**UNITEDSTATES SECURITIES AND EXCHANGECOMMISSIONWashington, DC  20549**

**FORM 10-Q**

x    **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934****for the quarterly period ended July 2, 2006**

**OR**

o   ** TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)   OF THE SECURITIES EXCHANGE ACT OF 1934****for the transition period from           to           .**

**COMMISSIONFILE NUMBER:  N/A**

**PalaceEntertainment Holdings, Inc.**

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

Indicate by check mark whether the Registrant (1) 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 o  NA x

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 a shell company (asdefined in Rule 12b-2 of the Exchange Act).
|  | o  Yes  x  No |
|--|--------------------|

 

Common Stock, $.01 statedvalue per share, 100 shares outstanding as of July 2, 2006.

 

 

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**TABLEOF CONTENTS**
| PART I. CONDENSED FINANCIAL  INFORMATION                                                             |   |   |
|------------------------------------------------------------------------------------------------------|--------|--------|
| Item 1. Financial  Statements (unaudited)                                                            |   |   |
| 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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**CAUTIONARYNOTE REGARDING**

**FORWARD-LOOKING STATEMENTS ANDRISK FACTORS**

**(Cautionary Statements Under thePrivate Securities Litigation Reform Act of 1995)**

This quarterly report on Form10-Q contains forward-looking statements. Forward-lookingstatements are statements that are not historical facts, including statementsabout our beliefs and expectations or any statement that may predict, forecast,indicate or imply future results, performance, achievements or events. Forward-lookingstatements include, but are not limited to, statements generally preceded by,followed by or that include the words “believe,” “expect,” “anticipate,” “plan,”“estimate,” “intend,” “project,” “targets,” “likely,” “would,” “could” orsimilar expressions. These statements include, among others, statementsregarding our expected business outlook, anticipated financial and operatingresults, strategies, contingencies, financing plans, working capital needs,sources of liquidity, capital expenditures, amounts and timing of expenditures andcontemplated transactions.

Forward-looking statementsreflect our current expectations and are not guarantees of performance. Thesestatements are based on our management’s beliefs and assumptions, which in turnare based on currently available information. Important assumptions relating tothese forward-looking statements include, among others, assumptionsregarding demand for our water parks and family entertainment centers, expectedpricing levels, the timing and cost of planned capital expenditures, theestimated operational costs for each of our water parks and familyentertainment centers, expected outcomes of pending litigation, competitiveconditions and general economic conditions. These assumptions could proveinaccurate. Forward-looking statements involve risks and uncertainties,which could cause actual results to differ materially from those contained inany forward-looking statement. Many of these factors are beyond ourability to control or predict. Such factors may relate to, among other things:

·                  adverseweather conditions and other natural phenomena;

·                  seasonaloperations of water parks;

·                  riskof in-park accidents and health risks;

·                  changesin consumer preferences;

·                  reductionsin consumer disposable income;

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

·                  governmentaland environmental requirements and changes in those requirements;

·                  increasesin general liability and workers compensation claims;

·                  discontinuationof our leases pursuant to termination or default provisions;

·                  acquisitionand retention of key personnel;

·                  ourlevel of indebtedness; and

·                  restrictionscontained in our debt agreements.

You should not place unduereliance 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 tofuture events and are based on assumptions and subject to risks anduncertainties that may cause actual results to differ materially from trends,plans or expectations set forth in the forward-looking statements which,as a result, may adversely affect the value of, and our ability to makepayments on, the 10 7/8% Senior Notes issued by Festival Fun Parks, LCC and unconditionallyguaranteed by Palace Entertainment Holdings, Inc. (“Notes”). These risks anduncertainties may include those discussed in Item 1A of this report. New riskscan emerge 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 the forward-lookingstatements. Given such risks and uncertainties, we urge you to read this reportcompletely with the understanding that actual future results may be materiallydifferent from what we plan or expect.

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**PART I. FINANCIAL INFORMATION**

Item 1. FINANCIAL STATEMENTS

**PALACE ENTERTAINMENT HOLDINGS, INC.**

**CONDENSED CONSOLIDATEDBALANCE SHEETS (unaudited, in thousands except for per share amounts)As of December 31, 2005 and June 30, 2006**

 
|                                                                                  | ** ** | **Post-Acquisition** | ** ** | **Pre-Acquisition**  | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                                                       | ** ** | **June 30**     | ** ** | **December 31** | ** ** |
| ** **                                                                       | ** ** | **2006**             | ** ** | **2005**             | ** ** |
| **ASSETS**                                                                       | ** ** | ** **           |       |                 |       |
|                                                                             |       |                 |       |                 |       |
| CURRENT ASSETS                                                                   |       |                 |       |                 |       |
| Cash and cash equivalents                                                        |       | $                    | 6,525      |                 | $          | 5,240 |   |
| Inventories                                                                      |       | 2,817                |       | 3,295                |       |
| Prepaid expenses and other current assets                                        |       | 5,003                |       | 3,901                |       |
|                                                                             |       |                 |       |                 |       |
| Total current assets                                                             |       | 14,345               |       | 12,436               |       |
|                                                                             |       |                 |       |                 |       |
| PROPERTY AND  EQUIPMENT - Net                                                    |       | 127,446              |       | 112,388              |       |
|                                                                             |       |                 |       |                 |       |
| GOODWILL                                                                         |       | 69,996               |       | 37,471               |       |
|                                                                             |       |                 |       |                 |       |
| INTANGIBLES - Net                                                                |       | 20,400               |       | —               |       |
|                                                                             |       |                 |       |                 |       |
| OTHER ASSETS -  Net                                                              |       | 6,663                |       | 3,368                |       |
|                                                                             |       |                 |       |                 |       |
| TOTAL                                                                            |       | $                    | 238,850    |                 | $          | 165,663 |   |
|                                                                             |       |                 |       |                 |       |
| **LIABILITIES,  SHAREHOLDER’S EQUITY AND MEMBER’S INTEREST**           | ** ** | ** **           |       |                 |       |
|                                                                             |       |                 |       |                 |       |
| CURRENT  LIABILITIES:                                                            |       |                 |       |                 |       |
| Accounts payable                                                                 |       | $                    | 4,855      |                 | $          | 2,706 |   |
| Accrued interest                                                                 |       | 3,927                |       | 610                  |       |
| Accrued wages and payroll taxes                                                  |       | 3,318                |       | 2,485                |       |
| Other accrued liabilties                                                         |       | 9,267                |       | 7,155                |       |
| Unearned revenue                                                                 |       | 3,098                |       | 1,342                |       |
| Current portion of long-term debt                                                |       | 836                  |       | 7,870                |       |
|                                                                             |       |                 |       |                 |       |
| Total current liabilties                                                         |       | 25,301               |       | 22,168               |       |
|                                                                             |       |                 |       |                 |       |
| LONG-TERM DEBT -  Less current portion                                           |       | 159,682              |       | 157,374              |       |
|                                                                             |       |                 |       |                 |       |
| OTHER LONG-TERM  LIABILITIES                                                     |       | 3,364                |       | 3,260                |       |
|                                                                             |       |                 |       |                 |       |
| Total liabilities                                                                |       | 188,347              |       | 182,802              |       |
|                                                                             |       |                 |       |                 |       |
| COMMITMENTS AND  CONTINGENCIES                                                   |       |                 |       |                 |       |
|                                                                             |       |                 |       |                 |       |
| SHAREHOLDER’S  EQUITY:                                                      |       |                 |       |                 |       |
| Common stock, $.01 stated value, 1000 shares  authorized, 100 shares outstanding |       |                 |       |                 |       |
| Additional Paid-in Capital                                                       |       | 54,218               |       |                 |       |
| Accumulated Deficit                                                              |       | (3,715               | )          |                 |       |
|                                                                             |       |                 |       |                 |       |
| Total  Shareholder’s Equity                                                 |       | 50,504               |       |                 |       |
|                                                                             |       |                 |       |                 |       |
| MEMBER’S  INTEREST:                                                         |       | —               |       | (17,139              | )          |
|                                                                             |       |                 |       |                 |       |
| TOTAL                                                                            |       | $                    | 238,850    |                 | $          | 165,663 |   |

 

See notes toconsolidated financial statements.

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**PALACE ENTERTAINMENT HOLDINGS, INC.**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited/in thousands)**

**For the three months ended June 30, 2006 and 2005**

 
|                                            | ** ** | **Post-Acquisition**                        | ** ** | **Pre-Acquisition**                         | ** ** | **For the Three** | ** ** |
|--------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **For the Period**                | ** ** | **For the Period**                | ** ** | **months ended**       | ** ** |
| ** **                                 | ** ** | **April 13 to June 30** | ** ** | **April 1 to April 12** | ** ** | **June 30,**           | ** ** |
| ** **                                 | ** ** | **2006**                                    | ** ** | **2006**                                    | ** ** | **2005**                    | ** ** |
|                                       |       |                                        |       |                                        |       |                        |       |
| REVENUES—Net                          |       | $                                           | 39,462     |                                        | $          | 2,601                       |       | $ | 41,467 |   |
|                                       |       |                                        |       |                                        |       |                        |       |
| OPERATING COSTS  AND EXPENSES:             |       |                                        |       |                                        |       |                        |       |
|  Cost of  revenue                     |       | 29,207                                      |       | 2,916                                       |       | 29,664                      |       |
|  Selling,  general and administrative |       | 5,471                                       |       | 397                                         |       | 5,838                       |       |
|  Loss on  disposal of assets          |       |                                        |       |                                        |       | 195                         |       |
|  Depreciation  and amortization       |       | 4,301                                       |       | 298                                         |       | 4,420                       |       |
|                                       |       |                                        |       |                                        |       |                        |       |
| Total operating costs and expenses         |       | 38,979                                      |       | 3,611                                       |       | 40,117                      |       |
|                                       |       |                                        |       |                                        |       |                        |       |
| OPERATING INCOME  / (LOSS)                 |       | 483                                         |       | (1,010                                      | )          | 1,350                       |       |
|                                       |       |                                        |       |                                        |       |                        |       |
| OTHER EXPENSE:                             |       |                                        |       |                                        |       |                        |       |
|  Interest  expense, net               |       | 4,154                                       |       | 671                                         |       | 5,859                       |       |
|                                       |       |                                        |       |                                        |       |                        |       |
| (LOSS) FROM  OPERATIONS                    |       | (3,671                                      | )          | (1,681                                      | )          | (4,509                      | )          |
|                                       |       |                                        |       |                                        |       |                        |       |
| INCOME TAX  PROVISION                      |       | 44                                          |       | —                                      |       | —                      |       |
|                                       |       |                                        |       |                                        |       |                        |       |
| NET (LOSS)                                 |       | $                                           | (3,715     | )                                           | $          | (1,681                      | )          | $ | (4,509 | ) |

 

See notes to consolidated financialstatements.

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**PALACE ENTERTAINMENTHOLDINGS, INC.**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS (unaudited/in thousands)**

**For the six monthsended June 30, 2006 and 2005**

** **

 
| ** **                          | ** ** | **Post-Acquisition**                        | ** ** | **Pre-Acquisition**                           | ** ** | **For the Six** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|---------------------------|------------|
| ** **                          | ** ** | **For the Period**                | ** ** | **For the Period**                  | ** ** | **months ended**     | ** ** |
| ** **                          | ** ** | **April 13 to June 30** | ** ** | **January 1 to April 12** | ** ** | **June 30,**         | ** ** |
| ** **                          | ** ** | **2006**                                    | ** ** | **2006**                                      | ** ** | **2005**                  | ** ** |
|                                |       |                                        |       |                                          |       |                      |       |
| REVENUES—Net                   |       | $                                           | 39,462     |                                          | $          | 23,397                    |       | $ | 61,447 |   |
|                                |       |                                        |       |                                          |       |                      |       |
| OPERATING COSTS AND EXPENSES:       |       |                                        |       |                                          |       |                      |       |
| Cost of revenue                     |       | 29,207                                      |       | 26,190                                        |       | 51,147                    |       |
| Selling, general and administrative |       | 5,471                                       |       | 4,208                                         |       | 9,439                     |       |
| Loss on disposal of assets          |       | —                                      |       | —                                        |       | 173                       |       |
| Depreciation and amortization       |       | 4,301                                       |       | 4,478                                         |       | 8,722                     |       |
|                                |       |                                        |       |                                          |       |                      |       |
| Total operating costs and expenses  |       | 38,979                                      |       | 34,876                                        |       | 69,481                    |       |
|                                |       |                                        |       |                                          |       |                      |       |
| OPERATING INCOME / (LOSS)           |       | 483                                         |       | (11,479                                       | )          | (8,034                    | )          |
|                                |       |                                        |       |                                          |       |                      |       |
| OTHER (EXPENSE) INCOME:             |       |                                        |       |                                          |       |                      |       |
| Interest expense, net               |       | 4,154                                       |       | 6,674                                         |       | 11,598                    |       |
|                                |       |                                        |       |                                          |       |                      |       |
| (LOSS) FROM OPERATIONS              |       | (3,671                                      | )          | (18,153                                       | )          | (19,632                   | )          |
|                                |       |                                        |       |                                          |       |                      |       |
| INCOME TAX PROVISION                |       | 44                                          |       | —                                        |       | —                    |       |
|                                |       |                                        |       |                                          |       |                      |       |
| NET (LOSS)                          |       | $                                           | (3,715     | )                                             | $          | (18,153                   | )          | $ | (19,632 | ) |

 

See notes to consolidated financialstatements.

