for the three months ended September 30, 2006 compared to the same periodin 2005 primarily due to revenue driven incremental food, beverage andmerchandise costs The implementation of our consolidated purchasing initiativelowered the food and beverage cost of sales percentage from 32.9% in 2005 to30.9% in 2006.

·                  Salaries and benefits increased $1.5 millionor 9.8% for the three months ended September 30, 2006 compared to the sameperiod in 2005 due primarily to increased man hours of hourly employees toservice higher attendance levels at the WPs and management’s continuing effortto improve customer service levels in the FECs and WPs.

·                  Operating and maintenance costs increased$1.2 million or 12.2% for the three months ended September 30, 2006primarily resulting from higher revenues, a $0.2 million increase in insurancepremiums and a rate driven $0.6 million increase in utility costs.

·                  Rent and property taxes decreased $0.05 million or0.8% for the three months ended September 30, 2006 compared to the same periodin 2005 as a result of lower common area charges.  In addition, there were lower revenues forthe three month period ended September 30, 2006 compared to the three monthsperiod ended September 30, 2005 at the Southern California locations whichresulted in lower rent expenses for the “rentals based on a percentage of grossrevenues” contracts.

42

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*Selling,general and administrative expenses.*  Selling, general andadministrative expenses totaled $7.5 million for the three months endedSeptember 30, 2006 compared to $5.8 million for the same period in 2005, anincrease of $1.7 million or 29.3%.  Theincrease was driven by a $0.5 million increase in advertising costs; aresult of deferring media campaigns to later in the WP season. Alsocontributing to the increase is $0.2 million in stock compensationexpense, increased management fees as well as costs associated with thecorporate reorganization, transition costs following the Acquisition and costsattributable to being a public company.

*Depreciationand amortization. *Depreciation andamortization expenses decreased $0.4 million or 7.8% for the three months endedSeptember 30, 2006 compared to the same period in 2005.  Several large assets acquired in prioracquisitions were adjusted to fair market values lower than their originalcosts with new useful lives as of the date of Acquisition which caused $0.6million lower depreciation in the third quarter 2006 compared to the thirdquarter in 2005.    The decrease wasoffset by higher depreciation and amortization in 2006 as a result ofincreasing property and equipment and intangibles to fair market value inconnection with the Acquisition.

*Interestexpense, net*.  Interest expense, net totaled$4.2 million for the three monthsended September 30, 2006 compared to$5.7 million during the same period in 2005, a decrease of $1.5 million or26.3%.  The decrease in interest expenseresulted from lower interest rates and the Company’s improved cash position.

*Income tax expense. *Based upon a revised projection of operating incomefor full year period post Acquisition, the Company recorded $9.5 million ofincome tax expense for the three months ended 2006. The Company is currentlyprojecting a net operating loss for the fourth quarter.  To the extent these losses offset a portionof income from operations earned during the period ended September 30, 2006, anincome tax benefit will be recognized.

*Income fromoperations. *The foregoing resultedin income from operations of $15.3 million for the three months ended September 30, 2006 and $24 million for the same period in2005.

**Comparison ofNine Months ended September 30, 2006 and 2005**

The period April 13, 2006 to September 30, 2006 reflect the results ofoperations by the Company following the acquisition of FFP while the period January1, 2006 to April 12, 2006 reflect the operations of FFP under the ownership ofPAL.  Therefore, the periods are notcomparable.  However, for the purpose ofcomparing the operations for the nine months ended September 30, 2006 and 2005,the pre-acquisition and post-acquisition periods in 2006 have been combined inthe discussions below:

43

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We had combined net loss of $6.53million and net income of $4.4 million for the nine months ended September 30,2006 and 2005, respectively. The following table sets forth statement ofoperations data and other data for the periods indicated:
| ** **                          | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|
| **$ in thousands**        | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                          | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **Statement  of operations:**       | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **Revenues**                        |       |                                                    |       |   |   |
| FECs                                |       | $                                                       | 65,715     |   | $ | 64,698 |   |
| WPs                                 |       | 79,364                                                  |       | 75,215 |   |
| Total revenues                      |       | 145,079                                                 |       | 139,913 |   |
| **Operating  costs and expenses**   |       |                                                    |       |   |   |
| Cost of revenue                     |       | 96,262                                                  |       | 89,038 |   |
| % of Revenues                       |       | 66.30                                                   | %          | 63.60 | % |
| (Gain) / Loss on disposal of assets |       | 0                                                       |       | (32 | ) |
| Selling, general and administrative |       | 17,238                                                  |       | 15,274 |   |
| % of Revenues                       |       | 11.90                                                   | %          | 10.90 | % |
| Depreciation and amortization       |       | 13,506                                                  |       | 13,851 |   |
| Total operating costs and expenses  |       | 127,006                                                 |       | 118,131 |   |
| Operating Income                    |       | 18,073                                                  |       | 21,782 |   |
| Interest and  other expense, net    |       | 15,044                                                  |       | 17,333 |   |
| Income tax  expense                 |       | 9,564                                                   |       | 73 |   |
| Net Loss                            |       | $                                                       | (6,535     | ) | $ | 4,376 |   |

 
| ** **                          | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                          | ** ** | **WPs**                                                 | ** ** | **FECs** | ** ** |
| ** **                          | ** ** | **Combined**                                            | ** ** | ** ** | ** ** | **Combined** | ** ** | ** ** | ** ** |
| **($ in thousands)**      | ** ** | **2006**                                                | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues, net                       |       | $                                                       | 79,364     |   | $ | 75,215 |   | $ | 65,715 |   | $ | 64,698 |   |
| Segment-level  EBITDA               |       | 25,794                                                  |       | 26,487 |   | 14,153 |   | 15,586 |   |
| Segment-level capital  expenditures |       | 5,993                                                   |       | 3,179 |   | 3,965 |   | 4,574 |   |
|                                     |            |                                                         |            |  |  |  |  |  |  |  |  |  |  |

 

The following is areconciliation of EBITDA to Net Income for the Nine Months Ended September 30,2006 and September 30, 2005:

|                             | ** ** | **Nine Months Ending** | ** ** | **Nine Months Ending** | ** ** |
|-----------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| WPs EBITDA                  |       | $                                | 25,794     |                             | $          | 26,487 |   |
| FECs EBITDA                 |       | 14,153                           |       | 15,586                           |       |
| Total Segment  EBITDA       |       | 39,947                           |       | 42,073                           |       |
|                        |       |                             |       |                             |       |
| Depreciation                |       | 13,506                           |       | 13,851                           |       |
| Gain on disposal  of assets |       | 0                                |       | (32                              | )          |
| Income tax  expense         |       | 9,564                            |       | 73                               |       |
| Interest                    |       | 15,044                           |       | 17,333                           |       |
| Corporate  G&A          |       | 8,368                            |       | 6,472                            |       |
| Total Expenses              |       | 46,482                           |       | 37,697                           |       |
|                        |       |                             |       |                             |       |
| Net Income                  |       | $                                | (6,535     | )                                | $          | 4,376 |   |

 

44

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| ** **                       | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------------------|------------|---------------------------------------------------------|------------|
| ** **                       | ** ** | **Combined**                                            | ** ** | ** ** | ** ** |
| **WP operating data:** | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| WP attendance                    |       | 2,756,638                                               |       | 2,733,423 |   |
| Revenue per guest                |       | $                                                       | 28.79      |   | $ | 27.52 |   |
|                                  |            |                                                         |            |  |  |  |  |

 

*Revenue.*  Revenuefor the nine months ended September 30, 2006 totaled $145 million comparedto $139.9 million for the same period in 2005, an increase of $5 millionor 3.5%. The increase in 2006 resulted primarily from a 5.5% increase in WPsrevenues.  Our initiatives to improveguest service and the over all park appearance at the WPs drove a 0.8 %increase in attendance despite unfavorable weather conditions at the east coastWPs during the last week of August through the Labor Day weekend.  In addition WP revenues increased due to astrong 4.6 % increase in revenue per guest spending.  The overall FEC revenue during the first sixmonths was reduced by the impact of hot weather conditions during July andearly August at our California locations.

