**UNITED STATES SECURITIES AND EXCHANGECOMMISSION**

**Washington,DC 20549**

**FORM 10-Q**

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

**forthe quarterly period ended July 1, 2007**

**OR**

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

**forthe transition periodfrom           to**

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

**Palace Entertainment Holdings, Inc.**

(Exact name of registrantas specified in its charter)

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

 

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

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

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

 

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

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

 

There were 100shares of common stock with a par value of $0.01 per share outstanding as ofJuly 1, 2007.

 

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

 

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

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

This quarterly report on Form 10-Q containsforward-looking statements. Forward-looking statements are statements that arenot historical facts, including statements about our beliefs and expectationsor any statement that may predict, forecast, indicate or imply future results,performance, achievements or events. Forward-looking statements include, but arenot limited to, statements generally preceded by, followed by or that includethe words “believe,” “expect,” “anticipate,” “plan,” “estimate,” “intend,” “project,”“targets,” “likely,” “would,” “could” or similar expressions. These statementsinclude, among others, statements regarding our expected business outlook,anticipated financial and operating results, strategies, contingencies,financing plans, working capital needs, sources of liquidity, capitalexpenditures, amounts and timing of expenditures and contemplated transactions.

Forward-looking statements reflect our currentexpectations and are not guarantees of performance. These statements are basedon our management’s beliefs and assumptions, which in turn are based oncurrently available information. Important assumptions relating to theseforward-looking statements include, among others, assumptions regarding demandfor our water parks and family entertainment centers, expected pricing levels,the timing and cost of planned capital expenditures, the estimated operationalcosts for each of our water parks and family entertainment centers, expectedoutcomes of pending litigation, competitive conditions and general economicconditions. These assumptions could prove inaccurate. Forward-looking statementsinvolve risks and uncertainties, which could cause actual results to differmaterially from those contained in any forward-looking statement. Many of thesefactors are beyond our ability to control or predict. Such factors may relateto, among other things:

·                  adverse weather conditions and other naturalphenomena;

·                  seasonal operations of water parks;

·                  risk of in-park accidents and health risks;

·                  changes in consumer preferences;

·                  reductions in consumer disposable income;

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

·                  governmental and environmental requirements andchanges in those requirements;

·                  increases in general liability and workerscompensation claims;

·                  discontinuation of our leases pursuant totermination or default provisions;

·                  acquisition and retention of key personnel;

·                  our level of indebtedness; and

·                  restrictions contained in our debt agreements.

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

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements**

**PALACEENTERTAINMENT HOLDINGS, INC.**

**CONDENSEDCONSOLIDATED BALANCE SHEETSAS OF JUNE 30, 2007 AND DECEMBER 31, 2006(unaudited / in thousands except for per share amounts)**
| ** **                                                                                  | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| **ASSETS**                                                                                  |       |                        |       |                            |       |
|                                                                                        |       |                        |       |                            |       |
| CURRENT ASSETS                                                                              |       |                        |       |                            |       |
| Cash and cash equivalents                                                                   |       | $                           | 5,932      |                            | $          | 2,090 |   |
| Inventories                                                                                 |       | 3,481                       |       | 2,124                           |       |
| Prepaid expenses and other current assets                                                   |       | 5,399                       |       | 5,316                           |       |
| Deferred income taxes                                                                       |       | 6,873                       |       | 1,171                           |       |
|                                                                                        |       |                        |       |                            |       |
| Total current assets                                                                        |       | 21,685                      |       | 10,701                          |       |
|                                                                                        |       |                        |       |                            |       |
| Property and  equipment - net                                                               |       | 115,689                     |       | 114,150                         |       |
|                                                                                        |       |                        |       |                            |       |
| Goodwill                                                                                    |       | 86,504                      |       | 86,504                          |       |
|                                                                                        |       |                        |       |                            |       |
| Other intangible  assets - net                                                              |       | 18,583                      |       | 19,032                          |       |
|                                                                                        |       |                        |       |                            |       |
| Other assets -  net                                                                         |       | 6,506                       |       | 7,307                           |       |
|                                                                                        |       |                        |       |                            |       |
| TOTAL                                                                                       |       | $                           | 248,967    |                            | $          | 237,694 |   |
|                                                                                        |       |                        |       |                            |       |
| **LIABILITIES  AND SHAREHOLDER’S EQUITY**                                              |       |                        |       |                            |       |
|                                                                                        |       |                        |       |                            |       |
| CURRENT  LIABILITIES                                                                        |       |                        |       |                            |       |
| Accounts payable                                                                            |       | $                           | 4,863      |                            | $          | 1,791 |   |
| Accrued interest                                                                            |       | 3,796                       |       | 3,518                           |       |
| Accrued wages and payroll taxes                                                             |       | 3,597                       |       | 2,513                           |       |
| Other accrued liabilities                                                                   |       | 14,392                      |       | 10,170                          |       |
| Unearned revenue                                                                            |       | 4,513                       |       | 1,323                           |       |
| Current portion of long-term debt                                                           |       | 707                         |       | 848                             |       |
|                                                                                        |       |                        |       |                            |       |
| Total current liabilities                                                                   |       | 31,868                      |       | 20,163                          |       |
|                                                                                        |       |                        |       |                            |       |
| Long-Term Debt -  Less current portion                                                      |       | 165,077                     |       | 150,008                         |       |
| Deferred income  taxes                                                                      |       | 3,142                       |       | 2,032                           |       |
| Other long term  liabilities                                                                |       | 7,293                       |       | 7,296                           |       |
|                                                                                        |       |                        |       |                            |       |
| Total liabilities                                                                           |       | 207,380                     |       | 179,499                         |       |
|                                                                                        |       |                        |       |                            |       |
| COMMITMENTS AND  CONTINGENCIES (NOTE 10)                                                    |       |                        |       |                            |       |
|                                                                                        |       |                        |       |                            |       |
| SHAREHOLDER’S  EQUITY                                                                  |       |                        |       |                            |       |
| Common Stock, $.01 stated value, 1000 shares  authorized, 100 shares issued and outstanding |       |                        |       |                            |       |
| Additional Paid-in Capital                                                                  |       | 54,887                      |       | 54,633                          |       |
| Accumulated (deficit) earnings                                                              |       | (13,300                     | )          | 3,562                           |       |
|                                                                                        |       |                        |       |                            |       |
| Total  Shareholder’s equity                                                            |       | 41,587                      |       | 58,195                          |       |
|                                                                                        |       |                        |       |                            |       |
| TOTAL                                                                                       |       | $                           | 248,967    |                            | $          | 237,694 |   |

 

*SeeNotes to Condensed Consolidated Financial Statements*

3

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**PALACE ENTERTAINMENT HOLDINGS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE THREE MONTH PERIOD ENDED JUNE 30, 2007 AND 2006(unaudited / in thousands)**
| ** **                                                                | ** ** | **Successor**                    | ** ** | **Successor**                               | ** ** | **Predecessor**                             | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                | ** ** | **For the three**      | ** ** | **For the period**                | ** ** | **For the period**                | ** ** |
| ** **                                                                | ** ** | **month period ended** | ** ** | **April 13 to June 30** | ** ** | **April 1 to April 12** | ** ** |
| ** **                                                                | ** ** | **June 30, 2007**      | ** ** | **2006**                                    | ** ** | **2006**                                    | ** ** |
|                                                                      |       |                             |       |                                        |       |                                        |       |
| REVENUES - net                                                            |       | $                                | 45,004     |                                        | $          | 39,462                                      |       | $ | 2,601 |   |
|                                                                      |       |                             |       |                                        |       |                                        |       |
| OPERATING COSTS  AND EXPENSES                                             |       |                             |       |                                        |       |                                        |       |
| Cost of revenue (exclusive of depreciation and  amortization shown below) |       | 33,665                           |       | 29,207                                      |       | 2,916                                       |       |
| Selling, general and administrative                                       |       | 7,281                            |       | 5,471                                       |       | 397                                         |       |
| Depreciation and amortization                                             |       | 4,506                            |       | 4,301                                       |       | 298                                         |       |
| Loss on disposal of assets                                                |       | 5                                |       | —                                      |       | —                                      |       |
|                                                                      |       |                             |       |                                        |       |                                        |       |
| Total operating costs and expenses                                        |       | 45,457                           |       | 38,979                                      |       | 3,611                                       |       |
|                                                                      |       |                             |       |                                        |       |                                        |       |
| OPERATING (LOSS)  INCOME                                                  |       | (453                             | )          | 483                                         |       | (1,010                                      | )          |
|                                                                      |       |                             |       |                                        |       |                                        |       |
| OTHER EXPENSE                                                             |       |                             |       |                                        |       |                                        |       |
| Interest expense - net                                                    |       | 4,747                            |       | 4,154                                       |       | 671                                         |       |
| Total other expense - net                                                 |       | 4,747                            |       | 4,154                                       |       | 671                                         |       |
|                                                                      |       |                             |       |                                        |       |                                        |       |
| LOSS FROM  OPERATIONS                                                     |       | (5,200                           | )          | (3,671                                      | )          | (1,681                                      | )          |
| BEFORE INCOME  TAXES                                                      |       |                             |       |                                        |       |                                        |       |
|                                                                      |       |                             |       |                                        |       |                                        |       |
| INCOME TAX  PROVISION                                                     |       | 1,011                            |       | 44                                          |       | —                                      |       |
|                                                                      |       |                             |       |                                        |       |                                        |       |
| NET LOSS                                                                  |       | $                                | (6,211     | )                                           | $          | (3,715                                      | )          | $ | (1,681 | ) |

 

*See Notes to Condensed Consolidated Financial Statements*

4

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**PALACE ENTERTAINMENT HOLDINGS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSFOR THE SIX MONTH PERIOD ENDED JUNE 30, 2007 AND 2006(unaudited / in thousands)**
| ** **                                                                | ** ** | **Successor**                    | ** ** | **Successor**                               | ** ** | **Predecessor**                               | ** ** |
|---------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                | ** ** | **For the six**        | ** ** | **For the period**                | ** ** | **For the period**                  | ** ** |
| ** **                                                                | ** ** | **month period ended** | ** ** | **April 13 to June 30** | ** ** | **January 1 to April 12** | ** ** |
| ** **                                                                | ** ** | **June 30, 2007**      | ** ** | **2006**                                    | ** ** | **2006**                                      | ** ** |
|                                                                      |       |                             |       |                                        |       |                                          |       |
| REVENUES - net                                                            |       | $                                | 66,537     |                                        | $          | 39,462                                        |       | $ | 23,397 |   |
|                                                                      |       |                             |       |                                        |       |                                          |       |
| OPERATING COSTS  AND EXPENSES                                             |       |                             |       |                                        |       |                                          |       |
| Cost of revenue (exclusive  of depreciation and amortization shown below) |       | 57,394                           |       | 29,207                                      |       | 26,190                                        |       |
| Selling, general and administrative                                       |       | 12,167                           |       | 5,471                                       |       | 4,208                                         |       |
| Depreciation and amortization                                             |       | 9,230                            |       | 4,301                                       |       | 4,478                                         |       |
| Gain on disposal of assets                                                |       | (35                              | )          | —                                      |       | —                                        |       |
|                                                                      |       |                             |       |                                        |       |                                          |       |
| Total operating costs and expenses                                        |       | 78,756                           |       | 38,979                                      |       | 34,876                                        |       |
|                                                                      |       |                             |       |                                        |       |                                          |       |
| OPERATING (LOSS)  INCOME                                                  |       | (12,219                          | )          | 483                                         |       | (11,479                                       | )          |
|                                                                      |       |                             |       |                                        |       |                                          |       |
| OTHER EXPENSE                                                             |       |                             |       |                                        |       |                                          |       |
| Interest expense - net                                                    |       | 9,162                            |       | 4,154                                       |       | 6,674                                         |       |
| Total other expense - net                                                 |       | 9,162                            |       | 4,154                                       |       | 6,674                                         |       |
|                                                                      |       |                             |       |                                        |       |                                          |       |
| LOSS FROM  OPERATIONS                                                     |       | (21,381                          | )          | (3,671                                      | )          | (18,153                                       | )          |
| BEFORE INCOME  TAXES                                                      |       |                             |       |                                        |       |                                          |       |
|                                                                      |       |                             |       |                                        |       |                                          |       |
| INCOME TAX  (BENEFIT) PROVISION                                           |       | (4,519                           | )          | 44                                          |       | —                                        |       |
|                                                                      |       |                             |       |                                        |       |                                          |       |
| NET LOSS                                                                  |       | $                                | (16,862    | )                                           | $          | (3,715                                        | )          | $ | (18,153 | ) |

 

*See Notes to Condensed Consolidated Financial Statements*

5

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**PALACE ENTERTAINMENT HOLDINGS, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWSFOR THE SIX MONTH PERIOD ENDED JUNE 30, 2007 AND 2006(unaudited / in thousands)**
| ** **                                                                       | ** ** | **Successor**                    | ** ** | **Successor**                               | ** ** | **Predecessor**                               | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                       | ** ** | **For the six**        | ** ** | **For the period**                | ** ** | **For the period**                  | ** ** |
| ** **                                                                       | ** ** | **month period ended** | ** ** | **April 13 to June 30** | ** ** | **January 1 to April 12** | ** ** |
| ** **                                                                       | ** ** | **June 30, 2007**      | ** ** | **2006**                                    | ** ** | **2006**                                      | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                           | ** ** | ** **                       | ** ** | ** **                                  | ** ** | ** **                                    | ** ** |
| Net loss                                                                         |       | $                                | (16,862    | )                                           | $          | (3,715                                        | )          | $ | (18,153 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |                             |       |                                        |       |                                          |       |
| Depreciation and amortization                                                    |       | 9,230                            |       | 4,300                                       |       | 4,478                                         |       |
| Gain on disposal of assets                                                       |       | (35                              | )          |                                        |       |                                          |       |
| Amortization of deferred financing costs                                         |       | 385                              |       | 163                                         |       | 796                                           |       |
| Financed Interest Payments                                                       |       |                             |       |                                        |       | 3,515                                         |       |
| Share based compensation                                                         |       | 240                              |       | 458                                         |       |                                          |       |
| Deferred rent expense                                                            |       | 118                              |       | 134                                         |       | 36                                            |       |
| Deferred income taxes                                                            |       | (4,592                           | )          |                                        |       |                                          |       |
|                                                                             |       |                             |       |                                        |       |                                          |       |
| Changes in net operating assets and liabilities:                                 |       |                             |       |                                        |       |                                          |       |
| Inventories                                                                      |       | (1,357                           | )          | (629                                        | )          | (214                                          | )          |
| Prepaid expenses and other current assets                                        |       | (83                              | )          | (1,171                                      | )          | 1,105                                         |       |
| Other assets                                                                     |       | 416                              |       | (118                                        | )          | 8                                             |       |
| Accounts payable                                                                 |       | 3,067                            |       | 317                                         |       | 1,160                                         |       |
| Accrued interest                                                                 |       | 278                              |       | 3,841                                       |       | 436                                           |       |
| Accrued wages and payroll taxes                                                  |       | 1,084                            |       | 999                                         |       | (167                                          | )          |
| Other accrued liabilities                                                        |       | 4,210                            |       | 4,521                                       |       | (1,347                                        | )          |
| Unearned revenue                                                                 |       | 3,190                            |       | 1,762                                       |       | (6                                            | )          |
| Other long-term liabilities                                                      |       | (6                               | )          | (88                                         | )          | 22                                            |       |
|                                                                             |       |                             |       |                                        |       |                                          |       |
| Net cash (used in) provided by operating activities                              |       | (717                             | )          | 10,774                                      |       | (8,331                                        | )          |
|                                                                             |       |                             |       |                                        |       |                                          |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                           |       |                             |       |                                        |       |                                          |       |
|                                                                             |       |                             |       |                                        |       |                                          |       |
| Payment for  acquisition of Festival Fun Parks, LLC, net                         |       |                             |       | (37,599                                     | )          |                                          |       |
| Purchases of  property and equipment                                             |       | (10,350                          | )          | (3,356                                      | )          | (3,951                                        | )          |
| Proceeds from  disposal of assets                                                |       | 72                               |       |                                        |       |                                          |       |
|                                                                             |       |                             |       |                                        |       |                                          |       |
| Net cash used in investing activities                                            |       | (10,278                          | )          | (40,955                                     | )          | (3,951                                        | )          |
|                                                                             |       |                             |       |                                        |       |                                          |       |
| Issuance of  common stock                                                        |       |                             |       | 54,260                                      |       |                                          |       |
| Capital  contribution                                                            |       | 800                              |       |                                        |       |                                          |       |
| Return of  capital                                                               |       | (786                             | )          | (500                                        | )          |                                          |       |
| Proceeds from  long-term debt                                                    |       | 22,000                           |       | 163,500                                     |       | 13,100                                        |       |
| Payments on  long-term debt                                                      |       | (7,000                           | )          | (180,095                                    | )          | (767                                          | )          |
| Payments for  cost of financing                                                  |       |                             |       | (5,575                                      | )          |                                          |       |
| Payments on  capital leases                                                      |       | (177                             | )          |                                        |       | (118                                          | )          |
| Distributions to  member                                                         |       |                             |       |                                        |       | (57                                           | )          |
|                                                                             |       |                             |       |                                        |       |                                          |       |
| Net cash provided by financing activities                                        |       | 14,837                           |       | 31,590                                      |       | 12,158                                        |       |
|                                                                             |       |                             |       |                                        |       |                                          |       |
| NET INCREASE  (DECREASE) IN CASH AND   CASH EQUIVALENTS                          |       | 3,842                            |       | 1,409                                       |       | (124                                          | )          |
|                                                                             |       |                             |       |                                        |       |                                          |       |
| CASH AND CASH  EQUIVALENTS,   BEGINNING OF PERIOD                                |       | 2,090                            |       | 5,116                                       |       | 5,240                                         |       |
|                                                                             |       |                             |       |                                        |       |                                          |       |
| CASH AND CASH  EQUIVALENTS,   END OF PERIOD                                      |       | $                                | 5,932      |                                        | $          | 6,525                                         |       | $ | 5,116 |   |