 

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**PALACE ENTERTAINMENT HOLDINGS, INC.**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the six months ended June 30, 2006 and June30, 2005 (unaudited/in thousands)**

 
|                                                                                      | ** ** | **Post-Acquisition**                        | ** ** | **Pre-Acquisition**                           | ** ** | **For the Six** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|---------------------------|------------|
| ** **                                                                           | ** ** | **For the Period**                | ** ** | **For the Period**                  | ** ** | **months ended**     | ** ** |
| ** **                                                                           | ** ** | **April 13 to June 30** | ** ** | **January 1 to April 12** | ** ** | **June 30,**         | ** ** |
| ** **                                                                           | ** ** | **2006**                                    | ** ** | **2006**                                      | ** ** | **2005**                  | ** ** |
| ** **                                                                           | ** ** | ** **                                  | ** ** | ** **                                    | ** ** | ** **                | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                           |       |                                        | ** ** | ** **                                    | ** ** | ** **                | ** ** |
| Net loss                                                                             |       | $                                           | (3,715     | )                                             | $          | (18,153                   | )          | $ | (19,632 | ) |
| **Adjustments to reconcile net loss to net cash provided  by operating activities:** |       |                                        |       |                                          |       |                      |       |
| Depreciation and amortization                                                        |       | 4,300                                       |       | 4,478                                         |       | 8,722                     |       |
| Loss on disposal of assets                                                           |       | —                                      |       | —                                        |       | 173                       |       |
| Amortization of deferred financing costs and discount  accretion                     |       | 163                                         |       | 796                                           |       | 1,332                     |       |
| Financed Interest Payments                                                           |       | 0                                           |       | 3,515                                         |       | 1,235                     |       |
| Share Based Compensation                                                             |       | 458                                         |       |                                          |       |                      |       |
| Deferred rent expense                                                                |       | 134                                         |       | 36                                            |       | 190                       |       |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| Changes in net operating assets and liabilities:                                     |       |                                        |       |                                          |       |                      |       |
| Inventories                                                                          |       | (629                                        | )          | (214                                          | )          | (875                      | )          |
| Prepaid expenses and other current assets                                            |       | (1,171                                      | )          | 1,105                                         |       | 494                       |       |
| Other assets                                                                         |       | (118                                        | )          | 8                                             |       | (116                      | )          |
| Accounts payable                                                                     |       | 317                                         |       | 1,160                                         |       | 1,135                     |       |
| Accrued interest                                                                     |       | 3,841                                       |       | 436                                           |       | 181                       |       |
| Accrued wages and payroll taxes                                                      |       | 999                                         |       | (167                                          | )          | 2,115                     |       |
| Other accrued liabilities                                                            |       | 4,521                                       |       | (1,347                                        | )          | 1,318                     |       |
| Unearned Revenue                                                                     |       | 1,762                                       |       | (6                                            | )          | 1,413                     |       |
| Other long-term liabilities                                                          |       | (88                                         | )          | 22                                            |       | (15                       | )          |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| Net cash (used) provided by operating activities                                     |       | 10,774                                      |       | (8,331                                        | )          | (2,330                    | )          |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                           |       |                                        |       |                                          |       |                      |       |
| Payment for acquisition of park, net                                                 |       | (37,599                                     | )          |                                          |       |                      |       |
| Purchases of property and equipment                                                  |       | (3,356                                      | )          | (3,951                                        | )          | (5,968                    | )          |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| Net cash used in investing activities                                                |       | (40,955                                     | )          | (3,951                                        | )          | (5,968                    | )          |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                           |       |                                        |       |                                          |       |                      |       |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| Issuance of  Common Stock                                                            |       | 54,260                                      |       |                                          |       | —                    |       |
| Return on  capital                                                                   |       | (500                                        | )          |                                          |       | —                    |       |
| Proceeds from  issuance of long-term debt                                            |       | 163,500                                     |       | 13,100                                        |       | 15,250                    |       |
| Repayment of LT  Debt                                                                |       | (180,095                                    | )          | (767                                          | )          | (1,214                    | )          |
| Payments for  cost of financing                                                      |       | (5,575                                      | )          | —                                        |       | (176                      | )          |
| Payments on  Capital Leases                                                          |       |                                        |       | (118                                          | )          | (113                      | )          |
| Distributions to  Member                                                             |       | —                                      |       | (57                                           | )          | (60                       | )          |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| Net cash (used) provided by financing activities                                     |       | 31,590                                      |       | 12,158                                        |       | 13,687                    |       |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| NET INCREASE  (DECREASE) IN CASH AND CASH EQUIVALENTS                                |       | 1,409                                       |       | (124                                          | )          | 5,389                     |       |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                                      |       | 5,116                                       |       | 5,240                                         |       | 2,347                     |       |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                            |       | $                                           | 6,525      |                                          | $          | 5,116                     |       | $ | 7,736 |   |
|                                                                                 |       |                                        |       |                                          |       |                      |       |
| Supplemental  Disclosures of Cash Flow Information                                   |       |                                        |       |                                          |       |                      |       |
| Cash Paid for  Interest                                                              |       | 249                                         |       | 1,925                                         |       | 8,819                     |       |
| Property, plant  and equipment included in accounts payable                          |       | 360                                         |       |                                          |       |                      |       |

 

See notes toconsolidated financial statements.

 

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**PALACE ENTERTAINMENTHOLDINGS, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS(unaudited, $ in thousands)**

**1.**                      ORGANIZATION

**Organization**

On April 12, 2006, PalaceEntertainment Holdings, Inc. (“Company”) a Delaware company acquired FestivalFun Parks, LLC (“FFP”).  The Company is a100% owned subsidiary of Palace Holdings Group, LLC (“Holdings”), which isprimarily owned by MidOcean Partners, LP (“MidOcean Partners”), a New York andLondon based private equity firm.  FFP isa Delaware limited liability company formed on June 23, 1998, with PalaceEntertainment, Inc. (“PAL”) being the sole member prior to acquisition. TheCompany was established to purchase and operate family entertainment centers (“FECs”)and water parks (“WPs”). At June 30, 2006 and 2005, the company owned andoperated 32 FECs and WPs (“Parks”). Of the 32 Parks currently owned atJune 30, 2006, 16 are located in California, five are located in Florida, fourare located in Texas, and two each are located in Georgia and New York, and oneeach in North Carolina, New Jersey, and New Hampshire. Revenue earned from theParks located in California represents approximately 48.7% and 47.9%, in theaggregate, of the Company’s revenues for the six months ended June 30, 2006 and2005, respectively. Eight of the Parks are WPs featuring such attractions aswater slides, flumes, and pools and one is a nature theme park. The other23 Parks generally feature such attractions as miniature golf, battingcages, kiddy parks, go-carts, and video arcades.

For financial reportingpurposes, the Company uses a 52- or 53-week fiscal year. The fiscal periodspresented, which ended July 2, 2006 and July 1, 2005, comprised 26 weeks, orone half of the fiscal year. The fiscal period ends on the Sunday nearest to June30. For simplicity of presentation, the Company refers to the 26-week periodsas ended on June 30.

**2.**                      SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

**Basis of Presentation**

The acquisition of theCompany (See footnote 3) was accounted for under the purchase method ofaccounting, as required by Statement of Financial Accounting Standards (SFAS)No.141, *Business Combinations*.  The purchase price has been “pushed-down” andallocated to the assets and liabilities of the Company.  Accordingly, the post-acquisition consolidatedfinancial statements reflect a new basis of accounting.  The Company’s Consolidated Statements ofOperations and Cash Flows for the period ending April 12, 2006 and theConsolidated Balance Sheet as of December 31, 2005 reflect the operations ofthe Company prior to the acquisition. Hence, there is a blackline division on the financial statements, whichis intended to signify that the reporting entities shown are not comparable.

The accompanyingcondensed consolidated financial statements have been prepared by the Companypursuant to the rules and regulations of the Securities and Exchange Commission(the “SEC”).  The information reflects all normal and recurringadjustments which in the opinion of the Company’s management are necessary fora fair presentation of the financial position of the Company and its results ofoperations for the interim periods set forth herein.

**Principlesof Consolidation**

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

8

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**Cash andCash Equivalents**

The Company considers allhighly liquid instruments with an original maturity of six months or less to becash equivalents.

**Inventories**

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

**Property and Equipment**

Property and equipment are stated at cost and aredepreciated using the straight-line method over the following estimatedlives:

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

 

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

Ordinary repairs andmaintenance are expensed as incurred; major replacements and betterments arecapitalized.

**Long-LivedAssets**

Long-lived assets arecarried at cost less accumulated depreciation. Long-lived assets areevaluated for potential impairment at least annually or whenever events orchanges in circumstances indicate that their carrying amounts may not berecoverable. In the event that periodic assessments reflect that the carryingamount of a long-lived asset exceeds the sum of the undiscounted cashflows (excluding interest) that are expected to result from the use and eventualdisposition of the long-lived asset, the Company recognizes an impairmentloss to the extent the carrying amount exceeds the fair value of the long-livedasset. The Company estimates the fair value using available market informationor other industry valuation techniques, such as present-value calculations. TheCompany has recorded no impairment losses for the six months ended June 30,2006 and 2005.  In conjunction with thepurchase of FFP by the Company long-lived assets were revalued at fair marketvalue.  (See Footnote 3)

**Advertising**

The Company expenses thecosts of advertising, promotion, and marketing programs as incurred. Thesecosts were $4,393 and $4,796, during the six months ended June 30, 2006 and2005, respectively.  These costs were $3,361and $3,618 for the three months ended June 30, 2006 and 2005, respectively.

**Goodwill**

Goodwill is tested forimpairment annually, or when a possible impairment is indicated, using the fairvalue-based test prescribed by SFAS No. 142, *Goodwill andOther Intangible Assets*. The goodwill impairment test prescribed bySFAS No. 142 requires the Company to identify reporting units and to determineestimates of the fair value of the Company’s reporting units as of the date ofthe test for impairment. As of June 30, 2006, the Company’s reporting unitsconsisted of two segments,

9

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FECs and WPs. As of June30, 2005 and December 31, 2005, the reporting units consisted of 32 Parks.  To conduct a goodwill impairment test, thefair value of the reporting segment is compared with its carrying value. If thereporting unit’s carrying value exceeds its fair value, an impairment loss isrecorded to the extent that the carrying value of the goodwill exceeds itsimplied fair value. The fair value of a reporting segment is the amount forwhich the segment as a whole could be bought or sold in a current transactionbetween willing parties. The Company estimates the fair values of its reportingsegments using discounted cash flow valuation models. The Company estimates theseamounts by evaluating historical trends, current budgets, operating plans, andindustry data. Determining the fair value of reporting segments and goodwillincludes significant judgment by management and different judgments could yielddifferent results.

The Company recorded noimpairment losses for the six months ended June 30, 2006 and 2005.

**Intangibles**

Trademarksare amortized over their estimated useful lives of 20 years and property leasesare amortized over the terms of the related leases.

**FinancingCosts**

Financing costs, whichare included in other assets, are deferred and amortized using thestraight-line method which approximates the effective interest method, over theterm of the respective loan agreements. At June 30, 2006 and December 31, 2005,deferred financing costs were $5,422 and $2,934, respectively, net ofaccumulated amortization of $153 and $4,076, respectively. All debt outstandingas of the acquisition date was repaid and the related discounts were writtenoff.  Additionally, discount on loans isbeing amortized using the effective interest method over the term of therespective loan agreement.

**SelfInsurance Claims Liability**

The Company is partiallyself-insured for its workers’ compensation and general liability programs. Inconnection with these programs, the Company pays a base premium plus actuallosses incurred, not to exceed certain stop-loss limits. The Company is insuredfor losses above these limits, both per occurrence and in the aggregate. Theself-insurance claim liability is determined based on claims filed and claimsincurred but not reported. As of June 30, 2006, the Company has four separateunused letters of credit totaling $4,687 to secure its obligations for workers’compensation and general liability claims with three insurance carriers.

**UnearnedRevenue**

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

**DeferredRent**

Certain of the Company’sground leases require minimum annual rent increases. Rent expense is recognizedon a straight-line basis over the term of each lease. Under this method, theCompany recognized $170 and $190 for the six months ended June 30, 2006 and2005, respectively, of rent expense not currently due. Such amounts areincluded in other long-term liabilities.