*Cost ofrevenue.*  Our park level operating expenses totaled$96.2 million for the nine months ended September 30, 2006 compared to $89million for the same period in 2005, an increase of $7.2 million or 8.1%. Theincrease in operating expenses continued to be impacted by management’s plannedincreased spending on catch-up maintenance and other one-time expenditures atthe WPs and FECs. We believe that the Company’s performance should continue tobenefit from these expenditures over the next several fiscal quarters.   The primary drivers in each expense categorywere as follows:

·                  Cost of products sold increased $0.38 million or3.7% for the nine months ended September 30, 2006 compared to the same periodin 2005 primarily due to costs revenue related incremental food, beverage andmerchandise costs.  Food and Beveragecosts of sales percentage continued to benefit from our use of a nationalsupplier, decreasing from 32.6 % in 2005 to 31.1% in 2006.

·                  Salaries and benefits increased $2.2 millionor 5.8% for the nine months ended September 30, 2006 compared to the sameperiod in 2005 due primarily to increased man hours of hourly employees toservice higher attendance levels and to strengthen customer service efforts atthe WPs and FECs.  In addition, in ourWPs we opened our operations earlier in 2006 than in 2005 in order to be betterprepared for the summer season.

·                  Operating and maintenance costs increased $4.2million or 17.4% for the nine months ended September 30, 2006 compared to thesame period in 2005 due primarily to management’s continued commitment toimprove the appearance of our WPs and FECs. Maintenance spending increased$0.6 million as a result of the prior management’s liquidity constraintsin 2005 and early 2006. Supply costs increased $0.9 million due to higherrevenues and price increases particularly in fuel costs. Insurance premiumsincreased $0.6 million and outside services and fees increased$0.3 million over 2005.  In addition,utility costs increased $0.9 million primarily resulting from rateincreases.

·                  Rent and property taxes increased $0.3 million or2.1% due primarily to increases in rent tied to inflation or park performance,as well as slight increases in property taxes tied to statutory rate increases.

*Selling,general and administrative expenses.*  Selling, general andadministrative expenses totaled $17.2 million for the nine months endedSeptember 30, 2006 compared to $15.2 million for the same period in 2005, anincrease of $2.0 million or 13%. The increase was primarily driven by the$0.7 million in stock compensation expense recorded in the period April 13to September 30, 2006, management fees as well as costs associated withcorporate reorganization, transition costs following the Acquisition and costsattributable to being a public company.

*Depreciationand amortization. *Depreciation andamortization expenses decreased $0.34 million or 2.5% for the nine months endedSeptember 30, 2006 compared to the same period in 2005.   Several large assets acquired in prior acquisitionswere adjusted to fair market values lower than their original costs with newuseful lives as of the date of Acquisition which caused depreciation for thenine months ended 2006 to be lower than 2005.   This decrease was offset by higher depreciation and amortization in 2006as a result of increasing property and equipment and intangibles to fair marketvalue in connection with the Acquisition.

*Interestexpense, net*.  Interest expense, net totaled$15 million for the nine months endedSeptember 30, 2006 compared to $17.3million during the same period in 2005, a decrease of $2.3 million or13.3%.  The decrease in interest expenseresulted from lower interest rates.

 *Income taxes. *Based upon a revised projection ofoperating income for the full year period post Acquisition, the Companyrecorded $9.5 million of income tax expense for the nine months ended 2006. Thecompany is currently projecting a net operating loss for the fourthquarter.  To the extent these lossesoffset a portion of income from operations earned during the period endedSeptember 30, 2006, an income tax benefit will be recognized.

*Income (Loss)from operations. *The foregoing resultedin a loss from operations of $6.53 million for the nine months ended September 30, 2006 and net income of $4.4 million for the same period in 2005.

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**Liquidity andcapital resources**

During the nine months endedSeptember 30, 2006 and 2005, net cash provided by operating activities was$27.4 million and $19.5 million, respectively. Because our business is seasonaland involves significant levels of cash transactions, factors impacting our netoperating cash flows are the same as those impacting our cash-based revenuesand expenses discussed above.

Net cash used in investingactivities was $47.7 million and $7.4 million for the nine months endedSeptember 30, 2006 and 2005, respectively, primarily driven by funds disbursedfor the acquisition of FFP by the Company .