 

*See Notes to Condensed Consolidated Financial Statements*

6

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**PALACEENTERTAINMENT HOLDINGS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited, Dollars in thousands)**

**1.****                      ORGANIZATION**

**Organization**

On April 12, 2006,Palace Entertainment Holdings, Inc. (the “Company”), a Delaware corporation,acquired Festival Fun Parks, LLC, a Delaware limited liability company (“FFP”).  The Company is a 100% owned subsidiary ofPalace Holdings Group, LLC (“Holdings”), which is primarily owned by MidOceanPartners, LP (“MidOcean Partners”), a New York and London based private equityfirm.  FFP was formed on June 23,1998, with Palace Entertainment, Inc., a Delaware corporation (“PAL”), beingthe sole member prior to the acquisition. The Company was established topurchase and operate family entertainment centers (“FECs”) and water parks (“WPs”).

On March 8, 2007, the Company purchased certain waterpark assets located in Sacramento, California from Premier WaterworldSacramento, Inc. (“Premier”), an affiliate of Six Flags Theme Parks, Inc., andthe lease between Premier and the State of California was assigned to theCompany.  The Company has renamed the WPRaging Waters Sacramento.

At June 30, 2007,the Company owned and operated 33 FECs and WPs (“Parks”). Of the 33 Parksowned at June 30, 2007, 17 are located in California, five are located inFlorida, four are located in Texas, and two each are located in Georgia and NewYork, and one each is located in North Carolina, New Jersey, and New Hampshire.Revenue earned from the Parks located in California represents approximately50% and 49%, in the aggregate, of the Company’s revenues for the six monthperiod ended June 30, 2007 and 2006, respectively. Nine of the Parks are WPsfeaturing such attractions as water slides, flumes, and pools and one is anature theme park. The other 23 FECs generally feature such attractions asminiature golf, batting cages, children’s parks, go-carts, and video arcades.

For financialreporting purposes, the Company uses a 52- or 53-week fiscal year. The fiscalperiods presented, which ended July 1, 2007 and July 2, 2006, consists of26 weeks, or one half of the fiscal year. The fiscal period ends on the Sundaynearest to  June 30. For simplicity of presentation, we refer to the26-week period as ended on June 30.

**2.****                      SUMMARY OFSIGNIFICANT ACCOUNTING AND REPORTING POLICIES**

**Basis ofPresentation**

The accompanyingunaudited condensed consolidated financial statements of the Company have beenprepared in accordance with generally accepted accounting principles in theUnited States for interim financial information and in accordance with therules and regulations of the Securities and Exchange Commission (the “SEC”).The information reflects the required adjustments that are of normal, recurringnature, and that in the opinion of our management are necessary for a fairpresentation of the financial position of the Company, its results ofoperations and cash flows for the interim period presented.  They do not include all of the informationand notes required by generally accepted accounting principles in the UnitedStates for annual financial statements as permitted under applicable rules andregulations. The condensed consolidated balance sheet at December 31, 2006was derived from the audited financial statements at that date but may notinclude all disclosures required by accounting principles generally accepted inthe United States.

These CondensedConsolidated Financial Statements should be read in conjunction with theConsolidated Financial Statements included in the Company’s annual report onForm 10K for the fiscal year ended December 31, 2006.

The results ofoperations for the six month period ended June 30, 2007 are not indicative ofthe expected full year results.  Our WPoperations contribute a significant amount of the Company’s annual revenue fromMay through Labor Day each year while certain expenses are incurred year round.

The CondensedConsolidated Financial Statements include the accounts of the Company and itswholly owned subsidiaries. All intercompany transactions and balances have beeneliminated in consolidation.

7

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The acquisition ofFFP by the Company (“Acquisition”) (See Footnote 3) was accounted for under thepurchase method of accounting, as required by Statement of Financial AccountingStandards (“SFAS”) No.141 (“SFAS No. 141”), *Business Combinations*.  The purchase price has been allocated to theassets and liabilities of FFP based on their respective fair values.  Accordingly, the post-Acquisition CondensedConsolidated Financial Statements reflect all the necessary adjustments requiredby SFAS No. 141.

**Propertyand Equipment**

Property andequipment is stated at cost and is depreciated using the straight-line methodover 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 Condensed Consolidated Statement of Operations. Leasehold improvements areamortized over the shorter of the lease term or their useful lives.

Ordinary repairsand maintenance are expensed as incurred; major replacements and bettermentsare capitalized.

**Long-Lived Assets**

Long-lived assetsare carried at cost less accumulated depreciation. Long-lived assets areevaluated for potential impairment in accordance with SFAS No. 144 (“SFAS No.144”) *Accounting for Impairment or Disposal of Long LivedAssets* 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 did notrecord any impairment charges for the three or six month periods ended June 30,2007 and 2006. In conjunction with the Acquisition long-lived assets wererevalued at fair market value. (See Footnote 3)

**Goodwill**

Goodwill is tested for impairment annually, or when apossible impairment is indicated, using the fair value-based test prescribed bySFAS No. 142 (“SFAS No. 142”), *Goodwill and OtherIntangible Assets*. The goodwill impairment test prescribed by SFASNo. 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 carryingvalue of the goodwill exceeds its implied fair value. The second stepdetermines the fair value of a reporting unit for the amount for which the unitas a whole could be bought or sold in a current transaction between willingparties. The Company estimates the fair value of its reporting units usingdiscounted cash flow valuation models. The Company estimates these amounts byevaluating historical trends, current budgets, operating plans, and industrydata. Determining the fair value of reporting units and goodwill includessignificant judgment by management and different judgments could yielddifferent results.  The Company testsgoodwill annually 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 andimpairment, if any, are recognized in earnings. The Company has identifiedtwenty reporting units.  Goodwill wasallocated to our reporting units based on the final purchase priceallocation.   We conducted our goodwilltest during the second quarter of fiscal year 2007 and no goodwill impairmentwas identified in any of our reporting units.

The Companyrecorded no goodwill impairment losses for the three and six month period endedJune 30, 2007 and 2006.

8

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**OtherIntangibles Assets**

Trademarks are amortized over their estimated useful lives of 20 yearsand property leases are amortized over the terms of the related leases. Theamortization expense relating to trademarks recorded for the three month periodended June 30, 2007 and 2006 was $167 and $145, respectively.  The amortization expense relating totrademarks recorded for the six month period ended June 30, 2007 and 2006 was$333 and $145, respectively.

**OtherAssets**

Financing costs,which are 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 June 30, 2007 and December 31,2006, deferred financing costs were $4,946 and $5,331, respectively, net ofaccumulated amortization of $939 and $553, respectively. All debt outstandingas of the Acquisition date was repaid and the related discounts were writtenoff. Additionally, discount on loans was being amortized using the effectiveinterest method over the term of the respective loan agreement.  As of June 30, 2007, the Company also had$318 of restricted cash, which is included in other assets, that must be usedfor capital expenditures.

**Stock-BasedCompensation**

PAL, the formerparent of FFP, issued stock options to the Company’s employees in 2002.Outstanding options and the related potential compensation amounts wereimmaterial, and were terminated in April 2006 in connection with theAcquisition. Following the Acquisition, Holdings adopted a new stockcompensation plan and the Company adopted SFAS No. 123(R) (“SFAS No. 123(R)”), “*Share-Based Payment*” to account for the equity incentiveunits granted. All awards granted, modified, or settled after the date ofadoption will be accounted for using the measurement, recognition, andattribution provisions of SFAS No.123(R). Under the fair value recognitionprovision of this statement, share based compensation costs are measured at thegrant date based upon the fair value of the award. The Company elected torecognize the expense on a straight-line basis over the requisite period thatis the vesting period.  See Footnote 9for a further description of the plan.

**RevenueRecognition**

The Companyrecognizes revenue net of sales tax at the point of sale to a customer or overthe period that receives the benefit.

**UnearnedRevenue**

Certain Parks sell season tickets and annual passes. These sales arerecorded as unearned revenue upon the sale of the tickets.  Revenue on season tickets and annual passesis recognized based on usage of the tickets and passes over the period of timethey are valid.

Certain FECs sell play cards that do not expire andcannot be redeemed for cash.  These salesare recorded as unearned revenue upon the sale of the play cards .  Therevenue on play cards is recognized based on their redemption at ourattractions.   Based on our historicalredemption patterns, the Company determines as breakage the expected unredeemedamount. The breakage income is recorded in revenue in the Company’s statementof operations based on actual redemption.

**Other Accrued Liabilities**

Other accrued liabilities consists of accrued propertytaxes, worker’s compensation and general liability self insurance reserve,accrued rent, accrued expenses, and other accrued liabilities.  At June 30, 2007 and December 31, 2006, theworker’s compensation and general liability self insurance reserve was $6,119and $6,308, respectively, and accrued expenses were $4,203 and $1,385,respectively.

9

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**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions 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 six month period ended June 30, 2007 and 2006, 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.

**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. For the fair value of long-term debt, see Footnote 7.

**RecentAccounting Pronouncements**

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 159 (“SFAS No. 159”), *The Fair Value Option for Financial Assets andFinancial Liabilities*— *includingan amendment of FASB Statement No. 115*. SFAS No. 159 gives theCompany the irrevocable option to carry most financial assets and liabilitiesat fair value, with changes in fair value recognized in the statement ofoperations. SFAS No. 159 is effective for the Company’s 2008 fiscal year,although early adoption is permitted. The Company is currently assessing thepotential effect of SFAS No. 159 on its consolidated financial statements.

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

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

In July 2006, theFASB issued Emerging Issues Task Forece (“EITF”) 06-3, (*How TaxesCollected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That Is, Gross versus Net Presentation*))that requires disclosure of the accounting policy related to any tax assessedby a government authority in a revenue producing transaction (either gross ornet) and the amount of such taxes in both interim and annual financialstatements if the amounts are significant. The Company has adopted EITF 06-3 and the Condensed Consolidatedfinancial statements conform to its requirements. The Company’s policy is topresent the taxes collected from the customers and remitted to governmentalauthorities on a net basis.

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**3.****                      ACQUISITION**

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

The final aggregate purchase price allocation isreflected on the accompanying condensed consolidated balance sheet as of June30, 2007 and there was no change in the aggregate purchase price allocationfrom the consolidated balance sheet at December 31, 2006.  The following table summarizes the estimatedfair values of the assets acquired and liabilities assumed as of April 12, 2006based upon management’s estimates and with the support of an independentappraiser.
| Current assets                                                 |   | $       | 7,303   |   |
|----------------------------------------------------------------|--------|---------|---------|--------|
| Property and  equipment — net                             |   | 118,963 |    |
| Goodwill                                                       |   | 86,504  |    |
| Other intangible  assets — net                            |   | 19,674  |    |
| Other assets —  net                                       |   | 6,395   |    |
| Current  liabilities                                           |   | (18,569 | )       |
| Other long term  liabilities                                   |   | (8,095  | )       |
| Allocated purchase  price, including related acquisition costs |   | $       | 212,175 |   |

 

The excess of the adjusted purchase price over thefair value of the net assets acquired or goodwill has been assigned to ourreporting units and has been finalized.  The final goodwill assigned to our twenty reporting units has resultedin a reallocation of goodwill between the WP and FEC segments.   As of June 30, 2007, the final goodwillassigned to the WP and FEC segment is $60,238 and $26,266 respectively.  The final aggregate purchase price allocationand goodwill reflected on the accompanying condensed consolidated balance sheetat June 30, 2007 did not change from the amount reflected on the consolidatedbalance sheet at December 31, 2006.   Thegoodwill is not amortized and is subject to an annual impairment test inaccordance with SFAS No.142, *Goodwill and OtherIntangible Assets*.  For incometax purposes, the Company amortizes goodwill and other intangible assets.  A goodwill test was performed during thesecond quarter of  fiscal year 2007 andno goodwill impairment was identified.

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

On March 8, 2007, the Company purchased certain waterpark assets located in Sacramento, California from Premier.  The Company has renamed the WP Raging WatersSacramento.  The asset purchase wasrecorded at its fair value for a cash amount of $950.  The Company did not record any intangibleassets, trademarks or other assets*.*    In addition, there were no liabilitiesassumed as a result of the transaction.  The majority of the assets purchased relate to rides and attractions andwere recorded to property and equipment at fair value.

The following condensed consolidated pro forma incomestatement information includes the three and six month periods ended June 30,2006.  The pro forma adjustments reflectthe purchase of FFP, the extinguishment of the prior debt and its replacementwith the Notes and the Revolver.  Thepro-forma also adjusts interest expense based upon the terms of the agreementsgoverning the Notes and the Revolver. The financial information below also substitutes the MidOcean Partnersadvisory fee for the Windward management fee and adjusts for the effect of thedirectors/officers and representations/warranties insurance policies issued inconnection with the sale transaction.  Wehave adjusted depreciation and amortization for property and equipment,trademarks and leases based on the purchase price allocation.

The Raging Waters Sacramento WP has also been includedin the 2006 pro forma income statement and assumes the Park has been operatingsince January 1, 2006.