**Stock-BasedCompensation**

The former parent of theCompany issued stock options to the Company’s employees in 2002.  Outstanding options and the related potentialcompensation amounts are immaterial, and were terminated on April 12, 2006 inconnection with the sale of FFP to the Company. During the post acquisition,Holdings adopted a new stock compensation plan and the Company adopted SFAS No.123(R), “*Share-Based Payment*”.  All awards granted, modified, or settled afterthe date of adoption will be accounted for using the measurement, recognition,and attribution provisions of SFAS No.123(R). Under the fair valuerecognition provision of this statement, share based compensation costs aremeasured at the grant date based upon the fair value of the award. The Companyelected to recognize the expense on a straight line basis over the requisiteservice period which is the vesting period. See footnote 11 for the furtherdescription of the plan.

10

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**RevenueRecognition**

The Company recognizesrevenue at the point of sale to a customer or over the period that receives thebenefit.

**Use ofEstimates**

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 months ended June 30, 2006 and 2005, the Company maintained cashbalances in its general cash accounts in excess of Federal Deposit InsuranceCorporation insurable limits; however, the Company places its cash with highcredit quality financial institutions.

**Seasonality**

The business of theCompany is highly seasonal. Generally, our WPs are open for a period from Maythrough September. In addition, our FECs are open year-round and generatehigher revenues during the summer months.

**FairValue of Financial Instruments**

The carrying values ofcash and cash equivalents, accounts receivable, and accounts payableapproximate fair values due to the relatively short maturities of such instruments.Long-term debt is carried at amounts approximating fair value based on currentrates offered to the Company for debt with similar collateral, if any, andmaturities. Fair values for related party amounts cannot be determined.

**RecentAccounting Pronouncements**

In May 2005, the FASBissued SFAS No. 154, *Accounting Changes andError Corrections*. SFAS No. 154 replaces APB Opinion No.20, *Accounting Changes*, and FASB Statement No. 3, *Reporting Accounting Changes in Interim Financial Statements*,and changes the requirements for the accounting for and reporting of a changein accounting principle. SFAS No. 154 applies to all voluntary changes inaccounting principles. APB No. 20 previously required that most voluntarychanges in accounting principle be recognized by including in net income of theperiod of the change the cumulative effect of changing to the new accountingprinciples. SFAS No. 154 requires retrospective application to prior periods’financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. When it is impracticable to determine the period-specificeffects of an accounting change on one or more individual prior periodspresented, SFAS No.154 requires that the new accounting principle be applied tothe balances of assets and liabilities as of the beginning of the earliestperiod for which retrospective application is practicable and that acorresponding adjustment be made to the opening balance of retained earnings(or other appropriate components of equity or net assets in the statement offinancial position) for that period rather than being reported in an incomestatement. When it is impracticable to determine the cumulative effect ofapplying a change in accounting principle to all prior periods, this statementrequires that the new accounting principle be applied as if it were adoptedprospectively from the earliest date practicable. The adoption of SFAS No. 154is not expected to have an impact on the Company’s financial statements.

11

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

On December 16, 2004, theFASB issued SFAS No. 123 (revised 2004), *Share-Based Payment*,which is a revision of SFAS No. 123, *Accounting for Stock-BasedCompensation*.  SFAS No. 123(R)supersedes, *Accounting for Stock Issued to Employees*(APB No. 25), and amends SFAS No. 95, Statement of Cash Flows.  Generally, the approach in SFAS No. 123(R) issimilar to the approach described in SFAS No. 123.  However, SFAS No. 123(R) requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer analternative to financial statement recognition. Non-public entities are required to adopt the provisions of SFAS No.123(R) as of the beginning of the first annual reporting period that beganafter December 15, 2005.  The Companyadopted SFAS No. 123(R) at the date of grant.

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

In July 2006, the FASBissued EITF 06-3, *How Taxes Collected from Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement (That Is, Gross versus Net Presentation)* that requiresdisclosure of the accounting policy related to any tax assessed by a governmentauthority in a revenue producing transaction (either gross or net) and theamount of such taxes in both interim and annual financial statements if theamounts are significant.  This EITFbecomes effective for reporting periods beginning after December 15, 2006. TheCompany is currently assessing the impact of the adoption of EITF 06-3 and itsimpact on the Company’s consolidated financial statements.

**3.****                                     ****ACQUISITION**

In accordance with a definitive agreement datedFebruary 21, 2006, the Company acquired FFP on April 12, 2006.  The preliminary aggregate purchase price of$212,175 was funded by a $53.5 million equity contribution by Holdings,issuance of $150,000 in aggregate principal amount of 10 7/8% Senior Notes (“Notes”)due in 2014 and a draw of $12,000 against the Company’s new revolving line ofcredit facility (“Revolver”) (See footnote 8). Proceeds from this debt issuance was used to payoff all outstanding termdebt in the amount of $173,177 as of April 12, 2006, less the remaining capitallease obligations of $1,635, to pay transaction related fees and costs, and tofund initial working capital for the Company.

The aggregate purchase price allocation is reflectedon the accompanying Consolidated Balance sheet as of June 30, 2006.  The purchase price allocation is preliminaryand will continue to be adjusted as final costs, independent appraisals andaccounting effects are determined.  Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed as of April 12, 2006 based upon management’s estimates andwith the support of an independent appraiser.
| Current Assets                                                 |   | $       | 6,020   |   |
|----------------------------------------------------------------|--------|---------|---------|--------|
| Property, plant  and equipment                                 |   | 127,859 |    |
| Intangibles                                                    |   | 20,570  |    |
| Other assets                                                   |   | 6,395   |    |
| Goodwill                                                       |   | 69,996  |    |
| Current  Liabilities                                           |   | (14,496 | )       |
| Other long term  liabilities                                   |   | (4,169  | )       |
| Allocated purchase  price, including related acquisition costs |   | $       | 212,175 |   |

 

12

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The excess of the purchase price over the fair valueof the net assets acquired or goodwill has been assigned to our WPs and FECs inthe amounts of $39,898 and $30,098, respectively.  The goodwill is not amortized and is subjectto an annual impairment test in accordance with SFAS No.142, *Goodwill and Other Intangible Assets*.  For income tax purposes, the Company expectsthese assets to be amortized.

The trademarks are being amortized using a 20-year useful life. Thefair values of the property leases are being amortized over the related leaseterms.

The following consolidated pro forma Income Statementscover the three month periods ended June 30, 2006 and June 30, 2005, as well asthe six month periods ended June 30, 2006 and June 30, 2005.

The pro forma adjustments reflect the purchase of theCompany, the extinguishment of the prior debt and its replacement with theNotes and the Revolver.  The pro formaalso adjusts interest expense based upon the terms of the agreements governingthe Notes and the Revolver.  Thefinancial information below substitutes the Windward management fee with theMidOcean Partners advisory fee and adjusts for the effect of thedirectors/officers and representations/warranties insurance policies issued inconnection with the sale transaction.

We have adjusted depreciation/amortization forproperty and equipment, trademarks, leases and incentive compensation forrestrictive stock grants.

Palace EntertainmentHoldings Inc.

Consolidated andCondensed Proforma Income Statement

Three and Six MonthsEnded June 30, 2006

(Unaudited)

 
|                         | ** ** | **THREE MONTHS** | ** ** | **SIX MONTHS** | ** ** |
|-------------------------|------------|-----------------------|------------|---------------------|------------|
|                    |       |                  |       |                |       |
| REVENUES - NET          |       | $                     | 42,063     |                | $          | 62,859 |   |
|                    |       |                  |       |                |       |
| (LOSS) FROM  OPERATIONS |       | (6,042                | )          | (22,550             | )          |
|                    |       |                  |       |                |       |
| NET (LOSS)              |       | $                     | (6,086     | )                   | $          | (22,594 | ) |

 

Palace Entertainment HoldingsInc.

Consolidated andCondensed Proforma Income Statement

Three and Six MonthsEnded June 30, 2005

(Unaudited)

 
|                         | ** ** | **THREE MONTHS** | ** ** | **SIX MONTHS** | ** ** |
|-------------------------|------------|-----------------------|------------|---------------------|------------|
|                    |       |                  |       |                |       |
| REVENUES - NET          |       | $                     | 41,467     |                | $          | 61,447 |   |
|                    |       |                  |       |                |       |
| (LOSS) FROM  OPERATIONS |       | (4,374                | )          | (19,601             | )          |
|                    |       |                  |       |                |       |
| NET (LOSS)              |       | $                     | (4,374     | )                   | $          | (19,601 | ) |

 

**4.**                      PREPAIDEXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets at June 30,2006 and December 31, 2005, consist of the following:
|                       | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-----------------------|------------|------------------|------------|----------------------|------------|
| ** **            | ** ** | **2006**         | ** ** | **2005**             | ** ** |
|                  |       |             |       |                 |       |
| Prepaid  insurance    |       | $                | 899        |                 | $          | 1,381 |   |
| Prepaid rent          |       | 1,085            |       | 1,070                |       |
| Accounts  receivable  |       | 1,779            |       | 331                  |       |
| Other current  assets |       | 1,240            |       | 1,119                |       |
|                  |       |             |       |                 |       |
| Total                 |       | $                | 5,003      |                 | $          | 3,901 |   |

 

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**5.**                      PROPERTYAND EQUIPMENT

Property andequipment at June 30, 2006 and December 31, 2005, consist of the following:
|                                                 | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2006**         | ** ** | **2005**             | ** ** |
|                                            |       |             |       |                 |       |
| Land                                            |       | $                | 158        |                 | $          | 158 |   |
| Buildings and  leasehold improvements           |       | 58,982           |       | 107,733              |       |
| Equipment and  fixtures                         |       | 15,536           |       | 26,295               |       |
| Games                                           |       | 3,866            |       | 15,686               |       |
| Rides and  attractions                          |       | 49,737           |       | 64,997               |       |
|                                            |       |             |       |                 |       |
| Total                                           |       | 128,279          |       | 214,869              |       |
|                                            |       |             |       |                 |       |
| Less accumulated  depreciation and amortization |       | 4,300            |       | 103,523              |       |
|                                            |       |             |       |                 |       |
| Add construction  in progress                   |       | 3,467            |       | 1,042                |       |
|                                            |       |             |       |                 |       |
| Total                                           |       | $                | 127,446    |                 | $          | 112,388 |   |

 

**6.**                      INTANGIBLES

As of June 30, 2006 Trademarks amount to $13,355 whichis net of accumulated amortization of $145.

The future amortization on Trademarks and PropertyLeases as of June 30, 2006 is as follows:
| Year Ending     | ** ** | ** **     | ** ** | **Property** | ** ** | ** ** | ** ** |
|----------------------|------------|----------------|------------|--------------|------------|------------|------------|
| **December 31** | ** ** | **Trademarks** | ** ** | **Lease**    | ** ** | **Total**  | ** ** |
|                 |       |           |       |         |       |       |       |
| 2006 (6 months)      |       | $              | 333        |         | $          | 59         |       | $ | 399 |   |
|                 |       |           |       |         |       |       |       |
| 2007                 |       | 675            |       | 119          |       | 798        |       |
|                 |       |           |       |         |       |       |       |
| 2008                 |       | 675            |       | 119          |       | 798        |       |
|                 |       |           |       |         |       |       |       |
| 2009                 |       | 675            |       | 119          |       | 798        |       |
|                 |       |           |       |         |       |       |       |
| 2010                 |       | 675            |       | 119          |       | 798        |       |
|                 |       |           |       |         |       |       |       |
| Thereafter           |       | 10,322         |       | 6,510        |       | 16,809     |       |
|                 |       |           |       |         |       |       |       |
| Total                |       | $              | 13,355     |         | $          | 7,045      |       | $ | 20,400 |   |

 

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**7.**                      OTHERACCRUED LIABILITIES

Other accrued liabilities at June 30, 2006 andDecember 31, 2005, consist of the following:

|                                                             | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|-------------------------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                                  | ** ** | **2006**         | ** ** | **2005**             | ** ** |
|                                                        |       |             |       |                 |       |
| Worker’s  compensation and general liability insurance |       | $                | 2,179      |                 | $          | 2,349 |   |
| Accrued property  tax                                       |       | 1,013            |       | 1,491                |       |
| Accrued expenses                                            |       | 3,703            |       | 1,371                |       |
| Other accrued  liabilities                                  |       | 2,372            |       | 1,944                |       |
|                                                        |       |             |       |                 |       |
| Total                                                       |       | $                | 9,267      |                 | $          | 7,155 |   |

 

**8.**                      LONG-TERMDEBT

Long-term debt at June30, 2006 and December 31, 2005 consists of the following:
|                                            | ** ** | **June 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------|------------|------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **2006**         | ** ** | **2005**             | ** ** |
|                                       |       |             |       |                 |       |
| 10 7/8% Senior  Notes [1]                  |       | $                | 150,000    |                 |       |   |
| Revolving line  of credit - GE Capital [2] |       | 9,000            |       |                 |       |
| Term loan A [3]                            |       |             |       | $                    | 8,773      |   |
| Term loan B [3]                            |       |             |       | 33,744               |       |
| Term loan C [3]                            |       |             |       | 2,500                |       |
| Mezzanine debt  [3]                        |       |             |       | 81,929               |       |
| Windward mezzanine  debt [3]               |       |             |       | 4,716                |       |
| Windward senior  secured [3]               |       |             |       | 9,113                |       |
| Revolving line  of credit - Antares [3]    |       |             |       | 22,850               |       |
| Capital lease  obligations [4]             |       | 1,518            |       | 1,619                |       |
|                                       |       |             |       |                 |       |
| Total                                      |       | 160,518          |       | 165,244              |       |
|                                       |       |             |       |                 |       |
| Less current  portion                      |       | 836              |       | 7,870                |       |
| *** ***                               |       |             |       |                 |       |
| Total long-term debt                       |       | $                | 159,682    |                 | $          | 157,374 |   |

 

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**[1]**           **10 7/8% Senior Notes**

In connection withthe April 12, 2006 acquisition transaction, 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 isdue on October 15, 2006.