Net cash provided by financingactivities for the nine months ended September 30, 2006 was $34.1 millioncompared to net cash used of $7.9 million for the nine months ended September30, 2005.    The net cash provided in2006 was primarily driven by the equity contribution relating to theacquisition of FFP by the Company in April 2006 offset by repayment andissuance of debt at the acquisition date and a repayment of the revolver duringthe third quarter.   For the nine monthsending September 30, 2005, cash was used to pay debt obligations.

In connection with theacquisition of FFP, we incurred debt, including amounts outstanding under theNotes and our senior secured revolving credit facility (“Revolver”). As of theclosing of the acquisition of FFP by the Company, we had total debt ofapproximately $163.6 million comprised of $150.0 million of Notes, $12.0million of seasonal borrowings on the Revolver and $1.6 million of capitalleases. Interest payments on this indebtedness will significantly reduce ourcash flow from operations. However, as a result of the refinancing of our debtin connection with the Transactions from the proceeds of the EquityContribution and the Notes, we expect our annual interest expense to decreaseand we will no longer be subject to annual debt amortization payments; net debtpayments totaled approximately $7.9 million in 2005.

Our new senior secured revolvingcredit facility consists of a $40.0 million revolving credit facility (suchavailability was reduced by the $4.3 million of issued but undrawn letters ofcredit at September 30, 2006), with $12.0 million drawn at close to fund theoperations of Festival between February 1, 2006 and the closing of theTransactions. Due to the seasonal nature of our business, we are dependent uponour revolving credit facility to fund off-season expenses with seasonal borrowingstypically peaking during our fiscal second quarter. Our ability to borrow underthe revolving credit facility is dependent upon compliance with certainconditions, including satisfying certain financial ratios and the absence ofany material adverse change.   As of September 30, 2006, there was no balanceoutstanding on our revolving credit facility.

The degree to which we areleveraged 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 on historicaland anticipated operating results, that cash flows from operations, available cashand available amounts under the new senior secured revolving credit facilitywill be adequate to meet our future liquidity needs, including anticipatedrequirements for working capital, capital expenditures and scheduled debtrequirements for the foreseeable future.

**Off balancesheet arrangements**

We have no off-balance sheetarrangements.

 

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**Contractual obligations**

The following table summarizes the timing of our requiredpayments due under various contractual obligations as of September 30, 2006 ona pro forma basis, giving effect to the Transactions and the offering of theNotes:
| **($ in thousands)**                | ** ** | **Less than  One  Year** | ** ** | **One Year  to Three Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-------------------------------|------------|---------------------------------------------|------------|----------------|------------|-----------|------------|
| As of September 30,  2006 (pro forma):        |       |                          |       |                                        |       |           |       |      |       |
| Long-term debt  including interest            |       | $                             | 16,312     |                                        | $          | 32,624         |       | $         | 231,560    |   | $ | 280,496 |   |
| Capital lease  obligations including interest |       | 925                           |       | 9                                           |       | —         |       | $         | 934        |   |
| Park and office leases                        |       | 15,292                        |       | 27,161                                      |       | 247,985        |       | $         | 290,438    |   |
|                                          |       | $                             | 32,529     |                                        | $          | 59,794         |       | $         | 479,545    |   | $ | 571,868 |   |

 

**Impact of inflation**

Substantial increases in costs and expenses could affectour operating results to the extent it may not be possible to pass suchincreases along to our guests. In particular, increases in labor, supplies andutility expenses could have an impact on our operating results. The majority ofour employees are seasonal and are paid hourly rates, which, although not tieddirectly to federal and state minimum wage laws, experience incrementalincreases as minimum wage rates increase. Our history of being able to passalong cost increases to guests through increases in admission, food,merchandise and other prices is limited. We believe that the effects ofinflation, if any, on our operating results and financial condition have beenand will continue to be minor over the next 12 months.