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

|                                  | ** ** | **June 30, 2006** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
|                             |       |                        |       |
| REVENUES — NET              |       | $                           | 43,138     |   |
|                             |       |                        |       |
| LOSS FROM  CONTINUING OPERATIONS |       | $                           | (6,129     | ) |
|                             |       |                        |       |
| NET LOSS                         |       | $                           | (6,129     | ) |

 

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

|                                  | ** ** | **June 30, 2006** | ** ** |
|----------------------------------|------------|-----------------------------|------------|
|                             |       |                        |       |
| REVENUES — NET              |       | $                           | 63,934     |   |
|                             |       |                        |       |
| LOSS FROM  CONTINUING OPERATIONS |       | $                           | (21,817    | ) |
|                             |       |                        |       |
| NET LOSS                         |       | $                           | (21,817    | ) |

 

**On a proforma basis for the three and  six monthperiod ended June 30, 2006, the Company had no tax expense and a 0% effectivetax rate due**to the net losses and full valuationreserves on a pro forma basis.

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**4.****                      PREPAIDEXPENSES AND OTHER CURRENT ASSETS**

Prepaid expenses andother current assets consist of the following:
|                        | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|------------------------|------------|------------------|------------|----------------------|------------|
| ** **             | ** ** | **2007**         | ** ** | **2006**             | ** ** |
|                   |       |             |       |                 |       |
| Prepaid  insurance     |       | $                | 589        |                 | $          | 1,261 |   |
| Prepaid rent           |       | 1,104            |       | 1,090                |       |
| Accounts  Receivable   |       | 1,511            |       | 780                  |       |
| Income Tax  Receivable |       | 560              |       | 560                  |       |
| Other current  assets  |       | 1,635            |       | 1,625                |       |
|                   |       |             |       |                 |       |
| Total                  |       | $                | 5,399      |                 | $          | 5,316 |   |

 

**5.****                      PROPERTY ANDEQUIPMENT**

Property andequipment consist of the following:
|                                                 | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2007**         | ** ** | **2006**             | ** ** |
|                                            |       |             |       |                 |       |
| Land                                            |       | $                | 158        |                 | $          | 158 |   |
| Buildings and  leasehold improvements           |       | 57,963           |       | 56,338               |       |
| Equipment and  fixtures                         |       | 17,065           |       | 14,234               |       |
| Games                                           |       | 5,079            |       | 3,772                |       |
| Rides and  attractions                          |       | 55,784           |       | 51,476               |       |
|                                            |       |             |       |                 |       |
| Total                                           |       | 136,049          |       | 125,978              |       |
|                                            |       |             |       |                 |       |
| Less accumulated  depreciation and amortization |       | 21,226           |       | 12,439               |       |
|                                            |       |             |       |                 |       |
| Add construction  in progress                   |       | 866              |       | 611                  |       |
|                                            |       |             |       |                 |       |
| Total                                           |       | $                | 115,689    |                 | $          | 114,150 |   |

 

**6.****                      OTHERINTANGIBLE ASSETS - NET**

The following are thegross carrying amounts and accumulated amortization of the other intangibleassets as of June 30, 2007 and December 31, 2006:

June 30, 2007
|                           | ** ** | **Gross Carrying** | ** ** | **Accumulated**  | ** ** | **Net Book** | ** ** |
|---------------------------|------------|-------------------------|------------|------------------|------------|-------------------|------------|
| ** **                | ** ** | **Amount**              | ** ** | **Amortization** | ** ** | **Value**         | ** ** |
| Other intangible  assets  |       |                    |       |             |       |              |       |
| Trademarks                |       | $                       | 13,328     |             | $          | 810               |       | $ | 12,518 |   |
| Property leases advantage |       | 6,346                   |       | 281              |       | 6,065             |       |
| Total                     |       | $                       | 19,674     |             | $          | 1,091             |       | $ | 18,583 |   |

 

December 31, 2006
|                           | ** ** | **Gross Carrying** | ** ** | **Accumulated**  | ** ** | **Net Book** | ** ** |
|---------------------------|------------|-------------------------|------------|------------------|------------|-------------------|------------|
| ** **                | ** ** | **Amount**              | ** ** | **Amortization** | ** ** | **Value**         | ** ** |
| Other intangible  assets  |       |                    |       |             |       |              |       |
| Trademarks                |       | $                       | 13,328     |             | $          | 476               |       | $ | 12,852 |   |
| Property leases advantage |       | 6,346                   |       | 166              |       | 6,180             |       |
| Total                     |       | $                       | 19,674     |             | $          | 642               |       | $ | 19,032 |   |

 

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The futureamortization on trademarks and property leases advantage as of June 30, 2007are as follows:
| Year Ending      | ** ** | ** **     | ** ** | **Property Leases** | ** ** | ** ** | ** ** |
|-----------------------|------------|----------------|------------|--------------------------|------------|------------|------------|
| **December 31,** | ** ** | **Trademarks** | ** ** | **Advantage**            | ** ** | **Total**  | ** ** |
|                  |       |           |       |                     |       |       |       |
| 2007 (6 months)       |       | $              | 333        |                     | $          | 116        |       | $ | 449 |   |
|                  |       |           |       |                     |       |       |       |
| 2008                  |       | 666            |       | 231                      |       | 897        |       |
|                  |       |           |       |                     |       |       |       |
| 2009                  |       | 666            |       | 231                      |       | 897        |       |
|                  |       |           |       |                     |       |       |       |
| 2010                  |       | 666            |       | 231                      |       | 897        |       |
|                  |       |           |       |                     |       |       |       |
| 2011                  |       | 666            |       | 231                      |       | 897        |       |
|                  |       |           |       |                     |       |       |       |
| Thereafter            |       | 9,521          |       | 5,025                    |       | 14,546     |       |
|                  |       |           |       |                     |       |       |       |
| Total                 |       | $              | 12,518     |                     | $          | 6,065      |       | $ | 18,583 |   |

 

The amortization of trademarks is recorded toamortization expense.   However, theamortization of property leases advantage is recorded as additional rentexpense in order to normalize rent expense. The amortization of property leasesdisadvantage is recorded as an offset to rent expense. The future amortizationof property leases disadvantage recorded in other long term liabilities as ofJune 30, 2007 is as follows:

 
| Year Ending      | ** ** | **Property Leases** | ** ** |
|-----------------------|------------|--------------------------|------------|
| **December 31,** | ** ** | **Disadvantage**         | ** ** |
|                  |       |                     |       |
| 2007 (6 months)       |       | $                        | (71        | ) |
|                  |       |                     |       |
| 2008                  |       | (141                     | )          |
|                  |       |                     |       |
| 2009                  |       | (141                     | )          |
|                  |       |                     |       |
| 2010                  |       | (141                     | )          |
|                  |       |                     |       |
| 2011                  |       | (141                     | )          |
|                  |       |                     |       |
| Thereafter            |       | (3,121                   | )          |
|                  |       |                     |       |
| Total                 |       | $                        | (3,756     | ) |

 

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**7.****                      LONG-TERMDEBT**

Long-term debt at June30, 2007 and December 31, 2006 consists of the following:
|                                            | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **2007**         | ** ** | **2006**             | ** ** |
|                                       |       |             |       |                 |       |
| 10 7/8% Senior  Notes (1)                  |       | $                | 150,000    |                 | $          | 150,000 |   |
| Revolving line  of credit - GE Capital (2) |       | 15,000           |       |                 |       |
| Capital lease  obligations (3)             |       | 784              |       | 856                  |       |
|                                       |       |             |       |                 |       |
| Total                                      |       | 165,784          |       | 150,856              |       |
|                                       |       |             |       |                 |       |
| Less current  portion                      |       | 707              |       | 848                  |       |
|                                       |       |             |       |                 |       |
| Total long-term debt                       |       | $                | 165,077    |                 | $          | 150,008 |   |

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

In connection with the Acquisition, FFP issued its 10 7/8% SeniorNotes, Series A, due April 12, 2014, which are fully and unconditionallyguaranteed by the Company.  Interest ispayable in semi-annual installments on October 15 and April 15 of eachsuccessive year.  The first payment wasmade on October 16, 2006 and the second payment was made on April 16,2007.  The fair value of the Notes were$150,750 and $151,500 as of June 30, 2007 and December 31, 2006, respectively.  The Company was in compliance with itscovenant requirements as of June 30, 2007.

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

Revolving line of credit up to a maximum of $40,000, maturing no laterthan April 12, 2012.  Interest is payableperiodically at the prime rate plus a margin of 1.75% or the London Inter BankOffered Rate (“LIBOR”) plus a margin of 2.75% based upon the Company’selection.  The outstanding balance was$15,000 which had a weighted average interest rate of 8.12% as of June 30, 2007.  The margin can vary based on the Company’sdebt to earnings ratio.  Under theRevolver, the Company had certain letters of credit outstanding to secure itsworkers compensation and general liability insurance policies.  Letters of credit outstanding at June 30,2007 and December 31, 2006 was $4,325. The fair value of the outstanding balance on the Revolver approximatesits carrying value.

The Revolver is secured by substantially all of the Company’sassets.   The Company was in compliancewith its covenant requirements as of June 30, 2007.

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

Capital lease obligations secured by applicable equipment with a netbook value of $676 and $648 at June 30, 2007 and December 31, 2006,respectively, are payable in periodic installments.

**8.****                      RELATED-PARTYTRANSACTIONS**

A professionalservices agreement was in effect between the Company and MidOcean Partners asof June 30, 2007. The agreement provides for quarterly payments of $250. Thesefees are paid quarterly and included in selling, general and administrativeexpenses in the Condensed Consolidated Statement of Operations.  The term of this agreement is through April12, 2016. Additionally, MidOcean Partners is entitled to reimbursement ofcertain expenses. As of June 30, 2007 and December 31, 2006, the Company had aprepaid balance of $81 relating to the professional services agreement.

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**9.****                      STOCKCOMPENSATION PLANS**

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

Holdings has adopted ashare-based compensation plan (the “Plan”) for certain management employees anddirectors of the Company. The Company has accounted for the fair value ofgrants made under the Plan in accordance with SFAS No. 123(R).   Holdings issued equity incentive units (“Units”)in May 2007, March 2007 and June 2006.

Under the Plan, Holdingsmay grant Units to selected management personnel and directors of the Company.Units are granted at the discretion of the Board of Directors. The Class BUnits vest in equal 1/20th amounts at the end of each full quarterfollowing the grant date and the Class C Units fully vest at the date of thegrant. Vesting on the Class B Units is accelerated in the event of aliquidating event, such as; the approved sale of the Company, including by wayof merger or consolidation as well as the sale of publicly traded securities ofthe Company. The accelerated vesting is subject to the achievement of specifiedinternal rate of return and return on investment hurdles based on MidOceanPartners’ initial investment. Should those hurdles not be met at the time ofthe liquidating event, the shares will continue to vest quarterly over the restof the original five year service period, with the exception of the B-2 Units,which will be forfeited on the date of the liquidating event if the hurdles arenot met.

The Board of Directors atits sole discretion may repurchase the vested portion of the Units fromterminated employees under certain conditions at the fair market value of theUnits.  In March 2005, the SEC issued SABNo. 107 (“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 assumptionused by the Company of 28.95%, 30.23% and 41.01% for the May 2007, March 2007and June 2006 grants, respectively, was determined by weighting the volatilityof public companies with comparable business lines and product lines becausethe Company does not have historical stock prices for direct comparison. Thevolatility weighting was based on the implied volatility, the most recent1-year volatility, and the median of the rolling 4.5 year volatility for theMay 2007 grant and rolling 5 year volatility for the March 2007 and June 2006grants. The risk-free interest rate of 4.55%, 4.50% and 4.90% for the May 2007,March 2007, and June 2006 grants, respectively, that was used in the MonteCarlo Simulation model is based on the risk free rate of return that is equalto the interpolated yield of a five-year and three-year zero-coupon U.S.Treasury note as of May 1, 2007 and that is equal to the yield of a five-yearzero-coupon U.S. Treasury note as of March 2007, and June 2006, respectively.Management uses an expected dividend yield of zero for the May 2007, March 2007and June 2006 grants, in the Monte Carlo Simulation model, as it has nointention to pay any cash dividends in the foreseeable future. SFAS No. 123(R)requires management to estimate forfeitures at the time of grant and revisethose estimates in subsequent periods if actual forfeitures differ from thoseestimates. Management uses an estimated forfeiture rate based on the weightedaverage of different scenarios as historical data is not available and recordsstock-based compensation expense only for those awards that are expected tovest. A discount has also been calculated into the fair value of the Units toaccount for the market requirement inherent in the Units.

The compensation costthat has been charged against income for the Plan was $155 and $240 for thethree and six month period ended June 30, 2007, respectively. For the threemonth period ended June 30, 2006 the compensation cost charged against incomewas $458. As of June 30, 2007, there was $2,715 of total unrecognizedcompensation cost related to unvested stock-based compensation that is expectedto be recognized over a weighted-average period of 4.6 years. Based on thecurrent outstanding Units, total stock-based compensation expense for the fullfiscal year 2007 is expected to be approximately $542.

16

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A summary of the Unitsgranted during the period and outstanding as of June 30, 2007 is presentedbelow:
| **Amounts below are reported in whole numbers** | ** ** | **Number  of units** | ** ** | **Weighted  Average Fair  Value** | ** ** | **Number  of units** | ** ** | **Weighted  Average Fair  Value** | ** ** | **Number  of units** | ** ** | **Weighted  Average Fair  Value** | ** ** | **Number  of units** | ** ** | **Weighted  Average Fair  Value** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|---------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **B1**                    | ** ** | ** **                             | ** ** | **B2**                    | ** ** | ** **                             | ** ** | **B3**                    | ** ** | ** **                             | ** ** | **C**                     | ** ** | ** **                             | ** ** |
| Equity incentive  units outstanding at January 1, 2007              |       | 3,673                     |       | $                                      | 482        |                      | 6,122      |                                   | $          | 308                       |       | 2,449                                  |       | $                         | 201        |                                   | 415        |   | $ | 1,000 |   |
| Granted                                                                       |       | 2,428                     |       | 414                                    |       | 4,047                     |       | 193                                    |       | 1,619                     |       | 82                                     |       | —                    |       |                                   |       |
| Repurchased                                                                   |       | (257                      | )          | 482                                    |       | (428                      | )          | 308                                    |       | (171                      | )          | 201                                    |       | —                    |       |                                   |       |
| Forfeited                                                                     |       | (2,314                    | )          | 482                                    |       | (3,857                    | )          | 308                                    |       | (1,543                    | )          | 201                                    |       | —                    |       |                                   |       |
| Equity incentive  units outstanding at March 31, 2007               |       | 3,530                     |       | 435                                    |       | 5,884                     |       | 229                                    |       | 2,354                     |       | 119                                    |       | 415                       |       | 1,000                                  |       |
| Granted                                                                       |       | 408                       |       | 427                                    |       | 680                       |       | 185                                    |       | 272                       |       | 50                                     |       | —                    |       |                                   |       |
| Repurchased                                                                   |       | (61                       | )          | 482                                    |       | (102                      | )          | 308                                    |       | (41                       | )          | 201                                    |       | (31                       | )          | 1,000                                  |       |
| Forfeited                                                                     |       | (347                      | )          | 482                                    |       | (578                      | )          | 308                                    |       | (231                      | )          | 201                                    |       | —                    |       |                                   |       |
| Equity incentive  units outstanding at June 30, 2007                |       | 3,530                     |       | $                                      | 429        |                      | 5,884      |                                   | $          | 215                       |       | 2,354                                  |       | $                         | 102        |                                   | 384        |   | $ | 1,000 |   |
|                                                                          |       |                      |       |                                   |       |                      |       |                                   |       |                      |       |                                   |       |                      |       |                                   |       |
| Vested Number of  Units as of June 30, 2007                         |       | 260                       |       |                                   |       | 434                       |       |                                   |       | 174                       |       |                                   |       | 384                       |       |                                   |       |
| Unvested Number of  Units as of June 30, 2007                       |       | 3,270                     |       |                                   |       | 5,450                     |       |                                   |       | 2,180                     |       |                                   |       | —                    |       |                                   |       |

 

**10.****               COMMITMENTS ANDCONTINGENCIES**

**Lease Expense**

As of June 30, 2007, the Company leased the land for all 33 Parks. Ofthe 33 Parks, 30 lease the land from third parties under noncancelableoperating leases that expire on various dates through 2041.  The leasesfor the facilities in Kingwood, Texas (MountasiaTM) , Vernon, New Jersey (“MountainCreek”) and Sacramento, California (“Raging Waters Sacramento”) contain earlytermination provisions allowing the landlords to terminate the lease prior tothe end of its term.  The Mountain Creekand Raging Waters Sacramento early termination provisions stipulate the paymentof compensation to the Company should the landlord exercise its option forearly termination. The ground leases for certain of the Parks requirethe Company to pay minimum monthly or annual rentals, which are adjustedperiodically based on changes in the Consumer Price Index or a percentage ofsales method. The ground leases for certain of the Parks require monthlyrentals based on a percentage of gross revenues derived from the operations ofthe premises. In addition, the ground leases require the payment of propertytaxes and certain leases require the payment of common area expenses. Certainof the leases provide the Company with options to renew for various periods oftime. In addition, certain of the leases provide the Company with options topurchase the leased premises in accordance with the terms of those leaseagreements, and certain other leases provide the Company with the right offirst refusal in the event that the lessors decide to sell the land during theterm of the leases.