**[2]**           **Revolving line of credit**

Revolving line ofcredit up to a maximum of $40 million, maturing no later than June 30,2014.  Interest is payable periodicallyat the prime rate plus a margin of 1.75% or the London Inter Bank Offered Rate(“LIBOR”) plus a margin of 2.75% based upon the Company’s election.  As of June 30, 2006 the weighted averageinterest rate was 9.88%.  The margin canvary based on the Company’s debt to earnings ratio.  Under this revolving line of credit, theCompany had certain letters of credit outstanding to secure its workerscompensation and general liability insurance policies.  Letters of credit outstanding at June 30,2006 was $4,686.

The revolvingcredit facility is secured by substantially all of the Company’s assets.

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**[3]****           Term,mezzanine, senior secured sub and Revolver Antares**

*Term LoanA*

Term loans payable, inthe original amount of $35,000, payable in installments of principal of $773 onMarch 31, 2006, $1,000 quarterly on June 30, December 31, and March 31of each period thereafter, and $4,000 on September 30 of each year throughJune 30, 2007. Prior to April 2, 2003, for the period January 5,2004 through March 7, 2005, and subsequent to March 31, 2005,interest was payable periodically at the base rate (greater of the prime rateor the federal funds rate plus 0.5% per annum) plus a margin of 2.25%–3% perannum or at London InterBank Offered Rate (“LIBOR”) plus a margin of 3.5%–4.25%per annum, based on the Company’s election for specified periods. EffectiveApril 2, 2003 through January 5, 2004, and March 8, 2005 throughMarch 31, 2005, interest payable was at the base rate plus the applicablemargin. The margin varied based on the Company’s debt to earnings ratio, asdefined. At April 12, 2006 and December 31, 2005, the interest rate was9.17% per annum based on the LIBOR rates in effect and 10.25% per annum, basedon the base rate, respectively. These loans were paid off in connection withApril 12, 2006 acquisition of FFP by the Company.

*Term LoanB*

Term loans payable, inthe original amount of $35,000, payable in installments of principal of $69 and$75 on March 31, 2006 and June 30, 2006, respectively, $88 on eachquarterly period from September 30, 2006 through June 30, 2007, and$16,625 on September 30, 2007, and on December 31, 2007. Prior toApril 2, 2003, for the period January 5, 2004 through March 7,2005, and subsequent to March 31, 2005, interest was payable periodicallyat the base rate (greater of the prime rate or the federal funds rate plus 0.5%per annum) plus a margin of 2.75%–3.5% per annum or at LIBOR plus a margin of4%–4.75% per annum, based on the Company’s election for specific periods.Effective April 2, 2003 through January 5, 2004, and March 8,2005 through March 31, 2005, interest was payable at the base rate plusthe applicable margin. The margin varied based on the Company’s debt toearnings ratio, as defined. At April 12, 2006 and December 31, 2005, theinterest rate was 9.67% per annum based on the LIBOR rate in effect and 10.75%per annum, based on the base rate, respectively. These loans were paid off inconnection with April 12, 2006 acquisition of FFP by the Company.

*Term Loan C*

On April 1, 2005,the Company entered into Term Note C in the amount of $2,500, pursuant toan amendment of the credit agreement on the $110,000 credit facility describedabove. The note was due December 31, 2007. During 2006, an additionalbalance was added to this note in the amount of $2,500 for a grand total of$5,000. Interest was payable periodically at the base rate (greater of theprime rate or the federal funds rate plus 0.5% per annum) plus a margin of5.75% per annum or at LIBOR plus a margin of 7.0% per annum, based on theCompany’s election for specified periods. At April 12, 2006 andDecember 31, 2005, the interest rates were 11.31% and 11.82%,respectively, based on LIBOR. These loans were paid off in connection with April12, 2006 acquisition of FFP by the Company.

*RevolvingLine of Credit*

Revolving line of credit,up to a maximum of $40,000, maturing no later than June 30, 2007. Prior toApril 2, 2003, for the period January 5, 2004 through March 7,2005, and subsequent to March 31, 2005, interest was payable periodicallyat the base rate (greater of the prime rate or the federal funds rate plus 0.5%per annum) plus a margin of 2.25%–3% per annum or at LIBOR plus a margin of3.5%–4.25% per annum, based on the Company’s election for specified periods.Effective April 2, 2003 through January 5, 2004, and March 8,2005 through April 12, 2006, interest was payable at the base rate plus theapplicable margin. The margin varied based on the

16

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Company’s debt to earnings ratio, as defined. Borrowingsunder the line of credit are limited based on the Company’s debt to earningsratio, as defined. At April 12, 2006 and December 31, 2005, theinterest rates were 9.04% based on the LIBOR rate and 10.25% based on the baserate respectively. During the period from June 15 through August 31of each year, the Company was required to repay the revolving line of credit inan amount equal to the Company’s aggregate cash balance in its bank accountsless $5,000. In addition, the lenders were generally not obligated to makeloans under the revolving line of credit during such periods. Under thisrevolving line of credit, the Company had certain letters of credit outstandingto secure its worker’s compensation and general liability insurance policies.Letters of credit outstanding at April 12, 2006 and December 31, 2005,were $4,549 and $9,045, respectively.

The credit facility wassecured by substantially all of the Company’s assets. The Company was requiredon an annual basis to prepay the credit facility by an amount equal to 50%–75%of the Company’s excess cash flow, depending on the Company’s debt to earningsratio as defined. For the three months and twelve day period through April 12,2006 and year ended December 31, 2005, no amounts were due under thisrequirement. Some of the lenders under the credit agreement are stockholders ofthe Company’s sole member PAL. These loans were paid off in connection withApril 12, 2006 acquisition of FFP by the Company.

**MezzanineDebt**

The Company issued 12%subordinated notes with a face value of $40,000 and 15% subordinated notes witha face value of $40,500. Interest payments were due quarterly; principal of$500 due on July 29, 2007, $5,500 due on September 30, 2007, and thebalance was due on July 29, 2008. For the 15% subordinated notes, theCompany had the option to pay 20% of the interest due in the form of additionalnotes. The Company issued additional notes of $611 and $1,337 for paid-in-kindinterest during the three months and twelve day period through April 12, 2006and year ended December 31, 2005, respectively. The principal paymentamount of $5,500 due on September 30, 2007, was reduced by the aggregateamount of interest that the Company could have paid in the form of additional notesbut has paid-in cash. The two notes were issued at a discount of $2,769, whichwas being amortized over the life of the notes at the weighted-averageeffective interest rate of 13.34%. In addition, $4,981 in loan proceedsreceived in 2002 were allocated to Member’s Interest for the 436,150 shares ofcommon stock of PAL issued to the lenders, based on an estimated value of$11.42 per common share of PAL, resulting in a discount to the Company, whichwas being amortized over the life of the notes. The amount of discount accretedwas $4,357 and $4,488 at April 12, 2006 and December 31, 2005,respectively. On January 5, 2004, additional subordinated notes payable of$807 were issued to the lenders in connection with a previous default discussedbelow. The note holders, including Windward Capital Partners, are alsostockholders of the Company’s sole member PAL. These loans were paid off inconnection with April 12, 2006 acquisition of FFP by the Company.

***Windward Mezzanine Debt***

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

**WindwardSenior Secured Notes**

The Company issued 15%subordinated notes with a face value of $9,054. The Company had the option topay 7.97% of the interest due quarterly in the form of additional notes. Inthis regard, the

17

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Company issued additionalnotes of $211 and $805 during the three months and twelve day period throughApril 12, 2006 and year ended December 31, 2005, respectively. The subordinatednotes are due on July 29, 2008. These loans were paid off in connectionwith April 12, 2006 acquisition of FFP by the Company.

**Senior Subordinated AdditionalNotes**

The company issued12% additional notes on March 31, 2006 in the amount of $3,288 under termsidentical to that of Term Loan C discussed above. These loans were paid off inconnection with April 12, 2006 acquisition of FFP by the Company.

**[4]****           CapitalLease Obligations**

Capital leaseobligations secured by applicable equipment with a net book value of $2,838 and$1,242 at December 31, 2005 and June 30, 2006, respectively, payable inperiodic installments.

Aggregate futureminimum payments for long-term debts as of June 30, 2006 are as follows:
|                                                          | ** ** | **Long-Term** | ** ** | **Capital** | ** ** | ** ** | ** ** |
|----------------------------------------------------------|------------|---------------|------------|-------------|------------|------------|------------|
| ** **                                               | ** ** | **Debt**      | ** ** | **Leases**  | ** ** | **Total**  | ** ** |
|                                                     |       |          |       |        |       |       |       |
| 2006 (6 months)                                          |       | $             | —     |        | $          | 693        |       | $ | 693 |   |
| 2007                                                     |       | —        |       | 919         |       | 919        |       |
| 2008 and  thereafter                                     |       | 159,000       |       | 8           |       | 159,008    |       |
|                                                     |       |          |       |        |       |       |       |
| Total                                                    |       | 159,000       |       | 1,620       |       | 160,620    |       |
|                                                     |       |          |       |        |       |       |       |
| Less amount  representing interest on capital leases     |       | —        |       | 102         |       | 102        |       |
|                                                     |       |          |       |        |       |       |       |
| Total long-term debt                                     |       | 159,000       |       | 1,518       |       | 160,518    |       |
|                                                     |       |          |       |        |       |       |       |
| Less current  portion, net of interest on capital leases |       | —        |       | 836         |       | 836        |       |
|                                                     |       |          |       |        |       |       |       |
| Total long-term  debt—noncurrent                    |       | $             | 159,000    |        | $          | 682        |       | $ | 159,682 |   |

 

**9.****            ****401(K) PLAN**

The Company has a 401(k)plan that covers substantially all management employees who meet certaineligibility requirements as to age and length of service. Matchingcontributions to the plan are at the discretion of the Company. For the sixmonths ended June 30, 2006 and 2005, no matching contributions were made to theplan.

**10.**          RELATED-PARTY TRANSACTIONS

A professional servicesagreement was in effect between the Company and MidOcean Partners as of June30, 2006. The agreement provides for quarterly payments of $250. The term ofthis agreement is through April 12, 2016. Additionally, MidOcean Partners isentitled to reimbursement of expenses. For the period April 12, 2006 throughJune 30, 2006, the Company had incurred a liability under this agreement of$219.  As of December 31, 2005, FFP hadaccrued expenses of $493 related to a management agreement with Windward, theprevious ownership group.

18

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**11.          STOCKCOMPENSATION PLANS**

The former parent of the Company issued stock optionsto Company employees in 2002. Outstanding options and the related potential compensation wereimmaterial and were terminated as of April 12, 2006 pursuant to the sale of FFP.

As of June 30, 2006, Holdings has adopted a share-basedcompensation plan for certain management employees and directors of theCompany. The Company has accounted for the fair value of these grants under thisPlan in accordance with FASB Statement 123(R).

Under the Incentive Equity Unit Plan, Holdings maygrant incentive units to selected management personnel and directors of theCompany. Four classes of units have been authorized in the following amounts 4,081.12class B-1 units, 6,801.87 class B-2 units, 2,720.75 class B-3 units and 1914.93class C units. Units are granted at the discretion of the Board of Directors. TheClass B units vest in equal 1/20th amountsat the end of each quarter from the grant date and the Class C units fully vestat the date of the grant. Vesting on the Class B units is accelerated in theevent of a liquidating event, such as; the approved sale of the Company,including merger or consolidation as well as the sale of publicly tradedsecurities of the Company. The accelerated vesting is subject to theachievement of specified internal rate of return and return on investment hurdlesbased on MidOcean Partners’ initial investment. Should those hurdles not be metat the time of the liquidating event, the shares will continue to vestquarterly over the rest of the original five year service period, with theexception of the B-2 units which will be fortified on the date of theliquidating event if the hurdles are not met.