**Recently issued accounting pronouncements**

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections*.SFAS No. 154 replaces APB Opinion No. 20, *Accounting Changes*, and FASB Statement No. 3, *Reporting Accounting Changes in Interim FinancialStatements*, and changes the requirements for the accounting for andreporting of a change in accounting principle. SFAS No. 154 applies to allvoluntary changes in accounting principle. APB No. 20 previously requiredthat most voluntary changes in accounting principle be recognized by includingin net income of the period of the change the cumulative effect of changing tothe new accounting principle. SFAS No. 154 requires retrospectiveapplication to prior periods’ financial statements of changes in accountingprinciple, unless it is impracticable to determine either the period-specificeffects or the cumulative effect of the change. When it is impracticable todetermine the period-specific effects of an accounting change on one or moreindividual prior periods presented, SFAS No. 154 requires that the newaccounting principle be applied to the balances of assets and liabilities as ofthe beginning of the earliest period for which retrospective application ispracticable and that a corresponding adjustment be made to the opening balanceof retained earnings (or other appropriate components of equity or net assetsin the statement of financial position) for that period rather than beingreported in an income statement. When it is impracticable to determine thecumulative effect of applying a change in accounting principle to all priorperiods, this statement requires that the new accounting principle be appliedas if it were adopted prospectively from the earliest date practicable. Theadoption of SFAS No. 154 is not expected to have an impact on ourfinancial statements.

In December 2005, theCompany adopted FASB Interpretation No. 47 (“FIN 47”), *Accounting for Conditional Asset RetirementObligations — an interpretation of FASB Statement No. 143*,which clarifies that the term “conditional asset retirement obligation” refersto a legal obligation to perform an asset retirement activity. Thisinterpretation also states that the fair value of a liability for theconditional asset obligation should be recognized when incurred. The initialadoption of FIN 47 was not material to the Company’s financial statements.

On December 16,2004, the FASB issued SFAS No. 123 (revised 2004), *Share-BasedPayment*, which is a revision of SFAS No. 123, *Accountingfor Stock-Based Compensation*. SFAS No. 123(R) supersedes, *Accounting for StockIssued to Employees* (APB No. 25), and amends SFAS No. 95, *Statement of Cash Flows*. Generally, the approach in SFAS No. 123(R) is similar to the approachdescribed in SFAS No. 123.  However, SFASNo. 123(R) requires all share-based payments to employees, including grants ofemployee stock options, to be recognized in the income statement based on theirfair values.  Pro forma disclosure is nolonger an alternative to financial statement recognition.  Non-public entities are required to adopt theprovisions of SFAS No. 123(R) as of the beginning of the first annual reportingperiod that began after December 15, 2005.

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In July 2006, theFASB issued FASB Interpretation No. 48 (“FIN 48”), *Accountingfor Uncertainty in Income Taxes*, which prescribes a recognitionthreshold and measurement process for recording in the financial statementsuncertain tax positions taken or expected to be taken in a tax return.  Additionally, FIN 48 provides guidance on thederecognition, classification, interest and penalties, accounting in interimperiods and disclosure requirements for uncertain tax positions.  The accounting provisions of FIN 48 areeffective for reporting periods beginning after December 15, 2006.  The Company is currently assessing the impactof the adoption of FIN 48 and its impact on the Company’s consolidatedfinancial statements.

In July 2006, theFASB issued 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 pro during transaction (either gross or net)and the amount of such taxes in both interim and annual financial statements ifthe amounts are significant.  This EITFbecomes effective for reporting periods beginning after December 15, 2006. TheCompany is currently assessing the impact of the adoption of EITF 06-3 and itsimpact on the Company’s consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, FairValue Measurements. SFAS No. 157 establishes a framework for measuring fairvalue in generally accepted accounting principles (“GAAP”), and expandsdisclosures about fair value measurements. This Statement is effective forfinancial statements issued for fiscal years beginning after November 15, 2007,and interim periods within those fiscal years. Management has not yet completedits evaluation of the impact of adopting SFAS No. 157.

In September 2006,the SEC issued SAB No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB No. 108”). SAB 108 establishes a single quantificationframework wherein the significance measurement is based on the effects of themisstatements on each of the financial statements as well as the relatedfinancial statement disclosures. If a company’s existing methods for assessingthe materiality of misstatements are not in compliance with the provisions ofSAB No. 108, the initial application of the provisions may be adopted byrestating prior period financial statements under certain circumstances orotherwise by recording the cumulative effect of initially applying theprovisions of SAB No. 108 as adjustments to the carrying values of assets andliabilities as of January 1, 2006 with an offsetting adjustment recorded to theopening balance of retained earnings. SAB No. 108 is effective for the firstannual period ending after November 15, 2006. The Company does not expect thatthe adoption of SAB No. 108 will have a material effect on its results ofoperations or financial position.