In addition, theCompany leases its corporate office facilities from an unaffiliated third partyunder a non-cancelable operating lease, which expires in 2009.

For the threemonth period ended June 30, 2007 and 2006, rent expense charged to cost ofrevenue in the Condensed Consolidated Statement of Operations, excludingproperty taxes, amounted to $4,383 and $4,176, respectively.  For the six month period ended June 30, 2007and 2006, rent expense charged to cost of revenue in the Condensed ConsolidatedStatement of Operations, excluding property taxes, amounted to $8,025 and$7,844, respectively.

17

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The future minimum lease payments required undernoncancelable Park leases and office leases as of June 30, 2007, are asfollows:
| Year Ending      | ** ** | ** **           | ** ** | ** **                           | ** ** |
|-----------------------|------------|----------------------|------------|--------------------------------------|------------|
| **December 31,** | ** ** | **Park Leases** | ** ** | **Corporate Office Lease** | ** ** |
|                  |       |                 |       |                                 |       |
| 2007 (6 months)       |       | $                    | 6,816      |                                 | $          | 208 |   |
| 2008                  |       | 13,405               |       | 427                                  |       |
| 2009                  |       | 13,281               |       | —                               |       |
| 2010                  |       | 13,329               |       | —                               |       |
| 2011                  |       | 13,504               |       | —                               |       |
| Thereafter            |       | 224,448              |       | —                               |       |
| Total                 |       | $                    | 284,783    |                                 | $          | 635 |   |

 

**Litigation**

From time to time, the Company is involved inlitigation relating to claims arising out of its operations in the normalcourse of business. As of June 30, 2007, the Company is not a party to anylegal proceedings, the adverse outcome of which, in management’s opinion,individually or in the aggregate, would have a materially adverse effect on theCompany’s consolidated financial position or results of operations.

The Company received written notice in December 2004concerning the Texas Department of Transportation’s intention to seize, throughthe eminent domain process, a portion of the real property leased by theCompany at its Dallas SpeedZone® FEC in connection with the widening ofInterstate 35 E. The Company is currently in negotiations with its landlord ona global resolution of the issue, and is close to an agreement whereby thelandlord will sell the subject portion of the property to the State and thenpay to modify the Company’s facilities to conform to the new property line.

The Company andMidOcean Partners have been named as defendants in a lawsuit alleging, amongother things, breach of a finder’s fee agreement and tortuous interference withsuch agreement in connection with the Acquisition.  The agreement at issueis between two tortious individuals and a company that are separate anddistinct from both the Company and MidOcean Partners.  The plaintiff, Steven Crowley (“Crowley”),asserts five claims in his Amended Complaint dated January 5, 2007.  Crowley purports to hold the Companyresponsible for the alleged breach of finder’s agreement between Crowley (andanother individual who is not a plaintiff) and VisionMaker, LLC (“VisionMaker”).Crowley claims that the Company is the successor in interest to VisionMaker. Although the lawsuit seeks aggregate damages in excess of $3.2 million, theCompany has filed a motion to dismiss, which is currently pending in the UnitedStates District Court for the Southern District of New York.

**11.****               INCOME TAXES**

The Company andits subsidiaries file a consolidated federal income tax return and variousstate income and franchise tax returns.  The Company uses the estimated effective tax rate for the year todetermine the provision for income taxes for interim periods.  The Company recorded an income tax benefit of$4,519 for the six month period ended June 30, 2007.  As of June 30, 2007, the Company has recordeda valuation allowance of $2,300.  Thevaluation allowance was determined based on the excess of the projected 2007fiscal year net operating losses that cannot be offset against the prior year’staxable income recognized during the period April 13to December 31, 2006.  The Company believes it is more likely thannot that the deferred tax asset reported on the Condensed Consolidated BalanceSheet will be realized in future periods.

The Company adopted the provisions of FASBInterpretation No. 48,*Accounting forUncertainty in Income Taxes*- an Interpretation of FASB StatementNo. 109, or FIN 48, on January 1, 2007. The Company did not have anyunrecognized tax benefits and there was no effect on our financial condition orresults of operations as a result of implementing FIN No. 48.

18

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The Company files income tax returns in the U.S.federal jurisdiction and various state jurisdictions. The Company does notbelieve there will be any material changes in our unrecognized tax positionsover the next 12 months.

Our policy is to recognize interest and penaltiesaccrued on any unrecognized tax benefits as a component of income tax expense.As of the date of adoption of FIN 48, we did not have any accrued interest orpenalties associated with any unrecognized tax benefits, nor was any interestexpense recognized during the six month period ended June 30, 2007. Oureffective tax rate differs from the federal statutory rate primarily due tostate taxes, non-deductible expenses, and the valuation allowance.

**12.****               SEGMENT INFORMATIONDISCLOSURE**

The Company hasoperations in two business segments and, as a result, has adopted SFASNo. 131 (“SFAS No. 131”), *Disclosuresabout Segments of an Enterprise and Related Information.* SFAS No.131 establishes standards for reporting information about operating segments inannual financial statements. Operating segments are defined as components of anenterprise about which separate financial information is available and isevaluated on a regular basis by the chief operating decision maker or decisionmaking group, in deciding how to allocate resources to an individual segmentand in assessing performance of the segment. The Company has identified thesetwo segments based on the nature of business.

The Company has two reportable segments: FECs and WPs. FECs primarilyoffer miniature golf, batting cages, children’s parks, go-carts, and videoarcades. WPs feature water slides, flumes, and pools as their primaryattractions. The accounting policies of the segments are the same as thosedescribed in Note 2. Operating income (loss) of segments does not includeinterest income or expense and provision for income taxes and also excludescorporate items, such as general and administrative expenses and corporatedepreciation expense. Identifiable assets are those used in the Company’soperations in each segment. Corporate assets consist primarily of deferredfinancing costs, deposits, property and equipment, and cash and cashequivalents.

As of June 30,2007, the final goodwill assigned to the WPs and FECs was $60,238 and $26,266respectively.

19

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**SEGMENTDATA:**

**SuccessorFor the three month period ended June 30, 2007**
| ** **                     | ** ** | **Revenues  Net** | ** ** | **Segment Earnings  Before Interest  Taxes,  Depreciation  and Amortization** | ** ** | **Depreciation  and  Amortization** | ** ** | **Capital  Expenditures** | ** ** |
|--------------------------------|------------|-------------------|------------|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| FEC                            |       | $                 | 24,542     |                                                                                         | $          | 6,600                               |       | $                         | 2,424      |   | $ | 2,219 |   |
| WP                             |       | 20,462            |       | 1,090                                                                                        |       | 1,693                               |       | 3,037                     |       |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Total Operations               |       | 45,004            |       | 7,690                                                                                        |       | 4,117                               |       | 5,256                     |       |
| Corporate                      |       |              |       |                                                                                         |       | 389                                 |       | 198                       |       |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Total                          |       | $                 | 45,004     |                                                                                         |       |                                | $          | 4,506                     |       | $ | 5,454 |   |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Reconciliation  to Net Loss:   |       |              |       |                                                                                         |       |                                |       |                      |       |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Corporate  Expenses            |       |              |       | (3,632                                                                                       | )          |                                |       |                      |       |
| Interest Expense  - Net        |       |              |       | (4,747                                                                                       | )          |                                |       |                      |       |
| Depreciation and  Amortization |       |              |       | (4,506                                                                                       | )          |                                |       |                      |       |
| Loss on disposal  of assets    |       |              |       | (5                                                                                           | )          |                                |       |                      |       |
| Income tax  provision          |       |              |       | (1,011                                                                                       | )          |                                |       |                      |       |
| Net Loss                       |       |              |       | $                                                                                            | (6,211     | )                                   |       |                      |       |   |

 

20

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**SEGMENTDATA:**

**PredecessorFor the period April 13 to June 30, 2006**
| ** **                     | ** ** | **Revenues  Net** | ** ** | **Segment Earnings  Before Interest  Taxes,  Depreciation  and Amortization** | ** ** | **Depreciation  and  Amortization** | ** ** | **Capital  Expenditures** | ** ** |
|--------------------------------|------------|-------------------|------------|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| FEC                            |       | $                 | 22,153     |                                                                                         | $          | 6,317                               |       | $                         | 2,686      |   | $ | 1,301 |   |
| WP                             |       | 17,309            |       | 909                                                                                          |       | 1,245                               |       | 2,052                     |       |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Total Operations               |       | 39,462            |       | 7,226                                                                                        |       | 3,931                               |       | 3,353                     |       |
| Corporate                      |       |              |       |                                                                                         |       | 370                                 |       | 3                         |       |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Total                          |       | $                 | 39,462     |                                                                                         |       |                                | $          | 4,301                     |       | $ | 3,356 |   |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Reconciliation  to Net Loss:   |       |              |       |                                                                                         |       |                                |       |                      |       |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Corporate  Expenses            |       |              |       | (2,442                                                                                       | )          |                                |       |                      |       |
| Interest Expense  - net        |       |              |       | (4,154                                                                                       | )          |                                |       |                      |       |
| Depreciation and  Amortization |       |              |       | (4,301                                                                                       | )          |                                |       |                      |       |
| Income tax  provision          |       |              |       | (44                                                                                          | )          |                                |       |                      |       |
| Net Loss                       |       |              |       | $                                                                                            | (3,715     | )                                   |       |                      |       |   |

 

**SEGMENTDATA:**

**PredecessorFor the period April 1 to April 12, 2006**
| ** **                     | ** ** | **Revenues  Net** | ** ** | **Segment Earnings (Loss)  Before Interest  Taxes,  Depreciation  and Amortization** | ** ** | **Depreciation  and  Amortization** | ** ** | **Capital  Expenditures** | ** ** |
|--------------------------------|------------|-------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| FEC                            |       | $                 | 2,164      |                                                                                                     | $          | 100                                 |       | $                         | (111       | ) | $ | 32 |   |
| WP                             |       | 437               |       | (747                                                                                                     | )          | 144                                 |       | 507                       |       |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Total Operations               |       | 2,601             |       | (647                                                                                                     | )          | 33                                  |       | 539                       |       |
| Corporate                      |       |              |       |                                                                                                     |       | 265                                 |       | 10                        |       |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Total                          |       | $                 | 2,601      |                                                                                                     |       |                                | $          | 298                       |       | $ | 549 |   |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Reconciliation  to Net Loss:   |       |              |       |                                                                                                     |       |                                |       |                      |       |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Corporate  Expenses            |       |              |       | (65                                                                                                      | )          |                                |       |                      |       |
| Interest Expense  - net        |       |              |       | (671                                                                                                     | )          |                                |       |                      |       |
| Depreciation and  Amortization |       |              |       | (298                                                                                                     | )          |                                |       |                      |       |
| Income Tax  provision          |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Net Loss                       |       |              |       | $                                                                                                        | (1,681     | )                                   |       |                      |       |   |

 

21

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**SEGMENTDATA:**

**SuccessorFor the six month period ended June 30, 2007**
| ** **                     | ** ** | **Revenues  Net** | ** ** | **Segment Earnings (Loss)  Before Interest  Taxes,  Depreciation  and Amortization** | ** ** | **Depreciation  and  Amortization** | ** ** | **Capital  Expenditures** | ** ** |
|--------------------------------|------------|-------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| FEC                            |       | $                 | 43,139     |                                                                                                     | $          | 9,497                               |       | $                         | 5,149      |   | $ | 3,814 |   |
| WP                             |       | 23,398            |       | (5,119                                                                                                   | )          | 3,303                               |       | 6,444                     |       |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Total Operations               |       | 66,537            |       | 4,378                                                                                                    |       | 8,452                               |       | 10,258                    |       |
| Corporate                      |       |              |       |                                                                                                     |       | 778                                 |       | 203                       |       |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Total                          |       | $                 | 66,537     |                                                                                                     |       |                                | $          | 9,230                     |       | $ | 10,461 |   |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Reconciliation  to Net Loss:   |       |              |       |                                                                                                     |       |                                |       |                      |       |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Corporate  Expenses            |       |              |       | (7,402                                                                                                   | )          |                                |       |                      |       |
| Interest Expense  - Net        |       |              |       | (9,162                                                                                                   | )          |                                |       |                      |       |
| Depreciation and  Amortization |       |              |       | (9,230                                                                                                   | )          |                                |       |                      |       |
| Gain on disposal  of assets    |       |              |       | 35                                                                                                       |       |                                |       |                      |       |
| Income tax  benefit            |       |              |       | 4,519                                                                                                    |       |                                |       |                      |       |
| Net Loss                       |       |              |       | $                                                                                                        | (16,862    | )                                   |       |                      |       |   |

 

22

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**SEGMENTDATA:**

**PredecessorFor the period April 13 to June 30, 2006**
| ** **                     | ** ** | **Revenues  Net** | ** ** | **Segment Earnings  Before Interest  Taxes,  Depreciation  and Amortization** | ** ** | **Depreciation  and  Amortization** | ** ** | **Capital  Expenditures** | ** ** |
|--------------------------------|------------|-------------------|------------|----------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| FEC                            |       | $                 | 22,153     |                                                                                         | $          | 6,317                               |       | $                         | 2,686      |   | $ | 1,301 |   |
| WP                             |       | 17,309            |       | 909                                                                                          |       | 1,245                               |       | 2,052                     |       |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Total Operations               |       | 39,462            |       | 7,226                                                                                        |       | 3,931                               |       | 3,353                     |       |
| Corporate                      |       |              |       |                                                                                         |       | 370                                 |       | 3                         |       |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Total                          |       | $                 | 39,462     |                                                                                         |       |                                | $          | 4,301                     |       | $ | 3,356 |   |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Reconciliation  to Net Loss:   |       |              |       |                                                                                         |       |                                |       |                      |       |
|                           |       |              |       |                                                                                         |       |                                |       |                      |       |
| Corporate  Expenses            |       |              |       | (2,442                                                                                       | )          |                                |       |                      |       |
| Interest Expense  - net        |       |              |       | (4,154                                                                                       | )          |                                |       |                      |       |
| Depreciation and  Amortization |       |              |       | (4,301                                                                                       | )          |                                |       |                      |       |
| Income tax  provision          |       |              |       | (44                                                                                          | )          |                                |       |                      |       |
| Net Loss                       |       |              |       | $                                                                                            | (3,715     | )                                   |       |                      |       |   |