The Board of Directors at its sole discretion may repurchasethe vested portion of terminated employees under certain conditions byestablishing a fair market value for the units and applying the same internalrate of return and return on investment hurdles.

In March 2005, the SEC issued SAB 107 which providesguidance on the implementation of SFAS 123R. The Company applied the principlesof SAB 107 in conjunction with its adoption of SFAS 123R. The volatilityassumption used by the Company of 43.24 percent was determined by weighting thevolatility of comparable public companies as the Company does not havehistorical stock prices. The volatility weighting was based on the impliedvolatility, the most recent 1-year volatility, and the median of the rolling5-year volatilities. The risk-free interest rate of 4.9 percent that was usedin the Monte Carlo Simulation model is based on the risk free rate of returnthat is equal to the yield of a five year zero-coupon U.S. Treasury note as ofJune 2006. Management uses an expected dividend yield of zero in the MonteCarlo Simulation model, as it has no intention to pay any cash dividends in theforeseeable future. SFAS 123R requires management to estimate forfeitures atthe time of grant and revise those estimates in subsequent periods if actualforfeitures differ from those estimates. Management uses an estimatedforfeiture rate based on the weighted average of different scenarios ashistorical data is not available and records stock-based compensation expenseonly for those awards that are expected to vest. A discount has also beencalculated into the fair value of the units to account for the marketrequirement inherent in the units.

The compensation cost that has been charged againstincome for that Plan was $458 for the three month period ended June 30, 2006.As of June 30, 2006, there was $4,105 of total unrecognized compensation costrelated to nonvested stock-based compensation that is expected to be recognizedover a weighted-average period of 4.96 years. Based on currently outstandingoptions, total stock-based compensation expense for fiscal year 2006 isexpected to be approximately $909.

A summary of the units granted during the period andoutstanding as of June 30, 2006 is presented below:

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

There were no Class Bvested units as of June 30, 2006.

**12.          COMMITMENTSAND CONTINGENCIES**

**LeaseExpense**

As of June 30, 2006, theCompany leases the land for all 32 Parks. Of the 32 Parks, 30 lease theland from third parties under noncancelable operating leases that expire onvarious dates through 2041 and two lease the land from third parties underoperating leases with a termination option by the respective landlords. Theground leases for certain of the Parks require the Company to pay minimummonthly or annual rentals, which are adjusted periodically based on changes inthe Consumer Price Index or a percentage of sales 

19

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method. The ground leasesfor certain of the Parks require monthly rentals based on a percentage of grossrevenues derived from the operations of the premises, as defined. In addition,the ground leases require the payment of property taxes and certain leasesrequire the payment of common area expenses. Certain of the leases provide theCompany with options to renew for various periods of time. In addition, certainof the leases provide the Company with options to purchase the leased premisesin accordance with the terms of those lease agreements, and certain otherleases provide the Company with the right of first refusal in the event thatthe lessors decide to sell the land during the term of the leases.

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

For the three monthsended June 30, 2006 and 2005, rent expense amounted to $4,176 and $4,065,respectively, including approximately $1,329 and $1,263, respectively, based onpercentage rents. Included in other accrued liabilities at June 30, 2006 andDecember 31, 2005, are $1,140 and $950, respectively, in accrued rent expense,based on percentage rents.

The future minimumlease payments required under noncancelable Park leases and office leases as ofJune 30, 2006, are as follows:
| Years Ending    | ** ** | **Park**   | ** ** | **Office** | ** ** |
|----------------------|------------|------------|------------|------------|------------|
| **December 31** | ** ** | **Leases** | ** ** | **Lease**  | ** ** |
|                 |       |       |       |       |       |
| 2006 (6 months)      |       | $          | 7,396      |       | $          | 203 |   |
| 2007                 |       | 13,242     |       | 416        |       |
| 2008                 |       | 13,360     |       | 426        |       |
| 2009                 |       | 13,281     |       |       |       |
| 2010                 |       | 13,437     |       |       |       |
| Thereafter           |       | 231,228    |       |       |       |
|                 |       |       |       |       |       |
|                 |       | $          | 291,944    |       | $          | 1,045 |   |

**Lease Income**

The Company subleasesbuilding space to various tenants. Included in net rent and property taxes forthe three months ended June 30, 2006 and 2005 is aggregate rental income of$189 and $151, respectively, including approximately $28 and $21 based onpercentage rents.

Future minimum leaseincome under noncancelable operating leases as of June 30, 2006, is as follows:
| Years Ending    | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| **December 31** | ** ** | ** ** | ** ** |
|                 |       |       |       |
| 2006 (6 months)      |       | $          | 193        |   |
| 2007                 |       | 291        |       |
| 2008                 |       | 50         |       |
| 2009                 |       | 50         |       |
|                 |       |       |       |
| Total                |       | $          | 584        |   |

 

**Litigation**

From time to time, theCompany is involved in litigation relating to claims arising out of itsoperations in the normal course of business. As of June 30, 2006, the Companyis not a party to any legal proceedings, the adverse outcome of which, inmanagement’s opinion, individually or in the aggregate, would have a materiallyadverse effect on the Company’s consolidated financial position or results ofoperations.

20

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The Company received writtennotice in December 2004 concerning the Texas Department of Transportation’sintention to seize, through the eminent domain process, a portion of the realproperty leased by the Company at its Dallas SpeedZone® FEC in connection withthe widening of Interstate 35 E. The Company is currently reviewing its optionsand has retained legal counsel to advise and assist it through this process. Inaddition, the city of Riverside, California is currently in the process ofseizing a portion of roadside property at its Castle Park FEC under thedoctrine of eminent domain in connection with the construction of a freewayaccess ramp. While the Company does not believe that any of the attractions atthis FEC will be affected, the landlord has claimed the full amount of damagesincurred because of the condemnation.

**13.          INCOMETAXES**

The current provision for income taxes for the periodApril 13 to June 30, 2006 represents state income taxes.  The Company has no significant deferred taxassets or liabilities as of June 30, 2006. The Company had no net operating loss carry forwards as a result of theacquisition.  The Company has provided avaluation allowance for the deferred tax asset related to the current operatingloss as it has determined it is more likely than not it will not be realized.

**14.          SEGMENTINFORMATION DISCLOSURE**

The Company hasoperations in two business segments and, as a result, has adopted SFASNo. 131, *Disclosures about Segments ofan Enterprise and Related Information.* SFAS No. 131 establishesstandards for reporting information about operating segments in annualfinancial 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 thesesegments based on the nature of business conducted by each.

TheCompany has two reportable segments, FECs and WPs. FECs primarily offerminiature golf, batting cages, kiddie parks, go-carts, and video arcades. WPsfeature water slides, flumes, and pools as their primary attractions. Theaccounting policies of the segments are the same as those described inNote 2. Operating income (loss) of segments does not include interestincome or expense and provision for income taxes and also excludes corporateitems, such as general and administrative expenses and corporate depreciationexpense. Identifiable assets are those used in the Company’s operations in eachsegment. Corporate assets consist primarily of deferred financing costs,deposits, property and equipment, and cash and cash equivalents.

Goodwill for FECs and WPswas $39,898 and $30,098 respectively, as of June 30, 2006 and was $20,729 and$16,741 respectively as of December 31, 2005.

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SEGMENT DATA:

Three Months Ended
| ** **                                             | ** ** | ** **   | ** ** | ** ** | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|--------------|------------|------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                             | ** ** | **Revenues** | ** ** | **Net**    | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **April 1 to April 12, 2006** | ** ** | **Net**      | ** ** | **Loss**   | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
|                                                   |       |         |       |       |       |             |       |             |       |       |       |
| FEC                                                    |       | $            | 2,164      |       | $          | 211              |       | $                | (111       | )          | $          | 32 |   | $ | 117,618 |   |
| WP                                                     |       | 437          |       | (893       | )          | 144              |       | 507              |       | 106,418    |       |
|                                                   |       |         |       |       |       |             |       |             |       |       |       |
| Total Operations                                       |       | 2,601        |       | (682       | )          | 33               |       | 538              |       | 224,036    |       |
|                                                   |       |         |       |       |       |             |       |             |       |       |       |
| Corporate                                              |       | —       |       | (999       | )          | 266              |       | 10               |       | 10,129     |       |
|                                                   |       |         |       |       |       |             |       |             |       |       |       |
| Total                                                  |       | $            | 2,601      |       | $          | (1,681           | )          | $                | 298        |       | $          | 548 |   | $ | 234,165 |   |

 
| ** **                     | ** ** | ** **   | ** ** | ** ** | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------|------------|--------------|------------|------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                     | ** ** | **Revenues** | ** ** | **Net**    | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **April 13 to  June 30, 2006** | ** ** | **Net**      | ** ** | **Loss**   | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
|                           |       |         |       |       |       |             |       |             |       |       |       |
| FEC                            |       | $            | 22,153     |       | $          | 3,632            |       | $                | 2,686      |       | $          | 1,301 |   | $ | 110,847 |   |
| WP                             |       | 17,309       |       | (335       | )          | 1,245            |       | 2,052            |       | 111,433    |       |
|                           |       |         |       |       |       |             |       |             |       |       |       |
| Total Operations               |       | 39,462       |       | 3,297      |       | 3,931            |       | 3,353            |       | 222,281    |       |
|                           |       |         |       |       |       |             |       |             |       |       |       |
| Corporate                      |       | —       |       | (7,046     | )          | 370              |       | 3                |       | 16,570     |       |
|                           |       |         |       |       |       |             |       |             |       |       |       |
| Total                          |       | $            | 39,462     |       | $          | (3,715           | )          | $                | 4,301      |       | $          | 3,356 |   | $ | 238,850 |   |

 
| ** **              | ** ** | ** **   | ** ** | ** ** | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------|------------|--------------|------------|------------|------------|------------------|------------|------------------|------------|------------|------------|
| **Three Months  Ended** | ** ** | **Revenues** | ** ** | **Net**    | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **June 30, 2005**       | ** ** | **Net**      | ** ** | **Loss**   | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
|                    |       |         |       |       |       |             |       |             |       |       |       |
| FEC                     |       | $            | 23,404     |       | $          | 4,392            |       | $                | 1,976      |       | $          | 2,499 |   | $ | 84,528 |   |
| WP                      |       | 18,062       |       | (378       | )          | 2,277            |       | 1,964            |       | 77,365     |       |
|                    |       |         |       |       |       |             |       |             |       |       |       |
| Total Operations        |       | 41,467       |       | 4,014      |       | 4,253            |       | 4,463            |       | 161,894    |       |
|                    |       |         |       |       |       |             |       |             |       |       |       |
| Corporate               |       | —       |       | (8,523     | )          | 166              |       | 29               |       | 13,264     |       |
|                    |       |         |       |       |       |             |       |             |       |       |       |
| Total                   |       | $            | 41,467     |       | $          | (4,509           | )          | $                | 4,420      |       | $          | 4,492 |   | $ | 175,158 |   |

 

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SEGMENT DATA:

Six Months Ended
| ** **                       | ** ** | ** **   | ** ** | ** ** | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|----------------------------------|------------|--------------|------------|------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                       | ** ** | **Revenues** | ** ** | **Net**    | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **January 1 to  April 12, 2006** | ** ** | **Net**      | ** ** | **Loss**   | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
|                             |       |         |       |       |       |             |       |             |       |       |       |
| FEC                              |       | $            | 19,268     |       | $          | (67              | )          | $                | 1,790      |       | $          | 1,104 |   | $ | 117,618 |   |
| WP                               |       | 4,129        |       | (8,161     | )          | 2,280            |       | 2,801            |       | 106,418    |       |
|                             |       |         |       |       |       |             |       |             |       |       |       |
| Total Operations                 |       | 23,397       |       | (8,228     | )          | 4,070            |       | 3,904            |       | 224,036    |       |
|                             |       |         |       |       |       |             |       |             |       |       |       |
| Corporate                        |       | —       |       | (9,925     | )          | 409              |       | 47               |       | 10,129     |       |
|                             |       |         |       |       |       |             |       |             |       |       |       |
| Total                            |       | $            | 23,397     |       | $          | (18,153          | )          | $                | 4,478      |       | $          | 3,951 |   | $ | 234,165 |   |

 
| ** **                     | ** ** | ** **   | ** ** | ** ** | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------|------------|--------------|------------|------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                     | ** ** | **Revenues** | ** ** | **Net**    | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **April 13 to  June 30, 2006** | ** ** | **Net**      | ** ** | **Loss**   | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
|                           |       |         |       |       |       |             |       |             |       |       |       |
| FEC                            |       | $            | 22,153     |       | $          | 3,632            |       | $                | 2,686      |       | $          | 1,301 |   | $ | 110,847 |   |
| WP                             |       | 17,308       |       | (336       | )          | 1,245            |       | 2,042            |       | 111,433    |       |
|                           |       |         |       |       |       |             |       |             |       |       |       |
| Total Operations               |       | 39,462       |       | 3,296      |       | 3,931            |       | 3,343            |       | 222,281    |       |
|                           |       |         |       |       |       |             |       |             |       |       |       |
| Corporate                      |       | —       |       | (7,011     | )          | 370              |       | 13               |       | 16,570     |       |
|                           |       |         |       |       |       |             |       |             |       |       |       |
| Total                          |       | $            | 39,462     |       | $          | (3,715           | )          | $                | 4,301      |       | $          | 3,356 |   | $ | 238,850 |   |

 
| ** **            | ** ** | ** **   | ** ** | ** ** | ** ** | **Depreciation** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-----------------------|------------|--------------|------------|------------|------------|------------------|------------|------------------|------------|------------|------------|
| **Six Months  Ended** | ** ** | **Revenues** | ** ** | **Net**    | ** ** | **and**          | ** ** | **Capital**      | ** ** | **Total**  | ** ** |
| **June 30, 2005**     | ** ** | **Net**      | ** ** | **Loss**   | ** ** | **Amortization** | ** ** | **Expenditures** | ** ** | **Assets** | ** ** |
|                  |       |         |       |       |       |             |       |             |       |       |       |
| FEC                   |       | $            | 39,997     |       | $          | 4,193            |       | $                | 3,953      |       | $          | 3,420 |   | $ | 84,528 |   |
| WP                    |       | 21,449       |       | (7,067     | )          | 4,447            |       | 2,500            |       | 77,365     |       |
|                  |       |         |       |       |       |             |       |             |       |       |       |
| Total Operations      |       | 61,447       |       | (2,875     | )          | 8,399            |       | 5,920            |       | 161,894    |       |
|                  |       |         |       |       |       |             |       |             |       |       |       |
| Corporate             |       | —       |       | (16,757    | )          | 322              |       | 48               |       | 13,264     |       |
|                  |       |         |       |       |       |             |       |             |       |       |       |
| Total                 |       | $            | 61,447     |       | $          | (19,632          | )          | $                | 8,722      |       | $          | 5,968 |   | $ | 175,158 |   |