**Critical accounting policies**

In the ordinary course of business, we make a number ofestimates and assumptions relating to the reporting of results of operationsand financial condition in the preparation of our consolidated financialstatements in conformity with accounting principles generally accepted in theUnited States. Results could differ significantly from those estimates underdifferent assumptions and conditions. We believe that the following discussionaddresses our most critical accounting policies, which are those that are mostimportant in the portrayal of our consolidated financial condition and resultsand require management’s most difficult, subjective and complex judgments,often as a result of the need to make estimates about the effect of mattersthat are inherently uncertain.

*Revenue recognition.*  Werecognize revenue at the point of sale to a customer or over the period thatthe customer receives the benefit. Certain of our Parks sell season tickets andannual passes. Revenue from season ticket sales is recognized on astraight-line basis over the period of time that the related park is open andrevenue from annual passes is recognized on a straight-line basis over12 months. All other revenues are generally recognized on a daily basis onactual guest spending at our facilities.

*Self-insurance reserves.*  Reservesare recorded for the estimated amounts of guest and employee claims andexpenses incurred, but not paid, each period that are not covered bythird-party insurance. These estimates are established based upon historicalclaims data and third-party estimates of settlement costs for incurred claims,and are recorded only when a loss is probable and reasonably estimatable, inaccordance with SFAS No.5, *Accounting forContingencies*. These reserves are periodically reviewed for changesin these factors and adjustments are made as needed.

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*Property and equipment.*  Propertyand equipment is recorded at cost and is depreciated on a straight-line basisover the estimated useful lives of the assets. Changes in circumstances such astechnological advances, changes to our business model or changes in our capitalstrategy could result in the actual useful lives differing from our estimates.In those cases in which we determine that the useful life of property andequipment should be shortened, we depreciate the net book value in excess ofthe salvage value over the revised remaining useful life, thereby increasingdepreciation expense.

*Valuation of long-lived and intangibleassets and goodwill.*  Long-lived assets are carried at the lower ofhistorical cost less accumulated depreciation or estimated fair value.Long-lived assets are evaluated for potential impairment whenever events orchanges in circumstances indicate that their carrying amounts may not berecoverable. In the event that periodic assessments reflect that the carryingamount of a long-lived asset exceeds the sum of the undiscounted cash flows(excluding interest) that are expected to result from the use and eventualdisposition of the long-lived asset, we recognize an impairment loss to theextent the carrying amount exceeds the fair value of the long-lived asset. Weestimate the fair value using available market information or other industryvaluation techniques such as present-value calculations. We did not record anyimpairment losses for the nine months ended September 30, 2006 and 2005.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

*InterestRates.*  Our marketrisks relate primarily to changes in interest rates. Our new senior securedrevolving credit facility carries floating interest rates that are tied to theLIBOR 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 up to $0.4 million annually,depending on the average carrying balance of the facility. We historically havenot engaged in interest rate hedging activities.

*CurrencyExchange Rates.*  We arenot exposed to currency exchange rate risks.

Item 4. CONTROLS AND PROCEDURES

Subsequent to thefiling of the original form 10Q, the Company’s management discovered that noncash accretion of interest expense related to the predecessor company’s redeemablesecurities, subsequently retired as of the date of the acquisition, wasoverstated for the three months and nine months ending September 30, 2005.

The Company isrestating to correct interest expense that was overstated in the previouslyfiled financial statements for periods referenced above. As a result of thisrestatement, net income increased for the three and nine month periods endedSeptember 30, 2005.

***DisclosureControls and Procedures***

The Company’smanagement, with the participation of the Company’s Chief Executive Officer andChief Financial Officer, evaluated the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as ofSeptember 30, 2006 in connection with the filing of the original Form 10-Q onNovember 15, 2006.  Based on thatevaluation, the Company’s Chief Executive Officer and Chief Financial Officerconcluded that these disclosure controls and procedures were effective.