 

**SEGMENTDATA:**

**PredecessorFor the period January 1 to April 12, 2006**
| ** **                     | ** ** | **Revenues  Net** | ** ** | **Segment Earnings (Loss)  Before Interest  Taxes,  Depreciation  and Amortization** | ** ** | **Depreciation  and  Amortization** | ** ** | **Capital  Expenditures** | ** ** |
|--------------------------------|------------|-------------------|------------|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------|------------|---------------------------|------------|
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| FEC                            |       | $                 | 19,268     |                                                                                                     | $          | 1,723                               |       | $                         | 1,790      |   | $ | 1,104 |   |
| WP                             |       | 4,129             |       | (5,881                                                                                                   | )          | 2,280                               |       | 2,801                     |       |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Total Operations               |       | 23,397            |       | (4,158                                                                                                   | )          | 4,070                               |       | 3,905                     |       |
| Corporate                      |       |              |       |                                                                                                     |       | 408                                 |       | 47                        |       |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Total                          |       | $                 | 23,397     |                                                                                                     |       |                                | $          | 4,478                     |       | $ | 3,952 |   |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Reconciliation  to Net Loss:   |       |              |       |                                                                                                     |       |                                |       |                      |       |
|                           |       |              |       |                                                                                                     |       |                                |       |                      |       |
| Corporate  Expenses            |       |              |       | (2,843                                                                                                   | )          |                                |       |                      |       |
| Interest Expense  - net        |       |              |       | (6,674                                                                                                   | )          |                                |       |                      |       |
| Depreciation and  Amortization |       |              |       | (4,478                                                                                                   | )          |                                |       |                      |       |
| Income tax  provision          |       |              |       | —                                                                                                   |       |                                |       |                      |       |
| Net Loss                       |       |              |       | $                                                                                                        | (18,153    | )                                   |       |                      |       |   |

 

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**13.****               SEPARATE FINANCIALINFORMATION OF SUSIDIARY GUARANTORS OF INDEBTEDNESS**

As described inFootnotes 3 and 7 above, FFP issued $150,000 in aggregate principal amount of10 7/8% Senior Notes, Series A, due in 2014. The Notes are guaranteed on a senior unsecured basis by the Company andcertain of the Company’s subsidiaries. All guarantees are full and unconditional and joint and several.

The followingdisclosures reflect the Company’s condensed consolidated financial informationfor the periods presented.  The CondensedConsolidated financial information for the Company and the Company’s guarantorsubsidiaries for the periods presented as outlined below have been preparedfrom the books and records maintained by the Company and the guarantorsubsidiaries.  The condensed financialinformation may not necessarily be indicative of the results of operations orfinancial position had the Company and the guarantor subsidiaries operated asindependent entities.  As a result ofthis activity there will be an amount due to / due from related companies;however, all intercompany amounts included in the subsidiary records areeliminated in consolidation.

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----

**SuccessorPalace Entertainment Holdings, Inc.Condensed Consolidated Balance Sheet as of June 30, 2007 ( in thousands)**
| ** **                                 | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|--------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| ASSETS                                     |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CURRENT ASSETS                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cash and cash  equivalents                 |       | $            | —     |                         | $          | 5,417                                 |       | $                | 515        |                       | $          | — |   | $ | 5,932 |   |
| Inventories                                |       | —       |       | 2,264                        |       | 1,217                                 |       | —           |       | 3,481                      |       |
| Prepaid Expenses  and Other Current Assets |       | —       |       | 3,807                        |       | 1,592                                 |       | —           |       | 5,399                      |       |
| Deferred Income  Taxes                     |       | —       |       | 6,873                        |       | —                                |       | —           |       | 6,873                      |       |
| Total Current  Assets                      |       | —       |       | 18,361                       |       | 3,324                                 |       | —           |       | 21,685                     |       |
|                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Property and equipment  - net              |       | —       |       | 56,380                       |       | 59,309                                |       | —           |       | 115,689                    |       |
| Goodwill                                   |       | —       |       | 53,776                       |       | 32,728                                |       | —           |       | 86,504                     |       |
| Other intangible assets  - net             |       | —       |       | 11,462                       |       | 7,121                                 |       | —           |       | 18,583                     |       |
| Other assets - net                         |       | —       |       | 6,326                        |       | 180                                   |       | —           |       | 6,506                      |       |
| Due from subsidiaries                      |       | —       |       | 92,133                       |       | —                                |       | (92,133          | )          | —                     |       |
| Investment in  subsidiaries                |       | 41,587       |       | 4,370                        |       | —                                |       | (45,957          | )          | —                     |       |
| TOTAL                                      |       | $            | 41,587     |                         | $          | 242,808                               |       | $                | 102,662    |                       | $          | (138,090 | ) | $ | 248,967 |   |
|                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
| LIABILITIES AND MEMBERS  INTEREST          |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CURRENT LIABILITIES                        |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Accounts Payable                           |       | $            | —     |                         | $          | 4,863                                 |       | $                | —     |                       | $          | — |   | $ | 4,863 |   |
| Accrued Interest                           |       | —       |       | 3,796                        |       | —                                |       | —           |       | 3,796                      |       |
| Accrued Wages  and Payroll Taxes           |       | —       |       | 3,597                        |       | —                                |       | —           |       | 3,597                      |       |
| Other accrued  liabilities                 |       | —       |       | 13,632                       |       | 760                                   |       | —           |       | 14,392                     |       |
| Unearned Revenue                           |       | —       |       | 1,378                        |       | 3,135                                 |       | —           |       | 4,513                      |       |
| Current portion  of long term debt         |       | —       |       | 37                           |       | 670                                   |       | —           |       | 707                        |       |
| Total Current  Liabilities                 |       | —       |       | 27,303                       |       | 4,565                                 |       | —           |       | 31,868                     |       |
|                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Long Term Debt - Less  Current portion     |       | —       |       | 165,077                      |       | —                                |       | —           |       | 165,077                    |       |
| Deferred income taxes                      |       | —       |       | 3,142                        |       | —                                |       | —           |       | 3,142                      |       |
| Other long term  liabilities               |       | —       |       | 5,699                        |       | 1,594                                 |       | —           |       | 7,293                      |       |
| Total  Liabilities                         |       | —       |       | 201,221                      |       | 6,159                                 |       | —           |       | 207,380                    |       |
|                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Due to parent                              |       | —       |       | —                       |       | 92,133                                |       | (92,133          | )          | —                     |       |
| Shareholder’s Equity                  |       | 41,587       |       | 41,587                       |       | 4,370                                 |       | (45,957          | )          | 41,587                     |       |
| TOTAL                                      |       | $            | 41,587     |                         | $          | 242,808                               |       | $                | 102,662    |                       | $          | (138,090 | ) | $ | 248,967 |   |

 

25

----

**SuccessorPalace Entertainment Holdings, Inc.Condensed Consolidated Balance Sheet As Of December 31, 2006 ( in thousands)**
| ** **                                 | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|--------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| ASSETS                                     |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CURRENT ASSETS                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cash and cash  equivalents                 |       | $            | —     |                         | $          | 1,966                                 |       | $                | 124        |                       | $          | — |   | $ | 2,090 |   |
| Inventories                                |       | —       |       | 896                          |       | 1,228                                 |       |             |       | 2,124                      |       |
| Prepaid Expenses  and Other Current Assets |       | —       |       | 4,538                        |       | 778                                   |       |             |       | 5,316                      |       |
| Deferred Income  Taxes                     |       | —       |       | 1,171                        |       | 0                                     |       |             |       | 1,171                      |       |
| Total Current  Assets                      |       | —       |       | 8,571                        |       | 2,130                                 |       | —           |       | 10,701                     |       |
|                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Property and equipment  - net              |       | —       |       | 54,309                       |       | 59,841                                |       |             |       | 114,150                    |       |
| Goodwill                                   |       | —       |       | 86,504                       |       | —                                |       |             |       | 86,504                     |       |
| Other intangible assets  - net             |       | —       |       | 11,734                       |       | 7,298                                 |       |             |       | 19,032                     |       |
| Other assets - net                         |       | —       |       | 7,163                        |       | 144                                   |       |             |       | 7,307                      |       |
| Due from subsidiaries                      |       |         |       | 57,340                       |       |                                  |       | (57,340          | )          |                       |       |
| Investment in  subsidiaries                |       | 58,195       |       | 9,523                        |       |                                  |       | (67,718          | )          | —                     |       |
| TOTAL                                      |       | $            | 58,195     |                         | $          | 235,144                               |       | $                | 69,413     |                       | $          | (125,058 | ) | $ | 237,694 |   |
|                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
| LIABILITIES AND MEMBERS  INTEREST          |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CURRENT LIABILITIES                        |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Accounts Payable                           |       | $            | —     |                         | $          | 1,791                                 |       | $                | —     |                       | $          | — |   | $ | 1,791 |   |
| Accrued Interest                           |       | —       |       | 3,518                        |       | —                                |       |             |       | 3,518                      |       |
| Accrued Wages  and Payroll Taxes           |       | —       |       | 2,513                        |       | —                                |       |             |       | 2,513                      |       |
| Other accrued  liabilities                 |       | —       |       | 9,640                        |       | 530                                   |       |             |       | 10,170                     |       |
| Unearned Revenue                           |       | —       |       | 141                          |       | 1,182                                 |       |             |       | 1,323                      |       |
| Current portion  of long term debt         |       | —       |       | 11                           |       | 837                                   |       |             |       | 848                        |       |
| Total Current  Liabilities                 |       | —       |       | 17,614                       |       | 2,549                                 |       | —           |       | 20,163                     |       |
|                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Long Term Debt - Less  Current portion     |       | —       |       | 150,007                      |       | 1                                     |       |             |       | 150,008                    |       |
| Deferred income taxes                      |       | —       |       | 2,032                        |       | —                                |       |             |       | 2,032                      |       |
| Other long term  liabilities               |       | —       |       | 7,296                        |       | —                                |       |             |       | 7,296                      |       |
| Total  Liabilities                         |       | —       |       | 176,949                      |       | 2,550                                 |       | 0                |       | 179,499                    |       |
|                                       |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Due to parent                              |       | —       |       | —                       |       | 57,340                                |       | (57,340          | )          | —                     |       |
| Shareholder’s Equity                  |       | 58,195       |       | 58,195                       |       | 9,523                                 |       | (67,718          | )          | 58,195                     |       |
| TOTAL                                      |       | $            | 58,195     |                         | $          | 235,144                               |       | $                | 69,413     |                       | $          | (125,058 | ) | $ | 237,694 |   |

 

26

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**SuccessorPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Operations For The Three Month Period EndedJune 30, 2007 ( inthousands)**
| ** **                                                                | ** ** | **Holdings** | ** ** | **Festival  Fun Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| REVENUES - net                                                            |       | $            | —     |                         | $          | 29,091                                |       | $                | 15,913     |                       | $          | — |   | $ | 45,004 |   |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING COSTS  AND EXPENSES                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cost of revenue (exclusive of depreciation and  amortization shown below) |       | —       |       | 21,511                       |       | 12,154                                |       | —           |       | 33,665                     |       |
| Selling, general and administrative                                       |       | —       |       | 5,183                        |       | 2,098                                 |       | —           |       | 7,281                      |       |
| Depreciation and amortization                                             |       | —       |       | 2,795                        |       | 1,711                                 |       | —           |       | 4,506                      |       |
| Loss on disposal of assets                                                |       | —       |       | 5                            |       | —                                |       | —           |       | 5                          |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Total operating costs and expenses                                        |       | —       |       | 29,494                       |       | 15,963                                |       | —           |       | 45,457                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING LOSS                                                            |       | —       |       | (403                         | )          | (50                                   | )          | —           |       | (453                       | )          |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Equity loss in  earnings of subsidiaries                                  |       | (6,211       | )          | (50                          | )          | —                                |       | 6,261            |       | —                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OTHER EXPENSE                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Interest expense - net                                                    |       | —       |       | 4,747                        |       | —                                |       | —           |       | 4,747                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Loss from continuing  operations  before income taxes                     |       | (6,211       | )          | (5,200                       | )          | (50                                   | )          | 6,261            |       | (5,200                     | )          |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income tax  provision                                                     |       | —       |       | 1,011                        |       | —                                |       | —           |       | 1,011                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net loss                                                                  |       | $            | (6,211     | )                            | $          | (6,211                                | )          | $                | (50        | )                          | $          | 6,261 |   | $ | (6,211 | ) |

 

27

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**SuccessorPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Operations For The Period Ended April 13 toJune 30, 2006 ( inthousands)**
| ** **                                                                | ** ** | **Holdings** | ** ** | **Festival  Fun Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| REVENUES - net                                                            |       | $            | —     |                         | $          | 24,709                                |       | $                | 14,753     |                       | $          | — |   | $ | 39,462 |   |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING COSTS  AND EXPENSES                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cost of revenue (exclusive of depreciation and  amortization shown below) |       |         |       | 16,994                       |       | 12,213                                |       |             |       | 29,207                     |       |
| Selling, general and administrative                                       |       |         |       | 3,805                        |       | 1,666                                 |       |             |       | 5,471                      |       |
| Depreciation and amortization                                             |       |         |       | 4,040                        |       | 261                                   |       |             |       | 4,301                      |       |
| Gain on disposal of assets                                                |       | —       |       | —                       |       | —                                |       | —           |       | —                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Total operating costs and expenses                                        |       | —       |       | 24,839                       |       | 14,140                                |       | —           |       | 38,979                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING INCOME  (LOSS)                                                  |       | —       |       | (130                         | )          | 613                                   |       | —           |       | 483                        |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Equity income (loss)  in earnings of subsidiaries                         |       | (3,715       | )          | 613                          |       | —                                |       | 3,102            |       | —                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OTHER EXPENSE                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Interest expense - net                                                    |       | —       |       | 4,154                        |       | —                                |       | —           |       | 4,154                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income (loss)  from continuing operations  before income taxes            |       | (3,715       | )          | (3,671                       | )          | 613                                   |       | 3,102            |       | (3,671                     | )          |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income tax  provision                                                     |       | —       |       | 44                           |       | —                                |       | —           |       | 44                         |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net income (loss)                                                         |       | $            | (3,715     | )                            | $          | (3,715                                | )          | $                | 613        |                       | $          | 3,102 |   | $ | (3,715 | ) |

 