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

As described in Notes 3and 8 above, FFP issued $150,000 in aggregate principal amount of 10 7/8%Senior Notes due in 2014.  The Notes areguaranteed on a senior unsecured basis by the Company and certain of theCompany’s subsidiaries.  The followingdisclosures reflect the Company’s condensed consolidating financial informationfor the periods presented.  The condensedconsolidating 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.  Certainintercompany amounts included in the subsidiary records are eliminated inconsolidation.  As a result of thisactivity, an amount due to / due from related companies will exist at any time.

Palace Entertainment Holdings, Inc.

Condensed Consolidated Balance Sheet

As Of June 30, 2006 (unaudited, in thousands)

 
| ** **                                | ** ** | ** **   | ** ** | ** ** | ** ** | **Combined Guarantor** | ** ** | ** **       | ** **                                                                                 | **Holdings**     | ** ** |
|-------------------------------------------|------------|--------------|------------|------------|------------|-----------------------------|------------|------------------|--------------------------------------------------------------------------------------------|------------------|------------|
| ** **                                | ** ** | **Holdings** | ** ** | **FFP**    | ** ** | **Subsidiaries**            | ** ** | **Eliminations** | ** **                                                                                 | **Consolidated** | ** ** |
| ASSETS                                    |       |         |       |       |       |                        |       |             |                                                                                       |             |       |
| CURRENT ASSETS                            |       |         |       |       |       |                        |       |             |                                                                                       |             |       |
| Cash and cash equivalents                 |       |         |       | $          | 6,095      |                        | $          | 430              |                                                                                       |             |       | $ | 6,525 |   |
| Inventories                               |       |         |       | 2,621      |       | 196                         |       |             |                                                                                       | 2,817            |       |
| Prepaid Expenses and Other Current Assets |       |         |       | 3,599      |       | 1,404                       |       |             |                                                                                       | 5,003            |       |
| Total Current Assets                      |       |         |       | 12,315     |       | 2,030                       |       |             |                                                                                       | 14,345           |       |
|                                      |       |         |       |       |       |                        |       |             |                                                                                       |             |       |
| PROPERTY AND  EQUIPMENT-NET               |       |         |       | 63,657     |       | 63,789                      |       |             |                                                                                       | 127,446          |       |
| GOODWILL                                  |       |         |       | 69,996     |       |                        |       |             |                 | 69,996           |       |
| INTANGIBLES, NET                          |       |         |       | 12,156     |       | 8,244                       |       |             |                                                                                       | 20,400           |       |
| OTHER ASSETS-NET                          |       |         |       | 6,520      |       | 143                         |       |             |                                                                                       | 6,663            |       |
| DUE FROM  SUBSIDIARIES                    |       |         |       | 30,738     |       |                        |       | $                | (30,738                                                                                    | )                |       |   |
| INVESTMENT IN  SUBSIDIARIES               |       | $            | 50,504     |       | 39,523     |                        |       |             | (90,027                                                                                    | )                |       |   |
| TOTAL                                     |       | $            | 50,504     |       | 234,905    |                        | $          | 74,206           |                                                                                       | $                | (120,765   | ) | $ | 238,850 |   |
|                                      |       |         |       |       |       |                        |       |             |                                                                                       |             |       |
| LIABILITIES AND  MEMBERS INTEREST         |       |         |       |       |       |                        |       |             |                                                                                       |             |       |
| CURRENT  LIABILITIES                      |       |         |       |       |       |                        |       |             |                                                                                       |             |       |
| Accounts Payable                          |       |         |       | $          | 4,855      |                        |       |             |                                                                                       |             | $          | 4,855 |   |
| Accrued Interest                          |       |         |       | 3,927      |       |                        |       |             |                                                                                       | 3,927            |       |
| Accrued Wages and Payroll Taxes           |       |         |       | 3,318      |       |                        |       |             |                                                                                       | 3,318            |       |
| Other accrued liabilities                 |       |         |       | 9,267      |       |                        |       |             |                                                                                       | 9,267            |       |
| Unearned Revenue                          |       |         |       | 677        |       | $                           | 2,421      |             |                                                                                       |             | 3,098      |   |
| Current portion of long term debt         |       |         |       | 18         |       | 818                         |       |             |                                                                                       | 836              |       |
| Total Current Liabilities                 |       |         |       | 22,062     |       | 3,239                       |       |             |                                                                                       | 25,301           |       |
|                                      |       |         |       |       |       |                        |       |             |                                                                                       |             |       |
| LONG TERM  DEBT-Less Current Portion      |       |         |       | 159,012    |       | 670                         |       |             |                                                                                       | 159,682          |       |
| DUE TO PARENT                             |       |         |       |       |       | 30,738                      |       | (30,738          | )                                                                                          |             |       |
| OTHER LONG TERM  LIABILITIES              |       |         |       | 3,327      |       | 37                          |       |             |                                                                                       | 3,364            |       |
| Total Liabilities                         |       |         |       | 184,401    |       | 34,684                      |       | (30,738          | )                                                                                          | 188,347          |       |
|                                      |       |         |       |       |       |                        |       |             |                                                                                       |             |       |
| SHAREHOLDER’S  EQUITY                |       | $            | 50,504     |       | 50,504     |                        | 39,523     |             | (90,027                                                                                    | )                | 50,504     |   |
| TOTAL                                     |       | $            | 50,504     |       | $          | 234,905                     |       | $                | 74,206                                                                                     |             | $          | (120,765 | ) | $ | 238,850 |   |

 

24

----

**FestivalFun Parks LLC**

**CondensedConsolidating Balance Sheet**

**As OfDecember 31, 2005**

**($ inthousands)**
| ** **                                | ** ** | ** **                       | ** ** | **Combined Guarantor** | ** ** | ** **       | ** ** | ** **                | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|-----------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **Festival Fun Parks** | ** ** | **Subsidiaries**            | ** ** | **Eliminations** | ** ** | **FFP Consolidated** | ** ** |
| ASSETS                                    |       |                             |       |                        |       |             |       |                      |       |
| CURRENT ASSETS                            |       |                             |       |                        |       |             |       |                      |       |
| Cash and cash equivalents                 |       | $                                | 5,125      |                        | $          | 115              |       |                      |       | $ | 5,240 |   |
| Inventories                               |       | 2,858                            |       | 437                         |       |             |       | 3,295                     |       |
| Prepaid Expenses and Other Current Assets |       | 2,878                            |       | 1,023                       |       |             |       | 3,901                     |       |
|                                      |       |                             |       |                        |       |             |       |                      |       |
| Total Current Assets                      |       | 10,861                           |       | 1,575                       |       |             |       | 12,436                    |       |
|                                      |       |                             |       |                        |       |             |       |                      |       |
| PROPERTY AND  EQUIPMENT—NET          |       | 61,778                           |       | 50,610                      |       |             |       | 112,388                   |       |
| GOODWILL                                  |       | 22,432                           |       | 15,039                      |       |             |       | 37,471                    |       |
| OTHER ASSETS—NET                     |       | 3,225                            |       | 143                         |       |             |       | 3,368                     |       |
| INVESTMENT IN  AND DUE FROM SUBSIDIARIES  |       | $                                | 64,477     |                        |       |             | $          | (64,477                   | )          |   |   |
|                                      |       |                             |       |                        |       |             |       |                      |       |
| TOTAL                                     |       | $                                | 162,773    |                        | $          | 67,367           |       | (64,477                   | )          | $ | 165,663 |   |
|                                      |       |                             |       |                        |       |             |       |                      |       |
| LIABILITIES AND  MEMBERS INTEREST         |       |                             |       |                        |       |             |       |                      |       |
| CURRENT  LIABILITIES                      |       |                             |       |                        |       |             |       |                      |       |
| Accounts Payable                          |       | $                                | 2,705      |                        |       |             |       |                      | $          | 2,705 |   |
| Accrued Interest                          |       | 610                              |       |                        |       |             |       | 610                       |       |
| Accrued Wages and Payroll Taxes           |       | 2,485                            |       |                        |       |             |       | 2,485                     |       |
| Other accrued liabilities                 |       | 7,156                            |       |                        |       |             |       | 7,156                     |       |
| Unearned Revenue                          |       | 92                               |       | $                           | 1,250      |             |       |                      | 1,342      |   |
| Current position of long term debt        |       | 7,106                            |       | 764                         |       |             |       | 7,870                     |       |
|                                      |       |                             |       |                        |       |             |       |                      |       |
| Total Current Liabilities                 |       | 20,154                           |       | 2,014                       |       |             |       | 22,168                    |       |
|                                      |       |                             |       |                        |       |             |       |                      |       |
| LONG TERM  DEBT—Less Current Portion |       | 156,535                          |       | 839                         |       |             |       | 157,374                   |       |
| OTHER LONG TERM  LIABILITIES              |       | 3,223                            |       | 37                          |       |             |       | 3,260                     |       |
| Total Current Liabilities                 |       | 179,912                          |       | 2,890                       |       |             |       | 182,802                   |       |
|                                      |       |                             |       |                        |       |             |       |                      |       |
| DUE TO/FROM  SUBSIDIARIES                 |       | (63,256                          | )          | 63,256                      |       | (20,394          | )          |                      |       |
| MEMBER’S  INTEREST                   |       | 46,117                           |       | 8,080                       |       | $                | (44,083    | )                         | (17,139    | ) |
|                                      |       |                             |       |                        |       |             |       |                      |       |
| TOTAL                                     |       | $                                | 162,773    |                        | $          | 74,226           |       | $                         | (64,477    | ) | $ | 165,663 |   |

 

25

----

 

Festival Fun Parks LLC

Condensed Consolidated Statement of Operations For The Period Ended April1 to April 12, 2006 ($ in thousands)

 
| ** **                           | ** ** | Festival Fun Parks | ** ** | **Combined Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **FFP Consolidated** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------|------------|
|                                 |       |                         |       |                                      |       |             |       |                      |       |
| Revenues, net                        |       | $                            | 2,096      |                                      | $          | 505              |       |                      |       | $ | 2,601 |   |
| Operating Costs and Expenses         |       |                         |       |                                      |       |             |       |                      |       |
| Cost  of Revenue                     |       | 2,135                        |       | 781                                       |       |             |       | 2,916                     |       |
| Selling,  General and Administrative |       | 371                          |       | 26                                        |       |             |       | 397                       |       |
| Depreciation  and Amortization       |       | 332                          |       | (34                                       | )          |             |       | 298                       |       |
| Total  Operating Expenses            |       | 2,838                        |       | 773                                       |       |             |       | 3,611                     |       |
|                                 |       |                         |       |                                      |       |             |       |                      |       |
| Operating  Loss                      |       | (742                         | )          | (268                                      | )          |             |       | (1,010                    | )          |
|                                 |       |                         |       |                                      |       |             |       |                      |       |
| Equity  in Earnings of Subsidiaries  |       | (268                         | )          |                                      |       | 268              |       | 0                         |       |
|                                 |       |                         |       |                                      |       |             |       |                      |       |
| Other Expense                        |       |                         |       |                                      |       |             |       |                      |       |
| Interest  and Other Expense, net     |       | 671                          |       | 0                                         |       |             |       | 671                       |       |
|                                 |       |                         |       |                                      |       |             |       |                      |       |
| Loss  from Continuing Operations     |       | (1,681                       | )          | (268                                      | )          | 268              |       | (1,681                    | )          |
|                                 |       |                         |       |                                      |       |             |       |                      |       |
| Net Loss                             |       | $                            | (1,681     | )                                         | $          | (268             | )          | $                         | 268        |   | $ | (1,681 | ) |
|                                      |            |                              |            |                                           |            |                  |            |                           |            |  |  |  |  |

 

Palace Entertainment Holdings Inc.