Subsequent to theevaluation made in connection with the filing of the Form 10-Q for the threemonths and nine months ended September 30, 2006 and in connection with therestatement and the filing of this Form 10-Q/A, the Company’s management, withthe participation of the Company’s Chief Executive Officer and Chief FinancialOfficer, reevaluated the effectiveness of the Company’s disclosure controls andprocedures. Based on the reevaluation, the Company’s Chief Executive Officerand Chief Financial Officer have now concluded that the Company’s financialdisclosure controls and procedures were ineffective as of September 30, 2006because of the following material weakness identified:

The designed manualfinancial reporting control, to ensure that the predecessor entity’s quarterlyfinancial information reported in the Company’s reports filed under the SecuritiesExchange Act were accurately recorded, were ineffective.

In light of thisconclusion, the Company performed additional analysis and reviewed itsfinancial reporting procedures to ensure its consolidated financial statementsare prepared in accordance with generally accepted accounting principles.  Accordingly, management believes that thefinancial statements included in this report fairly present in all materialrespects our financial condition, results of operations and cash flows for theperiods presented.

The Company is notrequired to comply with Section 404 of the Sarbanes-Oxley Act of 2002, asamended, until December 31, 2007, but has initiated significant efforts tofurther ensure the adequacy and effectiveness of its internal controls.

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**PART II.OTHER INFORMATION**

Item 1. LEGAL PROCEEDINGS

From time to time,the Company is involved in litigation relating to claims arising out of itsoperations in the normal course of business. As of September 30, 2006, 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 Companyreceived written notice in December 2004 concerning the Texas Departmentof Transportation’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 currentlyreviewing its options and has retained legal counsel to advise and assist itthrough this process. In addition, the city of Riverside, California iscurrently in the process of seizing a portion of roadside property at theCompany’s Castle Park FEC under the doctrine of eminent domain in connectionwith the construction of a freeway access ramp. The portion of land at issue isunimproved dirt, and the Company does not believe that any of the attractionsat this FEC will be affected.  The Company has reached a stipulation withthe landlord that will extricate it from the litigation, which will continuesolely between the City and the landlord.

The Company andMidOcean Partners have been named as defendants in a lawsuit Alleging, amongother things, breach of a finder’s fee agreement and tortious interference withsuch agreement in connection with the Acquisition by the Company.  Theagreement at issue is between two individuals and a company that are eachseparate and distinct from both the Company and MidOcean Partners.  Theplaintiff, Steven Crowley (“Crowley”) purports to hold the Company responsiblefor the alleged breach of a finder’s agreement between Crowley (and anotherindividual who is not a plaintiff) and VisionMaker, LLC (“VisionMaker”).  Crowley claims that the Company is thesuccessor in interest to VisionMaker.  Assuch, although the lawsuit seeks aggregate damages in excess of $3.2million, the Company remains hopeful that it will prevail on its motion to dismiss,which is currently pending in the United States District Court for the SouthernDistrict of New York.

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Item 1A. RISK FACTORS

**Risks related to our business**

There have been no material changes from the Risk Factors disclosedunder the heading in Part II, Other Information of our Quarterly Report on Form10-Q for the quarter ended July 2, 2006.

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

None.

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

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|        |   | FESTIVAL FUN PARKS, LLC                    |
|--------|--------|--------------------------------------------|
|   |   |                                       |
|   |   | /s/ Alexander Weber, Jr.                   |
|   |   | By: Alexander Weber, Jr.                   |
|   |   | Its: Chief Executive Officer and President |
|   |   | (Principal  Executive Officer)             |
|   |   | Dated: April 5, 2007                       |
|   |   |                                       |
|   |   |                                       |
|   |   | FESTIVAL FUN PARKS, LLC                    |
|   |   |                                       |
|   |   | /s/ James A. Burk                          |
|   |   | By: James A. Burk                          |
|   |   | Its: Chief Financial Officer               |
|   |   |                                       |
|   |   | Dated: April 5, 2007                       |

 