28

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**PredecessorPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Operations For The Period Ended April 1 toApril 12, 2006 ( inthousands)**
| ** **                                                                | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **FFP  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|-----------------------|------------|
| REVENUES - net                                                            |       | $                            | 2,096      |                                  | $          | 505              |       | $                     | —     |   | $ | 2,601 |   |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| OPERATING COSTS  AND EXPENSES                                             |       |                         |       |                                  |       |             |       |                  |       |
| Cost of revenue (exclusive of depreciation and  amortization shown below) |       | 2,135                        |       | 781                                   |       |             |       | 2,916                 |       |
| Selling, general and administrative                                       |       | 371                          |       | 26                                    |       |             |       | 397                   |       |
| Depreciation and amortization                                             |       | 332                          |       | (34                                   | )          |             |       | 298                   |       |
| Gain on disposal of assets                                                |       | —                       |       | —                                |       | —           |       | —                |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Total operating costs and expenses                                        |       | 2,838                        |       | 773                                   |       | —           |       | 3,611                 |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| OPERATING LOSS                                                            |       | (742                         | )          | (268                                  | )          | —           |       | (1,010                | )          |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Equity loss in  earnings of subsidiaries                                  |       | (268                         | )          | —                                |       | 268              |       | —                |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| OTHER EXPENSE                                                             |       |                         |       |                                  |       |             |       |                  |       |
| Interest expense - net                                                    |       | 671                          |       | —                                |       | —           |       | 671                   |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Loss from continuing  operations before income taxes                      |       | (1,681                       | )          | (268                                  | )          | 268              |       | (1,681                | )          |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Income tax  provision                                                     |       | —                       |       | —                                |       | —           |       |                  |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Net loss                                                                  |       | $                            | (1,681     | )                                     | $          | (268             | )          | $                     | 268        |   | $ | (1,681 | ) |

 

29

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**SuccessorPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Operations For The Six Month Period EndedJune 30, 2007 ( inthousands)**
| ** **                                                                | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| REVENUES - net                                                            |       | $            | —     |                         | $          | 46,057                                |       | $                | 20,480     |                       | $          | — |   | $ | 66,537 |   |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING COSTS AND  EXPENSES                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cost of revenue  (exclusive of depreciation and amortization shown below) |       | —       |       | 37,897                       |       | 19,497                                |       | —           |       | 57,394                     |       |
| Selling, general  and administrative                                      |       | —       |       | 9,462                        |       | 2,705                                 |       | —           |       | 12,167                     |       |
| Depreciation and  amortization                                            |       | —       |       | 5,800                        |       | 3,430                                 |       | —           |       | 9,230                      |       |
| Gain on disposal  of assets                                               |       | —       |       | (35                          | )          | —                                |       | —           |       | (35                        | )          |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Total operating  costs and expenses                                       |       | —       |       | 53,124                       |       | 25,632                                |       | —           |       | 78,756                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING LOSS                                                            |       | —       |       | (7,067                       | )          | (5,152                                | )          | —           |       | (12,219                    | )          |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Equity loss in earnings  of subsidiaries                                  |       | (16,862      | )          | (5,152                       | )          | —                                |       | 22,014           |       | —                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OTHER EXPENSE                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Interest expense  - net                                                   |       | —       |       | 9,162                        |       | —                                |       | —           |       | 9,162                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Loss from continuing  operations   before income taxes                    |       | (16,862      | )          | (21,381                      | )          | (5,152                                | )          | 22,014           |       | (21,381                    | )          |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income tax benefit                                                        |       | —       |       | (4,519                       | )          | —                                |       | —           |       | (4,519                     | )          |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net loss                                                                  |       | $            | (16,862    | )                            | $          | (16,862                               | )          | $                | (5,152     | )                          | $          | 22,014 |   | $ | (16,862 | ) |

 

30

----

**SuccessorPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Operations For The Period Ended April 13 toJune 30, 2006 ( inthousands)**
| ** **                                                                | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| REVENUES - net                                                            |       | $            | —     |                         | $          | 24,709                                |       | $                | 14,753     |                       | $          | — |   | $ | 39,462 |   |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING COSTS AND  EXPENSES                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Cost of revenue  (exclusive of depreciation and amortization shown below) |       |         |       | 16,994                       |       | 12,213                                |       |             |       | 29,207                     |       |
| Selling, general  and administrative                                      |       |         |       | 3,805                        |       | 1,666                                 |       |             |       | 5,471                      |       |
| Depreciation and  amortization                                            |       |         |       | 4,040                        |       | 261                                   |       |             |       | 4,301                      |       |
| Gain on disposal  of assets                                               |       | —       |       | —                       |       | —                                |       | —           |       | —                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Total operating  costs and expenses                                       |       | —       |       | 24,839                       |       | 14,140                                |       | —           |       | 38,979                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OPERATING INCOME (LOSS)                                                   |       | —       |       | (130                         | )          | 613                                   |       | —           |       | 483                        |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Equity income (loss) in  earnings of subsidiaries                         |       | (3,715       | )          | 613                          |       | —                                |       | 3,102            |       | —                     |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| OTHER EXPENSE                                                             |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Interest expense  - net                                                   |       | —       |       | 4,154                        |       | —                                |       | —           |       | 4,154                      |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income (loss) from  continuing operations   before income taxes           |       | (3,715       | )          | (3,671                       | )          | 613                                   |       | 3,102            |       | (3,671                     | )          |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Income tax provision                                                      |       | —       |       | 44                           |       | —                                |       | —           |       | 44                         |       |
|                                                                      |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net income (loss)                                                         |       | $            | (3,715     | )                            | $          | (3,715                                | )          | $                | 613        |                       | $          | 3,102 |   | $ | (3,715 | ) |

 

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**PredecessorPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Operations For The Period Ended January 1 toApril 12, 2006 ( inthousands)**
| ** **                                                                | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **FFP  Consolidated** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|-----------------------|------------|
| REVENUES - net                                                            |       | $                            | 17,818     |                                  | $          | 5,579            |       | $                     | —     |   | $ | 23,397 |   |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| OPERATING COSTS  AND EXPENSES                                             |       |                         |       |                                  |       |             |       |                  |       |
| Cost of revenue (exclusive of depreciation and  amortization shown below) |       | 18,148                       |       | 8,042                                 |       |             |       | 26,190                |       |
| Selling, general and administrative                                       |       | 3,151                        |       | 1,057                                 |       |             |       | 4,208                 |       |
| Depreciation and amortization                                             |       | 2,825                        |       | 1,653                                 |       |             |       | 4,478                 |       |
| Gain on disposal of assets                                                |       | —                       |       | —                                |       | —           |       | —                |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Total operating costs and expenses                                        |       | 24,124                       |       | 10,752                                |       | —           |       | 34,876                |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| OPERATING LOSS                                                            |       | (6,306                       | )          | (5,173                                | )          | —           |       | (11,479               | )          |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Equity loss in  earnings of subsidiaries                                  |       | (5,173                       | )          | —                                |       | 5,173            |       | —                |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| OTHER EXPENSE                                                             |       |                         |       |                                  |       |             |       |                  |       |
| Interest expense - net                                                    |       | 6,674                        |       | —                                |       | —           |       | 6,674                 |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Loss from  continuing operations   before income taxes                    |       | (18,153                      | )          | (5,173                                | )          | 5,173            |       | (18,153               | )          |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Income tax  provision                                                     |       | —                       |       | —                                |       | —           |       |                  |       |
|                                                                      |       |                         |       |                                  |       |             |       |                  |       |
| Net loss                                                                  |       | $                            | (18,153    | )                                     | $          | (5,173           | )          | $                     | 5,173      |   | $ | (18,153 | ) |

 

32

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**SUCCESSORPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Cash Flows For The Six Month Period EndedJune 30, 2007 ( inthousands)**
| ** **                                        | ** ** | **Holdings** | ** ** | **Festival  Fun Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|---------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| Net cash used in  operating activities            |       | $            | —     |                         | $          | (338                                  | )          | $                | (379       | )                          | $          | — |   | $ | (717 | ) |
|                                              |       |         |       |                         |       |                                  |       |             |       |                       |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**        |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                              |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Purchases of  property and equipment              |       |         |       | (7,438                       | )          | (2,912                                | )          |             |       | (10,350                    | )          |
| Proceeds from  disposal of assets                 |       |         |       | 72                           |       |                                  |       |             |       | 72                         |       |
|                                              |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash used in investing activities             |       | —       |       | (7,366                       | )          | (2,912                                | )          | —           |       | (10,278                    | )          |
|                                              |       |         |       |                         |       |                                  |       |             |       |                       |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**        |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                              |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Capital  Contribution                             |       | 800          |       | —                       |       | —                                |       | —           |       | 800                        |       |
| Return of  Capital                                |       | (786         | )          | —                       |       | —                                |       | —           |       | (786                       | )          |
| Proceeds from  long-term debt                     |       | 22,000       |       | —                       |       | —                                |       | —           |       | 22,000                     |       |
| Payments on  long-term debt                       |       | (7,000       | )          | —                       |       | —                                |       | —           |       | (7,000                     | )          |
| Advances to  related party                        |       | (15,014      | )          | 11,332                       |       | —                                |       | 3,682            |       | —                     |       |
| Advances from  related party                      |       | —       |       | —                       |       | 3,682                                 |       | (3,682           | )          | —                     |       |
| Payments on  capital leases                       |       | —       |       | (177                         | )          | —                                |       | —           |       | (177                       | )          |
| Distributions to  member                          |       | —       |       | —                       |       | —                                |       | —           |       | —                     |       |
|                                              |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash provided by financing activities         |       | —       |       | 11,155                       |       | 3,682                                 |       | —           |       | 14,837                     |       |
|                                              |       |         |       |                         |       |                                  |       |             |       |                       |       |
| NET INCREASE IN  CASH AND   CASH EQUIVALENTS      |       | —       |       | 3,451                        |       | 391                                   |       | —           |       | 3,842                      |       |
|                                              |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH AND CASH  EQUIVALENTS,   BEGINNING OF PERIOD |       |         |       | 1,966                        |       | 124                                   |       |             |       | 2,090                      |       |
|                                              |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH AND CASH  EQUIVALENTS,   END OF PERIOD       |       | $            | —     |                         | $          | 5,417                                 |       | $                | 515        |                       | $          | — |   | $ | 5,932 |   |

 

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**SUCCESSORPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Cash Flows For The Period Ended April 13 toJune 30, 2006 ( inthousands)**
| ** **                                          | ** ** | **Holdings** | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|-----------------------------------------------------|------------|--------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|----------------------------|------------|
| Net cash  provided by operating activities          |       | $            | —     |                         | $          | 9,503                                 |       | $                | 1,271      |                       | $          | — |   | $ | 10,774 |   |
|                                                |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:              |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                                |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Payment for  acquisition of FFP, net                |       | (37,599      | )          |                         |       |                                  |       |             |       | (37,599                    | )          |
| Purchases of  property and equipment                |       |         |       | (1,919                       | )          | (1,437                                | )          |             |       | (3,356                     | )          |
| Proceeds from  disposal of assets                   |       |         |       | —                       |       |                                  |       |             |       |                       |       |
|                                                |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash used in investing activities               |       | (37,599      | )          | (1,919                       | )          | (1,437                                | )          | —           |       | (40,955                    | )          |
|                                                |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:              |       |         |       |                         |       |                                  |       |             |       |                       |       |
|                                                |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Issuance of  common stock                           |       | 54,260       |       |                         |       |                                  |       |             |       | 54,260                     |       |
| Capital  Contribution                               |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Return of  Capital                                  |       | (500         | )          |                         |       |                                  |       |             |       | (500                       | )          |
| Proceeds from  long-term debt                       |       | 163,500      |       |                         |       |                                  |       |             |       | 163,500                    |       |
| Payments on  long-term debt                         |       |         |       | (180,095                     | )          |                                  |       |             |       | (180,095                   | )          |
| Payments for  cost of financing                     |       | (5,575       | )          |                         |       |                                  |       |             |       | (5,575                     | )          |
| Advances to  related party                          |       | (174,086     | )          | (607                         | )          | —                                |       | 174,693          |       |                       |       |
| Advances from  related party                        |       |         |       | 174,086                      |       | 607                                   |       | (174,693         | )          |                       |       |
| Payments on  capital leases                         |       |         |       | 116                          |       | (116                                  | )          |             |       |                       |       |
| Distributions to  member                            |       | —       |       | —                       |       | —                                |       | —           |       | —                     |       |
|                                                |       |         |       |                         |       |                                  |       |             |       |                       |       |
| Net cash provided by (used in) financing activities |       | 37,599       |       | (6,500                       | )          | 491                                   |       | —           |       | 31,590                     |       |
|                                                |       |         |       |                         |       |                                  |       |             |       |                       |       |
| NET INCREASE IN  CASH AND   CASH EQUIVALENTS        |       | —       |       | 1,084                        |       | 325                                   |       | —           |       | 1,409                      |       |
|                                                |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH AND CASH  EQUIVALENTS,   BEGINNING OF PERIOD   |       |         |       | 4,975                        |       | 141                                   |       |             |       | 5,116                      |       |
|                                                |       |         |       |                         |       |                                  |       |             |       |                       |       |
| CASH AND CASH  EQUIVALENTS,   END OF PERIOD         |       | $            | —     |                         | $          | 6,059                                 |       | $                | 466        |                       | $          | — |   | $ | 6,525 |   |

 

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**PredecessorPalace Entertainment Holdings, Inc.Condensed Consolidated Statement of Cash Flows For The Period Ended January 1to April 12, 2006 ( inthousands)**
| ** **                                              | ** ** | **Festival Fun  Parks** | ** ** | **Combined  Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **FFP  Consolidated** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|---------------------------------------|------------|------------------|------------|-----------------------|------------|
| Net cash used in  operating activities                  |       | $                            | (5,481     | )                                     | $          | (2,850           | )          |                  |       | $ | (8,331 | ) |
|                                                    |       |                         |       |                                  |       |             |       |                  |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                  |       |                         |       |                                  |       |             |       |                  |       |
|                                                    |       |                         |       |                                  |       |             |       |                  |       |
|                                                    |       |                         |       |                                  |       |             |       |                  |       |
| Purchases of  property and equipment                    |       | (1,269                       | )          | (2,682                                | )          |             |       | (3,951                | )          |
| Proceeds from  disposal of assets                       |       |                         |       |                                  |       |             |       |                  |       |
|                                                    |       |                         |       |                                  |       |             |       |                  |       |
| Net cash used in investing activities                   |       | (1,269                       | )          | (2,682                                | )          | —           |       | (3,951                | )          |
|                                                    |       |                         |       |                                  |       |             |       |                  |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                  |       |                         |       |                                  |       |             |       |                  |       |
|                                                    |       |                         |       |                                  |       |             |       |                  |       |
| Issuance of  Common Stock                               |       |                         |       |                                  |       |             |       |                  |       |
| Capital  Contribution                                   |       |                         |       |                                  |       |             |       |                  |       |
| Return of  Capital                                      |       |                         |       |                                  |       |             |       |                  |       |
| Proceeds from  long-term debt                           |       | 13,100                       |       |                                  |       |             |       | 13,100                |       |
| Payments on  long-term debt                             |       | (767                         | )          |                                  |       |             |       | (767                  | )          |
| Payments for  cost of financing                         |       |                         |       |                                  |       |             |       |                  |       |
| Advances to  related party                              |       | (5,558                       | )          | —                                |       | 5,558            |       |                  |       |
| Advances from  related party                            |       |                         |       | 5,558                                 |       | (5,558           | )          |                  |       |
| Payments on  capital leases                             |       | (118                         | )          | —                                |       |             |       | (118                  | )          |
| Distributions to  member                                |       | (57                          | )          |                                  |       |             |       | (57                   | )          |
|                                                    |       |                         |       |                                  |       |             |       |                  |       |
| Net cash provided by financing activities               |       | 6,600                        |       | 5,558                                 |       | —           |       | 12,158                |       |
|                                                    |       |                         |       |                                  |       |             |       |                  |       |
| NET INCREASE  (DECREASE) IN CASH AND   CASH EQUIVALENTS |       | (150                         | )          | 26                                    |       | —           |       | (124                  | )          |
|                                                    |       |                         |       |                                  |       |             |       |                  |       |
| CASH AND CASH  EQUIVALENTS,   BEGINNING OF PERIOD       |       | 5,125                        |       | 115                                   |       |             |       | 5,240                 |       |
|                                                    |       |                         |       |                                  |       |             |       |                  |       |
| CASH AND CASH  EQUIVALENTS,   END OF PERIOD             |       | $                            | 4,975      |                                  | $          | 141              |       | $                     | —     |   | $ | 5,116 |   |
|                                                         |            |                              |            |                                       |            |                  |            |                       |            |  |  |  |  |

 

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**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

OVERVIEW

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

Ourtypical WP offers 15 to 25 rides and attractions including variable depthpools, water slides, wave pools, action and “lazy” rivers, tube rides andwater-themed adventure areas, as well as interactive children’s play areas. Wegenerate revenue in our WPs from general admission ticket sales, the sales offood, beverages, souvenir items, strollers, locker rentals and parking.