Condensed Consolidated Statement of Operations For The Period EndedApril 13 to June 30, 2006 ($ in thousands)

 

|                                     | ** ** | **Holdings** | ** ** | **Festival Fun Parks** | ** ** | **Combined Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|-------------------------------------|------------|--------------|------------|----------------------------------|------------|-------------------------------------------|------------|------------------|------------|----------------------------|------------|
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Revenues, net                       |       | $            | 0          |                             | $          | 24,709                                    |       | $                | 14,753     |                       | $          | 0 |   | $ | 39,462 |   |
| Operating Costs  and Expenses       |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Cost of Revenue                     |       | 0            |       | 16,994                           |       | 12,213                                    |       | 0                |       | 29,207                     |       |
| Selling, General and Administrative |       | 0            |       | 3,805                            |       | 1,666                                     |       | 0                |       | 5,471                      |       |
| Depreciation and Amortization       |       | 0            |       | 4,040                            |       | 261                                       |       | 0                |       | 4,301                      |       |
| Total Operating Expenses            |       | 0            |       | 24,839                           |       | 14,141                                    |       | 0                |       | 38,979                     |       |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Operating Loss                      |       | 0            |       | (129                             | )          | 612                                       |       | 0                |       | 483                        |       |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Equity in Earnings of Subsidiaries  |       | (3,715       | )          | 612                              |       |                                      |       | 3,103            |       | 0                          |       |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Other Expense                       |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Interest and Other Expense, net     |       | 0            |       | 4,154                            |       | 0                                         |       | 0                |       | 4,154                      |       |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Loss from Continuing Operations     |       | (3,715       | )          | (3,671                           | )          | 612                                       |       | 3,103            |       | (3,671                     | )          |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Income Tax Provision                |       | 0            |       | 44                               |       | 0                                         |       | 0                |       | 44                         |       |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Net Loss                            |       | $            | (3,715     | )                                | $          | (3,715                                    | )          | $                | 612        |                       | $          | 3,103 |   | (3,715 | ) |
|                                     |            |              |            |                                  |            |                                           |            |                  |            |                            |            |  |  |  |  |  |

 

 

26

----

 

Festival Fun Parks LLC

Condensed Consolidated Statement of Operations For The Three MonthsEnded June 30, 2005 ( $ in thousands )

 
| ** **                          | ** ** | **Festival Fun Parks** | ** ** | **Combined Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **FFP Consolidated** | ** ** |
|-------------------------------------|------------|------------------------|------------|--------------------------------------|------------|------------------|------------|----------------------|------------|
|                                |       |                   |       |                                 |       |             |       |                 |       |
| Revenues, net                       |       | $                      | 26,638     |                                 | $          | 14,829           |       |                 |       | $ | 41,467 |   |
| Operating Costs and Expenses        |       |                   |       |                                 |       |             |       |                 |       |
| Cost of Revenue                     |       | 19,914                 |       | 9,750                                |       |             |       | 29,664               |       |
| Selling, General and Administrative |       | 2,004                  |       | 4,029                                |       |             |       | 6,033                |       |
| Depreciation and Amortization       |       | 2,528                  |       | 1,892                                |       |             |       | 4,420                |       |
| Total Operating Expenses            |       | 24,446                 |       | 15,671                               |       |             |       | 40,117               |       |
|                                |       |                   |       |                                 |       |             |       |                 |       |
| Operating Income                    |       | 2,192                  |       | (842                                 | )          |             |       | 1,350                |       |
|                                |       |                   |       |                                 |       |             |       |                 |       |
| Equity in Earnings of Subsidiaries  |       | 842                    |       |                                 |       | $                | (842       | )                    | 0          |   |
|                                |       |                   |       |                                 |       |             |       |                 |       |
| Other Expense                       |       |                   |       |                                 |       |             |       |                 |       |
| Interest and Other Expense, net     |       | 5,859                  |       |                                 |       |             |       | 5,859                |       |
|                                |       |                   |       |                                 |       |             |       |                 |       |
| Net Loss                            |       | $                      | (4,509     | )                                    | $          | (842             | )          | $                    | 842        |   | $ | (4,509 | ) |

 

Festival Fun Parks LLC

Condensed Consolidated Statement of Operations For The Six Months EndedJune 30, 2005 ( $ in thousands)

 
| ** **                          | ** ** | **Festival Fun Parks** | ** ** | **Combined Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **FFP Consolidated** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------|------------|
|                                |       |                             |       |                                      |       |             |       |                      |       |
| Revenues, net                       |       | $                                | 42,071     |                                      | $          | 19,376           |       |                      |       | $ | 61,447 |   |
| Operating Costs  and Expenses       |       |                             |       |                                      |       |             |       |                      |       |
| Cost of Revenue                     |       | 35,145                           |       | 16,002                                    |       |             |       | 51,147                    |       |
| Selling, General and Administrative |       | 4,364                            |       | 5,248                                     |       |             |       | 9,612                     |       |
| Depreciation and Amortization       |       | 5,025                            |       | 3,697                                     |       |             |       | 8,722                     |       |
| Total Operating Expenses            |       | 44,534                           |       | 24,947                                    |       |             |       | 69,481                    |       |
|                                |       |                             |       |                                      |       |             |       |                      |       |
| Operating Income                    |       | (2,463                           | )          | (5,571                                    | )          |             |       | (8,034                    | )          |
|                                |       |                             |       |                                      |       |             |       |                      |       |
| Equity in Earnings of Subsidiaries  |       | 5,571                            |       |                                      |       | $                | (5,571     | )                         |       |   |
|                                |       |                             |       |                                      |       |             |       |                      |       |
| Other Expense                       |       |                             |       |                                      |       |             |       |                      |       |
| Interest and Other Expense, net     |       | 11,598                           |       |                                      |       |             |       | 11,598                    |       |
|                                |       |                             |       |                                      |       |             |       |                      |       |
|                                |       |                             |       |                                      |       |             |       |                      |       |
| Net Loss                            |       | $                                | (19,632    | )                                         | $          | 5,571            |       | $                         | 5,571      |   | $ | (19,632 | ) |

 

27

----

Festival Fun Parks LLC

Condensed Consolidated Statement of Operations For The Period Ended Jan1 to April 12, 2006 ($ in thousands)

 
| ** **                          | ** ** | Festival Fun Parks | ** ** | **Combined Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **FFP Consolidated** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-------------------------------------------|------------|------------------|------------|---------------------------|------------|
|                                |       |                         |       |                                      |       |             |       |                      |       |
| Revenues, net                       |       | $                            | 17,818     |                                      | $          | 5,579            |       |                      |       | $ | 23,397 |   |
| Operating Costs  and Expenses       |       |                         |       |                                      |       |             |       |                      |       |
| Cost of Revenue                     |       | 16,148                       |       | 8,042                                     |       |             |       | 26,190                    |       |
| Selling, General and Administrative |       | 3,151                        |       | 1057                                      |       |             |       | 4,208                     |       |
| Depreciation and Amortization       |       | 2,825                        |       | 1,853                                     |       |             |       | 4,478                     |       |
| Total Operating Expenses            |       | 24,124                       |       | 10,752                                    |       |             |       | 34,876                    |       |
|                                |       |                         |       |                                      |       |             |       |                      |       |
| Operating Loss                      |       | (6,306                       | )          | (5,173                                    | )          |             |       | (11,479                   | )          |
|                                |       |                         |       |                                      |       |             |       |                      |       |
| Equity in Earnings of Subsidiaries  |       | (5,173                       | )          |                                      |       | 5,173            |       | 0                         |       |
|                                |       |                         |       |                                      |       |             |       |                      |       |
| Other Expense                       |       |                         |       |                                      |       |             |       |                      |       |
| Interest and Other Expense, net     |       | 6,674                        |       |                                      |       |             |       | 6,674                     |       |
|                                |       |                         |       |                                      |       |             |       |                      |       |
| Loss from Continuing Operations     |       | (18,153                      | )          | (5,173                                    | )          | 5,173            |       | (18,153                   | )          |
|                                |       |                         |       |                                      |       |             |       |                      |       |
| Net Loss                            |       | $                            | (18,153    | )                                         | $          | (5,173           | )          | $                         | (5,173     |   | $ | (18,153 | ) |
|                                     |            |                              |            |                                           |            |                  |            |                           |            |  |  |  |  |

 

Palace Entertainment Holdings Inc.

Condensed ConsolidatedStatement of Operations For The Period Ended April 13 to June 30, 2006 ($ inthousands)

|                                     | ** ** | **Holdings** | ** ** | **Festival Fun Parks** | ** ** | **Combined Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Holdings  Consolidated** | ** ** |
|-------------------------------------|------------|--------------|------------|----------------------------------|------------|-------------------------------------------|------------|------------------|------------|----------------------------|------------|
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Revenues, net                       |       | $            | 0          |                             | $          | 24,709                                    |       | $                | 14,753     |                       | $          | 0 |   | $ | 39,462 |   |
| Operating Costs  and Expenses       |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Cost of Revenue                     |       | 0            |       | 16,994                           |       | 12,213                                    |       | 0                |       | 29,207                     |       |
| Selling, General and Administrative |       | 0            |       | 3,805                            |       | 1,666                                     |       | 0                |       | 5,471                      |       |
| Depreciation and Amortization       |       | 0            |       | 4,040                            |       | 261                                       |       | 0                |       | 4,301                      |       |
| Total Operating Expenses            |       | 0            |       | 24,839                           |       | 14,141                                    |       | 0                |       | 38,979                     |       |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Operating Loss                      |       | 0            |       | (129                             | )          | 612                                       |       | 0                |       | 483                        |       |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Equity in Earnings of Subsidiaries  |       | (3,715       | )          | 612                              |       |                                      |       | 3,103            |       | 0                          |       |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Other Expense                       |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Interest and Other Expense, net     |       | 0            |       | 4,154                            |       | 0                                         |       | 0                |       | 4,154                      |       |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Loss from Continuing Operations     |       | (3,715       | )          | (3,671                           | )          | 612                                       |       | 3,103            |       | (3,671                     | )          |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Income Tax Provision                |       | 0            |       | 44                               |       | 0                                         |       | 0                |       | 44                         |       |
|                                |       |         |       |                             |       |                                      |       |             |       |                       |       |
| Net Loss                            |       | $            | (3,715     | )                                | $          | (3,715                                    | )          | $                | 612        |                       | $          | 3,103 |   | (3,715 | ) |
|                                     |            |              |            |                                  |            |                                           |            |                  |            |                            |            |  |  |  |  |  |

 