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**EXHIBIT INDEX**
| Exhibit No. | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.2         |       | Joinder  Agreement, dated as of April 12, 2006, by Festival Fun Parks, LLC, Palace  Finance, Inc., Palace Entertainment Holdings, Inc., Splish Splash at  Adventureland Inc., Family Fun Center Holdings LLC, Smartparks-San Jose Inc.,  Smartparks-Riverside Inc., Smartparks-San Dimas Inc., Raging Waters Group Inc.,  Wet N Wild Nevada Inc., Smartparks-Carolina Inc., Smartparks-Florida Inc.,  Smartparks-Silver Springs Inc. and Palace Management Company LLC (1) |
| 3.1         |       | Certificate of  Formation of Festival Fun Parks, LLC. (1)                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2         |       | Second Amended  and Restated Limited Liability Company Agreement of Festival Fun Parks, LLC  (1)                                                                                                                                                                                                                                                                                                                                                                           |
| 3.5         |       | Amended and  Restated Certificate of Incorporation of Palace Entertainment Holdings, Inc.  (1)                                                                                                                                                                                                                                                                                                                                                                             |
| 3.6         |       | By-laws of  Palace Entertainment Holdings, Inc. (1)                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1         |       | Indenture, dated  as of April 12, 2006, by and among Festival Fun Parks, LLC, Palace Finance,  Inc., Palace Entertainment Holdings, Inc. and Wells Fargo Bank, National  Association. (1)                                                                                                                                                                                                                                                                                  |
| 4.2         |       | Registration  Rights Agreement, dated as of April 12, 2006, by and among Festival Fun  Parks, LLC, Palace Finance, Inc., Palace Entertainment Holdings, Inc., the  other guarantors listed in Schedule 1 thereto, J.P. Morgan Securities Inc.  and Jefferies & Company, Inc. (1)                                                                                                                                                                                       |
| 10.1        |       | License  Agreement, dated as of April 12, 2006, by and between Festival Fun Parks, LLC  and Vision Maker, LLC. (1)                                                                                                                                                                                                                                                                                                                                                         |
| 10.2        |       | Employment  Agreement, dated as of April 12, 2006, by and among Festival Fun Parks, LLC,  Palace Entertainment Holdings, Inc. and John A. Cora. (1)(2)                                                                                                                                                                                                                                                                                                                     |
| 10.3        |       | Employment  Agreement, dated as of April 12, 2006, by and among Festival Fun Parks, LLC,  Palace Entertainment Holdings, Inc. and Daniel S. Martinez. (1)(2)                                                                                                                                                                                                                                                                                                               |
| 10.4        |       | Amended and  Restated Agreement, dated as of April 12, 2006, by and between Festival Fun  Parks, LLC and James Cleary. (1)(2)                                                                                                                                                                                                                                                                                                                                              |
| 10.5        |       | Credit  Agreement, dated as of April 12, 2006, among Festival Fun Parks, LLC, as  Borrower Representative, the Borrowers signatory thereto, the other Credit  Parties signatory thereto, the Lenders party thereto from time to time and  General Electric Capital Corporation as Agent and Lender. (1)                                                                                                                                                                    |
| 10.6        |       | Professional  Services Agreement, April 12, 2006 by and among Festival Fun Parks, LLC,  Palace Holdings Group LLC and MidOcean US Advisor, LP (1)(2)                                                                                                                                                                                                                                                                                                                       |
| 10.29       |       | Employment  Agreement, dated as of May 30, 2006, by and between Festival Fun Parks, LLC  and James A. Burk. (1)(2)                                                                                                                                                                                                                                                                                                                                                    |
| 10.30       |       | Letter  Agreement, dated as of May 22, 2006, by and between Festival Fun Parks, LLC  and Todd R. Wulffson. (1)(2)                                                                                                                                                                                                                                                                                                                                                          |
| 31.1        |       | Rule  13a-14(a)/15d-14(a) Certification by the Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                          |
| 31.2        |       | 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 Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (3)                                                                                                                                                                                                                                                                                                  |

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(1)                                  Incorporatedby reference to the Registration Statement on Form S-4 filed June 16, 2006, FileNo. 333-135091.

 

(2)                                  Denotesmanagement contract or compensatory plan or arrangement.

 

(3)                                  Thiscertification will not be deemed “filed” for purposes of Section 18 of theSecurities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to theliability of that section. Such certification will not be deemed to beincorporated by reference into any filing under the Securities Act orSecurities Exchange Act, except to the extent that the Company specificallyincorporates it by reference.

 

 

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