Withlocations in California, Florida, Georgia, New York and Texas, our FECs offer avariety of attractions, including some or all of the following: miniature golfcourses, go-karts, bumper boats, thrill rides, state-of-the-art arcade games,redemption games, batting cages, rock walls, laser tag and children’s rides.Two of our FECs offer dragster racing on six racing tracks. Our FECs typicallydo not charge a general admission fee; guests only pay for those games theywish to utilize. Additionally, under certain promotions, we offer bundledpricing and group packages. Our FECs generate revenues from attractions and thesales of food, beverages and merchandise.

Attendanceat our Parks is the key driver of our revenues and profitability. Adverseweather conditions significantly reduce our guests’ attendance. In addition,our Parks also are subject to changing consumer tastes, preferences anddemands, which directly affect attendance and revenue per guest. In general, wecompete indirectly with all phases of the entertainment and recreation industrywithin our primary markets, including movie theaters, bowling alleys, skatingrinks, sporting events, restaurants, zoos, museums, carnivals, aquariums,resorts, natural and historical attractions and playgrounds.

Inorder to anticipate and adapt to changing consumer preferences and maintain andincrease attendance, we must invest in new rides, amusements, arcade games andattractions.

Ouroperating costs and expenses consist of the following: cost of revenue, whichprimarily includes costs of products sold like food and beverage, arcaderedemption prizes and merchandise; salaries and benefits, which include thecosts of our park level full-time and part time employees; operating andmaintenance, which include outside services, supplies, spare parts, andutilities; rent (a portion of which are percentage rents) and property taxes,which includes all park level rent and property tax expenses (offset by rentalincome earned from the sublease of building space and/or land); selling,general and administrative expenses, which includes all corporate overheadincluding corporate salaries, office rent, insurance costs and fees to outsideprofessional service providers, other operating costs which include alladvertising, promotion and marketing program expenses (including television,radio and print advertising); and depreciation and amortization, which isprimarily related to our leasehold improvements, equipment and trademarks. Allof our facilities are on leased property. Certain of our expenses arerelatively fixed, and costs for full-time employees, outside services,maintenance, utilities, insurance, depreciation and amortization and occupancycosts do not vary significantly with attendance. We add significant numbers ofseasonal employees during the warmer months of the year, primarily fromMemorial Day to Labor Day. Our seasonal 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.

Ournine WPs and one nature park have gated entrances, which allow us to trackadmissions and per capita spending for these Parks. We generally do not trackattendance and per capita spending for our 23 non-gated FECs.

Ourbusiness is highly seasonal. Typically, our WPs operate on an approximate110-day operating season, generally from Memorial Day through Labor Day, andthough our FECs are open year-round, there is also significantly greaterattendance at our FECs during this period and other periods when children areout of school.  More than 75% of ourrevenues are generated during the second and third calendar quarters of eachyear.  We believe that the spending atour FECs varies widely among our customers based on age and other demographicfactors, and the location and nature of the attractions of the park.

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Ourbusiness is concentrated geographically and by the size of our Parks. Seventeenof our Parks are located in California and accounted for 50%****of our revenue for the six month period ended June 30,2007.

Theperiod April 13, 2006 to June 30, 2006 reflects the results of operations bythe Company following the acquisition of FFP while the period January 1 toApril 12, 2006 reflect the operations of FFP pre-acquisition.  Therefore,the periods are not comparable.  However, for the purpose of comparing theoperations for the three and six months ended June 30, 2007 and 2006, thepre-acquisition and post-acquisition periods in 2006 have been combined in thediscussions below:

**Comparison of Three Month Period Ended June 30, 2007 and 2006**

Ourcombined net loss was $6.2 million and $5.4 million for the three month periodended June 30, 2007 and 2006, respectively. The following table sets forthstatement of operations data and other data for the periods indicated: 
| ** **                              | ** ** | **For the three months ended June 30,** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)**                                  | ** ** |
| **Statement  of Operations:**           |       |                                                                  |       |   |   |
| ** **                              |       |                                                                  |       |   |   |
| **Revenues**                            |       |                                                                  |       |   |   |
| FECs                                    |       | $                                                                     | 24,542     |   | $ | 24,317 |   |
| WPs                                     |       | 20,462                                                                |       | 17,746 |   |
| Total revenues                          |       | 45,004                                                                |       | 42,063 |   |
|                                    |       |                                                                  |       |   |   |
| **Operating  costs and expenses**       | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
| Cost of revenues                        |       | 33,665                                                                |       | 32,123 |   |
| % of revenues                           |       | 74.8                                                                  | %          | 76.4 | % |
| Selling, general and administrative     |       | 7,281                                                                 |       | 5,868 |   |
| % of revenues                           |       | 16.2                                                                  | %          | 14.0 | % |
| Depreciation and amortization           |       | 4,506                                                                 |       | 4,599 |   |
| Loss on disposal of assets              |       | 5                                                                     |       | — |   |
| **Total  operating costs and expenses** |       | 45,457                                                                |       | 42,590 |   |
| Operating loss                          |       | (453                                                                  | )          | (527 | ) |
| Interest expense, net                   |       | 4,747                                                                 |       | 4,825 |   |
| **Net  loss from operations**           |       | (5,200                                                                | )          | (5,352 | ) |
| **Income  tax provision**               |       | 1,011                                                                 |       | 44 |   |
|                                    |       |                                                                  |       |   |   |
| **Net loss**                            |       | $                                                                     | (6,211     | ) | $ | (5,396 | ) |

 

We have two reportablesegments, FECs and WPs. The accounting policies of the segments are the same asthose described in critical accounting policies below. Net Income (loss) of thesegments does not include interest income or expense and provision for incometaxes. The following table sets forth certain statement of operations data bysegment and other data for the periods indicated:
| ** **                          | ** ** | **For the three months ended June 30,** | ** ** | **For the three months ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                          | ** ** | **WPs**                                                               | ** ** | **FECs**                                                              | ** ** |
| ** **                          | ** ** | **2007**                                                              | ** ** | **2006**                                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**                                  | ** ** | **(Dollars in thousands)**                                  | ** ** |
| Revnues, net                        |       | $                                                                     | 20,462     |                                                                  | $          | 17,746 |   | $ | 24,542 |   | $ | 24,317 |   |
| Segment level  income (loss) (1)    |       | (603                                                                  | )          | (1,227                                                                | )          | 4,176 |   | 3,842 |   |
| Segment level capital  expenditures |       | 3,037                                                                 |       | 2,559                                                                 |       | 2,219 |   | 1,333 |   |
|                                     |            |                                                                       |            |                                                                       |            |  |  |  |  |  |  |  |  |

----

(1)             See*footnote 12, Segment Information Disclosure,*inthe “Notes to the Condensed Consolidated Financial Statements” for thereconciliation between segment-level earnings (loss) and the Company’s netincome (loss).

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| ** **              | ** ** | **For the three months ended June 30,** | ** ** |
|-------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                                              | ** ** | **2006** | ** ** |
| **WP  operating data:** | ** ** | ** **                                                            | ** ** | ** ** | ** ** |
|                    |       |                                                                  |       |   |   |
| WP Attendance           |       | 721,574                                                               |       | 657,601 |   |
|                    |       |                                                                  |       |   |   |
| Revenue per guest       |       | $                                                                     | 28.36      |   | $ | 26.99 |   |
|                         |            |                                                                       |            |  |  |  |  |

 

**Three month periodended June 30, 2007 and 2006**

*Revenue.*  Revenue for the three month period ended June30, 2007 totaled $45.0 million compared to $42.1 million for thethree month period ended June 30, 2006, an increase of $2.9 million or7.0%.  FEC revenues increased $0.2million or 0.9% over the same period in 2006. FEC revenue increased this quarter as compared to the same quarter in2006 even though there was a timing difference in the Easter break with theprimary benefit of increased revenue occurring in the first quarter of 2007 ascompared to the primary benefit occurring in the second quarter of 2006.  In addition, the growth rate for the secondquarter continued to be reduced as a result of unfavorable weather in Texasthat adversely effected four FEC locations. Good weather in California and the southeast locations combined withpricing initiatives, increased capital spending, and last year’s initiatives toimprove the park appearances and the quality of the guest service contributedto this revenue increase.  WP revenueincreased by $2.7 million or 15.3% over the same period in 2006.  The WP revenue increase includes $1.0 millionof revenue for Raging Waters Sacramento which is a new park that beganoperations in the second quarter of 2007. The additional revenue increase at the WPs is also attributed to  pricing incentives, heavier season passrevenue, and increase in attendance.

*Cost of revenue.*  Our park level operating expenses totaled$33.7 million for the three month period ended June 30, 2007 compared to $32.1million for the same period in 2006, an increase of $1.6 million or 4.8%.Operating expenses as a percentage of revenue decreased to 74.8% in 2007compared to 76.4% in 2006.  The primarydrivers in each expense category were as follows:

·                  Cost of productssold increased $0.4 million or 12.2% for the three month period ended June 30,2007 compared to the same period in 2006 primarily due to revenue drivenincremental food, beverage and merchandise costs.  Food and beverage costs for the FECs as apercentage of revenue decreased which was offset by an increase for the WPs,for the three month period ended June 30, 2007 compared to the same period in 2006.

·                  Salaries andbenefits increased $0.8 million or 5.6% for the three month period ended June30, 2007 compared to the same period in 2006. The primary cause of the increase was due to the newly acquired park,Raging Waters Sacramento.  With revenue increasing7%, the Company has controlled and leveraged labor during this period byreducing overall hours and improving productivity.  This was accomplished despite minimum wageincreases.

·                  Operating andmaintenance costs were comparable, increasing less than 1%, for the three monthperiod ended June 30, 2007 compared to the same period in 2006.

·                  Rent andproperty taxes increased $0.3 million or 6.0% for the three month period endedJune 30, 2007 compared to the same period in 2006 as a result of the additionof the new park, Raging Waters Sacramento. The increase is also due to an increase in revenue, as several of therent agreements have rent expense based on a percentage of revenue.

*Selling, general and administrativeexpenses.*  Selling,general and administrative expenses totaled $7.3 million for the three monthperiod ended June 30, 2007 compared to $5.9 million for the same period in2006, an increase of $1.4 million or 24.1%.  The primary causes were a $0.3 millionincrease in severance related costs associated with the corporatereorganization at the beginning of 2007, a $0.5 million increase in bonuses dueto an expectation of a better year than 2006, and a $0.4 million increase inprofessional audit and legal fees attributable to being a public company.

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*Depreciation and amortization. *Depreciation and amortization expenses were comparable for the threemonth period ended June 30, 2007 to the same period in 2006.

*Interest expense, net*. Interest expense, net totaled $4.7 million for the three monthperiod ended June 30, 2007 compared to$4.8 million during the same period in 2006, a decrease of $0.1 million or1.6%.  The decrease in interest wasprimarily due to lower debt levels and lower interest rates that resulted fromthe new capital structure implemented at the time of the Acquisition.  The debt extinguishment fees relating to theloans repaid as of the Acquisition date were recorded to goodwill.

*Income tax provision. * The Company recorded an income tax provisionof $1.0 million for the three month period ended June 30, 2007 compared to $0.1million for the three month period ended June 30, 2006.  The primary difference was a valuationallowance of $2.3 million that was offset against the income tax benefit in2007. The valuation allowance was determined based on the excess of theprojected 2007 fiscal year net operating losses that cannot be offset againstthe prior year’s taxable income recognized during the stub period April 13to December 31, 2006.

**Comparison of Six Months Ended June 30, 2007 and 2006**

Ourcombined net loss was $16.9 million and $21.9 million for the six month periodended June 30, 2007 and 2006, respectively. The following table sets forthstatement of operations data and other data for the periods indicated: 
| ** **                              | ** ** | **For the six month period ended June 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **2007**                                                                       | ** ** | **2006** | ** ** |
| ** **                              | ** ** | **(Dollars in thousands)**                                           | ** ** |
| **Statement  of Operations:**           | ** ** | ** **                                                                     | ** ** | ** ** | ** ** |
|                                    |       |                                                                           |       |   |   |
| **Revenues**                            | ** ** | ** **                                                                     | ** ** | ** ** | ** ** |
| FECs                                    |       | $                                                                              | 43,139     |   | $ | 41,421 |   |
| WPs                                     |       | 23,398                                                                         |       | 21,438 |   |
| Total revenues                          |       | 66,537                                                                         |       | 62,859 |   |
|                                    |       |                                                                           |       |   |   |
| **Operating  costs and expenses**       | ** ** | ** **                                                                     | ** ** | ** ** | ** ** |
| Cost of revenues                        |       | 57,394                                                                         |       | 55,397 |   |
| % of revenues                           |       | 86.3                                                                           | %          | 88.1 | % |
| Selling, general and administrative     |       | 12,167                                                                         |       | 9,679 |   |
| % of revenues                           |       | 18.3                                                                           | %          | 15.4 | % |
| Depreciation and amortization           |       | 9,230                                                                          |       | 8,779 |   |
| Gain on disposal of assets              |       | (35                                                                            | )          | — |   |
| **Total  operating costs and expenses** |       | 78,756                                                                         |       | 73,855 |   |
| Operating loss                          |       | (12,219                                                                        | )          | (10,996 | ) |
| Interest expense, net                   |       | 9,162                                                                          |       | 10,828 |   |
| **Net  loss from operations**           |       | (21,381                                                                        | )          | (21,824 | ) |
| **Income  tax (benefit) provision**     |       | (4,519                                                                         | )          | 44 |   |
|                                    |       |                                                                           |       |   |   |
| **Net loss**                            |       | $                                                                              | (16,862    | ) | $ | (21,868 | ) |

 

39

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We have two reportablesegments, FECs and WPs. The accounting policies of the segments are the same asthose described in critical accounting policies below. Net Income (loss) of thesegments does not include interest income or expense and provision for incometaxes. The following table sets forth certain statement of operations data bysegment and other data for the periods indicated:
| ** **                          | ** ** | **For the six month period ended June 30,** | ** ** | **For the six month period ended June 30,** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **WPs**                                                                        | ** ** | **FECs**                                                                       | ** ** |
| ** **                          | ** ** | **2007**                                                                       | ** ** | ** 2006**                                                                 | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                          | ** ** | **(Dollars in thousands)**                                           | ** ** | **(Dollars in thousands)**                                           | ** ** |
| Revenues, net                       |       | $                                                                              | 23,398     |                                                                           | $          | 21,438 |   | $ | 43,139 |   | $ | 41,421 |   |
| Segment level  income (loss) (1)    |       | (8,422                                                                         | )          | (8,497                                                                         | )          | 4,348 |   | 3,564 |   |
| Segment level  capital expenditures |       | 6,444                                                                          |       | 4,853                                                                          |       | 3,814 |   | 2,405 |   |
|                                     |            |                                                                                |            |                                                                                |            |  |  |  |  |  |  |  |  |

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(1)             *See Footnote 12, Segment Information Disclosure,*in the “Notesto the Condensed Consolidated Financial Statements” for the reconciliationbetween segment-level earnings (loss) and the Company’s net income (loss).

 
| ** **              | ** ** | **For the six month period ended June 30,** | ** ** |
|-------------------------|------------|--------------------------------------------------------------------------------|------------|
| ** **              | ** ** | **2007**                                                                       | ** ** | **2006** | ** ** |
| **WP operating  data:** | ** ** | ** **                                                                     | ** ** | ** ** | ** ** |
|                    |       |                                                                           |       |   |   |
| WP Attendance           |       | 850,591                                                                        |       | 833,164 |   |
|                    |       |                                                                           |       |   |   |
| Revenue per  guest      |       | $                                                                              | 27.51      |   | $ | 25.73 |   |
|                    |       |                                                                           |       |   |   |
|                         |            |                                                                                |            |  |  |  |  |

 

**Six months ended June30, 2007 and 2006**

*Revenue.*  Revenue for the six month period ended June30, 2007 totaled $66.5 million compared to $62.9 million for the sixmonth period ended June 30, 2006, an increase of $3.6 million or 5.7%.  FEC revenues increased $1.7 million or 4.1%over the same period in 2006.  This wasachieved despite unfavorable weather in Texas that adversely effected four FEClocations.  Good weather in Californiaand the southeast locations combined with pricing initiatives, increasedcapital spending, and last year’s initiatives to improve the park appearancesand the quality of the guest service contributed to this revenue increase.  WP revenue increased by $2.0 million or 9.1%over the same period in 2006.  WP revenueincludes $1.0 million of revenue for Raging Waters Sacramento which is a newlyacquired park that began operations in the second quarter of 2007.  The additional revenue increase at the WPs isalso attributed to  pricing incentives,heavier season pass revenue, and the increase in attendance.

*Cost of revenue.*  Our park level operating expenses totaled$57.4 million for the six month period ended June 30, 2007 compared to $55.4million for the same period in 2006, an increase of $2.0 million or 3.4%.Operating expenses as a percentage of revenue decreased to 86.3% in 2007compared to 88.1% in 2006.  The primarydrivers in each expense category were as follows:

·                  Cost of productssold increased $0.4 million or 9.0% for the six month period ended June 30,2007 compared to the same period in 2006 primarily due to revenue drivenincremental food, beverage and merchandise costs. Food and beverage costs forthe FECs as a percentage of revenue decreased which was offset against the WPswhich increased for the six month period ended June 30, 2007 as compared to thesame period in 2006.

·                  Salaries andbenefits increased $0.6 million or 2.7% for the six month period ended June 30,2007 compared to the same period in 2006. The primary cause of the increase was due to the newly acquired park,Raging Waters Sacramento.  With revenueincreasing 5.7%, the Company has controlled and leveraged labor during thisperiod by reducing overall hours and improving productivity.  This was accomplished despite minimum wageincreases.

·                  Operating andmaintenance costs increased $0.7  million or 4.1% for the six month periodended June 30, 2007 compared to the same period in 2006.  The primary factor driving this change wasincreased revenue and a $0.3 million increase in the general liability selfinsurance reserve.

·                  Rent andproperty taxes increased $0.2 million or 2.3% for the six month period endedJune 30, 2007 compared to the same period in 2006 as a result of the additionof the new park, Raging Waters Sacramento. The increase is also due to an increase in revenue, as several of therent agreements have rent expense based on a percentage of revenue.

*Selling, general and administrativeexpenses.*  Selling,general and administrative expenses totaled $12.2 million for the six monthperiod ended June 30, 2007 compared to $9.7 million for the same period in2006, an increase of $2.5 million or 25.7%.  The increase was primarily driven by a $1.0 millionincrease in severance related costs associated with the corporatereorganization at the beginning of 2007, an increase in bonuses due to an expectation of a better year in 2007 than2006, and an increase in professional audit and legal fees attributable tobeing a public company.

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*Depreciation and amortization. *Depreciation and amortization expenses totaled $9.2 million for the sixmonth period ended June 30, 2007 and $8.8 million for the same period in 2006,an increase of $0.4 million or 5.1% for the six month period ended June 30,2007 compared to the same period in 2006.  The increase was a result of increasing property and equipmentand intangibles to fair market value and adjusting their economic useful livesin connection with the Acquisition.

*Interest expense, net*. Interest expense, net totaled $9.2 million for the six monthperiod ended June 30, 2007 compared to$10.8 million during the same period in 2006, a decrease of $1.6 million or15.4%.  The decrease in interest expensewas primarily due to the lower debt levels and lower interest rates thatresulted from the new capital structure implemented at the time of theAcquisition.  The debt extinguishmentfees relating to the loans repaid as of the Acquisition date were recorded togoodwill.

*Income tax benefit/provision. * The Company recorded an income tax benefit of$4.5 million for the six month period ended June 30, 2007 compared to an incometax provision of $0.1 million for the same period in 2006.  The Company recorded an income tax benefitsince it had a loss from operations for the six month period ended June 30,2007. The income tax benefit was offset against $2.3 million valuationallowance.  The valuation allowance wasdetermined based on the excess of the projected 2007 fiscal year net operatinglosses that cannot be offset against the prior year’s taxable income recognizedduring the stub period April 13toDecember 31, 2006.

**Liquidity and capital resources**

During the six month period ended June 30, 2007, netcash used in operating activities was $0.7 million and net cash provided byoperating activities in the same period in 2006 was $2.4 million. Because ourbusiness is seasonal and involves significant levels of cash transactions,factors impacting our net operating cash flows are the same as those impactingour cash-based revenues and expenses discussed above.

Net cash used in investing activities was $10.3million and $44.9 million for the six month period ended June 30, 2007 and2006, respectively.  Purchases ofproperty and equipment increased by approximately $3.0 million over the priorperiod as a result of the Sacramento acquisition and subsequent improvements tothe park.  In addition, in 2006, therewas the payment for the acquisition of FFP.

Net cash provided by financing activities for the sixmonth period ended June 30, 2007 was $14.8 million compared to $43.7 millionduring the same period in 2006.    Thenet cash provided in 2007 was primarily driven by the proceeds received fromour new senior secured revolving credit facility to fund working capitalrequirements.  In 2006,  the primary proceeds were related to theissuance of common stock relating to the Acquisition of FFP.

In connection with the Acquisition, we incurredsubstantial amounts of debt, including amounts outstanding under the Notes andour Revolver.  Interest payments on thisindebtedness significantly reduce our cash flow from operations. However, as aresult of the refinancing of our debt in connection with the Acquisition fromthe proceeds of equity contribution and the issuance of the Notes, our annualinterest expense has significantly decreased and we are no longer subject toannual debt amortization payments.  As ofJune 30, 2007, $150 million of Notes are outstanding and the principal is dueApril 12, 2014.  There was an interestpayment made on the Notes on April 16, 2007 with respect to the six monthperiod ending, June 30, 2007.

Our Revolver consists of a $40.0 million revolvingcredit facility. Due to the seasonal nature of our business, we are dependentupon our revolving credit facility to fund off-season expenses with seasonalborrowings typically peaking during our fiscal second quarter. Our ability toborrow under the revolving credit facility is dependent upon compliance withcertain conditions, including satisfying certain financial ratios and theabsence of any material adverse change.  As of June 30, 2007, there was $15.0 million outstanding on ourrevolving credit facility and $4.3 million of issued but undrawn letters ofcredit.

The degree to which we are leveraged could adverselyaffect our liquidity. Our liquidity could also be adversely affected byunfavorable weather, accidents or the occurrence of an event or condition,including negative publicity or significant local competitive events thatsignificantly reduce paid attendance and, therefore, revenue at any of ourParks. In addition, our anticipated cash flows could be materially adverselyaffected by the occurrence of certain of the risks described in “Risk Factors.”In that case, we would need to seek additional financing.

41

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We believe, based on historical and anticipatedoperating results, that cash flows from operations, available cash andavailable amounts under the Revolver will be adequate to meet our futureliquidity needs, including anticipated requirements for working capital,capital expenditures and scheduled debt requirements for the foreseeablefuture.

**Off balance sheet arrangements**

We have no off-balance sheet arrangements.

**Contractual Obligations**

The following table summarizes the timing of ourrequired payments due under various contractual obligations as of June 30,2007:
| ** **                         | ** ** | **Less than  One Year**    | ** ** | **One Year  to Three Years** | ** ** | **Three Years to  Five Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|------------------------------------|------------|--------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|----------------|------------|-----------|------------|
| ** **                         | ** ** | **(Dollars in thousands)** | ** ** |
| As of June 30,  2007:              |       |                                 |       |                                        |       |                                          |       |           |       |      |       |
| Long term debt  including interest |       | $                                    | 16,312     |                                        | $          | 32,624                                        |       | $              | 32,624     |      | $          | 182,624 |   | $ | 264,184 |   |
| Revolver (1)                       |       | 1,238                                |       | 2,476                                       |       | 2,476                                         |       | 15,000         |       | 21,190    |       |
| Capital lease  obligations         |       | 707                                  |       | 77                                          |       | —                                        |       | —         |       | 784       |       |
| Park and office  leases(2)         |       | 7,024                                |       | 27,113                                      |       | 26,833                                        |       | 224,448        |       | 285,418   |       |
| Total                              |       | $                                    | 25,281     |                                        | $          | 62,290                                        |       | $              | 61,933     |      | $          | 422,072 |   | $ | 571,576 |   |

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(1)             TheRevolver’s principal balance of $15,000 is not contractually due until2012.  The above reflects the amount ofinterest that would be due if the principal balance is paid in 2012.  Since the interest rate is variable, theCompany has assumed a variable interest rate of 8.25% per year.  The contractual due date does not indicatewhen the Revolver is expected to be repaid. Due to the seasonality of the business, amounts outstanding under theRevolver will fluctuate throughout the year.

(2)             Doesnot include annual rent escalations associated with the consumer price index orany percentage rent in excess of minimum levels.

**Recently issued accounting pronouncements**

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 159 (“SFAS No. 159”), *The Fair Value Option for Financial Assets andFinancial Liabilities*— *includingan amendment of FASB Statement No. 115*. SFAS No. 159 gives theCompany the irrevocable option to carry most financial assets and liabilitiesat fair value, with changes in fair value recognized in the statement ofoperations. SFAS No. 159 is effective for the Company’s 2008 fiscal year,although early adoption is permitted. The Company is currently assessing thepotential effect of SFAS No. 159 on its consolidated financial statements.

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

In July 2006, theFASB issued FASB Interpretation No. 48 (“FIN No. 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 No. 48 provides guidance on derecognition, classification,interest and penalties, accounting in interim periods and disclosurerequirements for uncertain tax positions. The Company adopted the provisions ofFIN No. 48, on January 1, 2007. The Company did not have any unrecognized taxbenefits and there was no effect on our financial condition or results ofoperations as a result of implementing FIN No. 48.

42

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In July 2006, theFASB issued Emerging Issues Task Forece (“EITF”) 06-3, (*How TaxesCollected from Customers and Remitted to Governmental Authorities Should BePresented in the Income Statement (That Is, Gross versus Net Presentation*))that requires disclosure of the accounting policy related to any tax assessedby a government authority in a revenue producing transaction (either gross ornet) and the amount of such taxes in both interim and annual financialstatements if the amounts are significant. The Company has adopted EITF 06-3 and the Condensed Consolidatedfinancial statements conform to its requirements. The Company’s policy is topresent the taxes collected from the customers and remitted to governmentalauthorities on a net basis.

**Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

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

*Currency Exchange Rates.*  We are not exposed to currency exchange raterisks.

**Item 4.CONTROLS AND PROCEDURES**

TheCompany’s management, with the participation of the Company’s Chief ExecutiveOfficer and Chief Financial Officer, has evaluated the effectiveness of theCompany’s disclosure controls and procedures as of June 30, 2007.  Based on that evaluation, the Company’s ChiefExecutive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of June 30, 2007.  The Company is not required to comply withSection 404 of the Sarbanes-Oxley Act of 2002, as amended, until December 31,2007, but has initiated efforts to further ensure the adequacy andeffectiveness of its internal controls. There were no material changes in the Company’s internal control overfinancial reporting during the second quarter.

**PART II.OTHER INFORMATION**

**Item 1. LEGAL PROCEEDINGS**

Fromtime to time, the Company is involved in litigation relating to claims arisingout of its operations in the normal course of business. As of June 30, 2007,the Company is not a party to any legal proceedings, the adverse outcome ofwhich, 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 Companyrecords reserves pursuant to Financial Accounting Standards Board Statement No5, *Accounting for Contingencies.*

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

The Company and MidOcean Partners have been named as defendants in alawsuit alleging, among other things, breach of a finder’s fee agreement andtortuous interference with such agreement in connection with theAcquisition.  The agreement at issue is between two tortious individualsand a company that are each separate and distinct from both the Company andMidOcean Partners.  The plaintiff, Steven Crowley (“Crowley”), assertsfive claims in his Amended Complaint dated January 5, 2007.  Crowley purports to hold the Companyresponsible for the alleged breach of a finder’s agreement between Crowley (andanother individual who is not a plaintiff) and VisionMaker, LLC (“VisionMaker”).  Crowley claims that the Company is thesuccessor in interest to VisionMaker. Although the lawsuit seeks aggregate damages in excess of $3.2 million,the Company has filed a motion to dismiss, which is currently pending in theUnited States District Court for the Southern District of New York.

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**Item 1A. RISK FACTORS**

**Risks related to our business**

Therehave been no material changes from the Risk Factors disclosed under the headingin Part I, Item 1A  of our Annual Reporton Form 10-K for the quarter ended June 30, 2007.

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

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

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

On May 30, 2007,Cynthia P. Kellogg, Chief Financial Officer, purchased 300 membership units(Class A) of Holdings for $300,000 in cash. Such Units were issued pursuant to the exemption from registrationcontained in Section 4(2) of the Securities Act as they were sold to asophisticated and accredited individual.

**Item 3. DEFAULTS UPON SENIORSECURITIES**

None.

**Item 4. SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

None.

**Item 5. OTHER INFORMATION**

None.

**Item 6. EXHIBITS**

See Exhibit Index

44

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**SIGNATURES**

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

|        |   | Palace Entertainment Holdings, Inc.           |
|--------|--------|-----------------------------------------------|
|   |   |                                          |
|   |   | /s/ Alexander Weber, Jr.                      |
|   |   | By: Alexander Weber, Jr.                      |
|   |   | Chief Executive Officer and President         |
|   |   | (Principal  Executive Officer)                |
|   |   |                                          |
|   |   | Dated: August 13, 2007                        |
|   |   |                                          |
|   |   |                                          |
|   |   | Palace Entertainment Holdings, Inc.           |
|   |   |                                          |
|   |   | /s/ Cynthia P. Kellogg                        |
|   |   | By: Cynthia P. Kellogg                        |
|   |   | Chief Financial Officer                       |
|   |   | (Principal  Financial and Accounting Officer) |
|   |   |                                          |
|   |   | Dated: August 13, 2007                        |

 

45

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**EXHIBITINDEX**
| Exhibit No. | ** ** | **Description of Document**                                                                                                          | ** ** |
|------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|             |       |                                                                                                                                           |       |
| 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 pursuant to Section 906 of the Sarbanes-Oxley Act of  2002† |       |
| 32.2             |       | Section 1350 Certification of Periodic Report by the  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002† |       |

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†                     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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