28

----

**PALACE ENTERTAINMENT HOLDINGS, INC.**

**Consolidated Statement of Cash Flows**

**for thesix months ended June 30, 2005 (unaudited, in thousands)**

 
| ** **                                                                       | ** ** | ** **   | ** ** | ** ** | ** ** | **Combined**  | ** ** | ** **      | ** ** | **Holdings**     | ** ** |
|----------------------------------------------------------------------------------|------------|--------------|------------|------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **Holdings** | ** ** | **FFP**    | ** ** | **Guarantor** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                        |       |         |       |       |       |          |       |            |       |             |       |
| **Net  Profit/(Loss)**                                                           |       |         |       | $          | (21,868    | )             | $          | (4,560          | )          | $                | 4,560      |   | $ | (21,868 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |         |       |       |       |          |       |            |       |             |       |
| Depreciation and amortization                                                    |       |         |       | 6,013      |       | 2,765         |       |            |       | 8,778            |       |
| Equity in Earnings of Subsidiaries                                               |       | $            | 21,868     |       | 4,560      |          |       |            | (26,428    | )                |       |   |
| Amortization of deferred financing costs and discount  accretion                 |       |         |       | 959        |       |          |       |            |       | 959              |       |
| Financial Interest Payments                                                      |       |         |       | 3,515      |       |          |       |            |       | 3,515            |       |
| Share Based Compensation                                                         |       |         |       | 458        |       |          |       |            |       | 458              |       |
| Deferred rent expense                                                            |       |         |       | 133        |       | 37            |       |            |       | 170              |       |
|                                                                             |       |         |       |       |       |          |       |            |       |             |       |
| **Changes  in Net Operating Assets and Liabilities:**                            |       |         |       |       |       |          |       |            |       |             |       |
| Inventories                                                                      |       |         |       | (1,084     | )          | 241           |       |            |       | (843             | )          |
| Prepaid Expenses and Other Current Assets                                        |       |         |       | 315        |       | (381          | )          |            |       | (66              | )          |
| Other Assets                                                                     |       |         |       | (110       | )          |          |       |            |       | (110             | )          |
| Accounts Payable                                                                 |       |         |       | 1,477      |       |          |       |            |       | 1,477            |       |
| Accrued Interest                                                                 |       |         |       | 4,277      |       |          |       |            |       | 4,277            |       |
| Accrued Wages and Payroll Taxes                                                  |       |         |       | 832        |       |          |       |            |       | 832              |       |
| Other Accrued Liabilities                                                        |       |         |       | 3,174      |       |          |       |            |       | 3,174            |       |
| Unearned Revenue                                                                 |       |         |       | 585        |       | 1,171         |       |            |       | 1,756            |       |
| Other long-term liabilities                                                      |       |         |       | (66        | )          |          |       |            |       | (66              | )          |
|                                                                             |       |         |       |       |       |          |       |            |       |             |       |
| Net Cash Provided by Operating Activities                                        |       | 21,868       |       | 3,170      |       | (727          | )          | (21,868         | )          | 2,443            |       |
|                                                                             |       |         |       |       |       |          |       |            |       |             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                        |       |         |       |       |       |          |       |            |       |             |       |
| ** **                                                                       |       |         |       |       |       |          |       |            |       |             |       |
| Payment for acquisition of parks, net                                            |       | (37,599      | )          |       |       |          |       |            |       | (37,599          | )          |
| Purchases of property and equipment                                              |       |         |       | (3,188     | )          | (4,119        | )          |            |       | (7,307           | )          |
|                                                                             |       |         |       |       |       |          |       |            |       |             |       |
| Net Cash used in Investing Activities                                            |       | (37,599      | )          | (3,188     | )          | (4,119        | )          |            |       | (44,906          | )          |
|                                                                             |       |         |       |       |       |          |       |            |       |             |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                        |       |         |       |       |       |          |       |            |       |             |       |
| Issuance of common stock                                                         |       | 54,260       |       |       |       |          |       |            |       | 54,260           |       |
| Return on capital                                                                |       | (500         | )          |       |       |          |       |            |       | (500             | )          |
| Proceeds from issuance of long-term debt                                         |       | 176,600      |       |       |       |          |       |            |       | 176,600          |       |
| Repayment of long-term debt                                                      |       |         |       | (180,862   | )          |          |       |            |       | (180,862         | )          |
| Payments for cost of financing                                                   |       | (5,575       | )          |       |       |          |       |            |       | (5,575           | )          |
| Payments on capital leases                                                       |       |         |       | (2         | )          | (116          | )          |            |       | (118             | )          |
| Advances to related company                                                      |       | (155,554     | )          | (5,314     | )          |          |       | 160,868         |       |             |       |
| Advances from related company                                                    |       |         |       | 187,186    |       | 5,314         |       | (192,500        | )          |             |       |
| Distributions to member                                                          |       |         |       | (57        | )          |          |       |            |       | (57              | )          |
|                                                                             |       |         |       |       |       |          |       |            |       |             |       |
| Net Cash Provided by financing activities                                        |       | 15,471       |       | 951        |       | 5,198         |       | (31,632         | )          | 43,748           |       |
|                                                                             |       |         |       |       |       |          |       |            |       |             |       |
| **NET  INCREASE IN CASH**                                                        |       |         |       | 933        |       | 352           |       |            |       | 1,285            |       |
| ** **                                                                       |       |         |       |       |       |          |       |            |       |             |       |
| **CASH AND  EQUIVALENTS - BEGINNING OF PERIOD**                                  |       |         |       | 5,125      |       | 115           |       |            |       | 5,240            |       |
| ** **                                                                       |       |         |       |       |       |          |       |            |       |             |       |
| **CASH AND EQUIVALENTS - END OF  PERIOD**                                        |       | $            | —     |       | $          | 6,058         |       | $               | 467        |             |       |   | $ | 6,525 |   |
|                                                                                  |            |              |            |            |            |               |            |                 |            |                  |            |  |  |  |  |  |

 

 

 

29

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**Festival Fun Parks LLC**

**Consolidated Statement of Cash Flows**

**for the six months ended June 30, 2005 (unaudited,in thousands)**

 
| ** **                                                                       | ** ** | ** ** | ** ** | **Combined**  | ** ** | ** **      | ** ** | **FFP**          | ** ** |
|----------------------------------------------------------------------------------|------------|------------|------------|---------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **FFP**    | ** ** | **Guarantor** | ** ** | **Elimination** | ** ** | **Consolidated** | ** ** |
| **CASH  FLOWS FROM OPERATING ACTIVITIES**                                        |       |       |       |          |       |            |       |             |       |
| **Net  Profit/(Loss)**                                                           |       | $          | (19,632    | )             | $          | (10,151         | )          | $                | 10,151     |   | $ | (19,632 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities: |       |       |       |          |       |            |       |             |       |
| Depreciation and Amortization                                                    |       | 5,026      |       | 3,696         |       |            |       | 8,722            |       |
| Equity in Earnings of Subsidiaries                                               |       | 10,151     |       |          |       | (10,151         | )          |             |       |
| Gain/loss on disposition                                                         |       | 173        |       |          |       |            |       | 173              |       |
| Amortization of Deferred financing costs                                         |       | 1,332      |       |          |       |            |       | 1,332            |       |
| Financed Interest payments                                                       |       | 1,235      |       |          |       |            |       | 1,235            |       |
| Deferred Rent Expense                                                            |       | 153        |       | 37            |       |            |       | 190              |       |
|                                                                             |       |       |       |          |       |            |       |             |       |
| **Changes  in Net Operating Assets and Liabilities:**                            |       |       |       |          |       |            |       |             |       |
| Inventories                                                                      |       | (254       | )          | (621          | )          |            |       | (875             | )          |
| Prepaid Expenses and Other Current Assets                                        |       | 856        |       | (362          | )          |            |       | 494              |       |
| Other Assets                                                                     |       | (51        | )          | (65           | )          |            |       | (116             | )          |
| Accounts Payable                                                                 |       | 1,135      |       |          |       |            |       | 1,135            |       |
| Accrued Interest                                                                 |       | 181        |       |          |       |            |       | 181              |       |
| Accrued Wages and Payroll Taxes                                                  |       | 2,115      |       |          |       |            |       | 2,115            |       |
| Other Accrued Liabilities                                                        |       | 1,318      |       |          |       |            |       | 1,318            |       |
| Unearned Revenue                                                                 |       | 346        |       | 1,067         |       |            |       | 1,413            |       |
| Other long-term liabilities                                                      |       | (15        | )          |          |       |            |       | (15              | )          |
|                                                                             |       |       |       |          |       |            |       |             |       |
| Net Cash Provided by Operating Activities                                        |       | 4,069      |       | (6,399        | )          |            |       | (2,330           | )          |
|                                                                             |       |       |       |          |       |            |       |             |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES**                                        |       |       |       |          |       |            |       |             |       |
| ** **                                                                       |       |       |       |          |       |            |       |             |       |
| Purchase of Property and Equipment                                               |       | (3,548     | )          | (2,420        | )          |            |       | (5,968           | )          |
|                                                                             |       |       |       |          |       |            |       |             |       |
| Net Cash used in Investing Activities                                            |       | (3,548     | )          | (2,420        | )          |            |       | (5,968           | )          |
|                                                                             |       |       |       |          |       |            |       |             |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES**                                        |       |       |       |          |       |            |       |             |       |
| Proceeds from issuance of long-term debt                                         |       | 15,250     |       |          |       |            |       | 15,250           |       |
| Repayment of long-term debt                                                      |       | (1,214     | )          |          |       |            |       | (1,214           | )          |
| Payments for cost of financing                                                   |       | (176       | )          |          |       |            |       | (176             | )          |
| Payments on capital leases                                                       |       | (16        | )          | (97           | )          |            |       | (113             | )          |
| Advances to related company                                                      |       | (9,204     | )          |          |       | 9,204           |       |             |       |
| Advances from related company                                                    |       |       |       | 9,204         |       | (9,204          | )          |             |       |
| Distributions to member                                                          |       | (60        | )          |          |       |            |       | (60              | )          |
|                                                                             |       |       |       |          |       |            |       |             |       |
| Net Cash Provided by (used in) Financing Activities                              |       | 4,580      |       | 9,107         |       |            |       | 13,687           |       |
|                                                                             |       |       |       |          |       |            |       |             |       |
| **NET  INCREASE (DECREASE) IN CASH**                                             |       | 5,101      |       | 288           |       |            |       | 5,389            |       |
| ** **                                                                       |       |       |       |          |       |            |       |             |       |
| **CASH  AND EQUIVALENTS - BEGINNING OF PERIOD**                                  |       | 2,215      |       | 132           |       |            |       | 2,347            |       |
| ** **                                                                       |       |       |       |          |       |            |       |             |       |
| **CASH AND EQUIVALENTS - END OF  PERIOD**                                        |       | $          | 7,316      |          | $          | 420             |       |             |       | $ | 7,736 |   |
|                                                                                  |            |            |            |               |            |                 |            |                  |            |  |  |  |  |

 

 

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

**Overview**

On April 12, 2006, PalaceEntertainment Holdings, Inc. (“Company”) a Delaware company acquired FestivalFun Parks LLC (“FFP”). The Company is a 100% owned subsidiary of PalaceHoldings Group. LLC (“Holdings”), which is primarily owned by MidOceanPartners. LP (“MidOcean Partners”) a New York and London based private equityfirm. FFP is a Delaware limited liability company formed on June 23, 1998. withPalace Entertainment, Inc. (“PAL”) being the sale member prior to acquisition.The Company was established to purchase and operate family entertainmentcenters (“FECs”) and water parks (“WPs”). At June 30, 2006 and 2005, thecompany owned and operated 32 FECs and WPs (“Parks”) Of the 32 Parks currentlyowned at June 30, 2006, 16 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 in North Carolina, New Jersey and New Hampshire. Revenueearned from the Parks located in California represents approximately 48.7% and48.04% in the aggregate of the Company’s revenues for the six months ended June30, 2006 and 2005, respectively. Eight of the Parks are WPs featuring such attractionsas water slides, flumes, and pools and one is a nature theme park. The other 23Parks generally feature such attractions as miniature golf, batting cages,kiddy parks, go-carts, and video arcades.

We are one of the largestoperators of WPs and FECs in the United States, based on the number of Parksoperated. As of June 30, 2006, we operated a geographically diverse portfolioof 32 Parks in eight states with an attendance that we estimate to be in excessof 10 million guests in 2005. Each of our Parks is a well-establishedbusiness with a long operating history, with our WPs and our FECs having beenin operation for an average of over 23 years and 17 years,respectively. We operate our Parks under several established brand names suchas Wet ’N Wild®, Splish SplashÔ, Raging Waters®, Malibu Grand Prix®, MountasiaÔ, SpeedZone®, Big Kahuna’s®, Silver Springs® and Boomers!®.

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

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

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

In order to anticipate and adaptto changing consumer preferences and maintain and increase attendance, we mustinvest in new rides, amusements, arcade games and attractions. Such investmentsrequire capital availability and spending on our part, and we estimate that asignificant new ride at one of our WPs may cost between $500,000 to$1.5 million. For the six months ended June 30, 2006, and year endedDecember 31, 2005 we spent $4.4 million and $2.6 million, respectively on newrides and attractions.

Our operating costs and expensesconsist of the following: cost of revenue, which primarily includes costs ofproducts sold like food and beverage, arcade redemption prizes and merchandise;salaries and benefits, which include the costs of our park level fulltime andpart time employees; operating and maintenance, which include outside services,supplies, spare parts, and utilities; rent (a portion of which are percentagerents) and property taxes, which includes all park level rent and property taxexpenses (offset by rental income earned from the sublease of building spaceand/or land); selling, general and administrative expenses, which includes allcorporate overhead including corporate salaries, office rent, insurance costsand fees to outside professional service providers, other operating costs whichinclude all advertising, promotion and marketing program expenses (includingtelevision, radio and print advertising); and depreciation and amortization,which is primarily related to our leasehold improvements. All of our facilitiesare on leased property. Certain of our expenses are relatively fixed, and costsfor full-time employees, outside services, maintenance, utilities, insurance,depreciation and amortization and occupancy costs do not vary significantlywith attendance. We add significant numbers of seasonal employees during thewarmer months of the year, primarily from Memorial Day to Labor Day. Ourworkforce consists primarily of high-school aged young adults and teachers whowork on an hourly basis during our operating season for our WPs and year-roundwith peak summer employment for our FECs. A significant number of our hourlypersonnel at our facilities are paid at rates related to the federal minimumwage. Under federal and state child labor laws, we are regulated in the numberof hours, the times and the types of jobs that youths up to the age of 18 arepermitted to work.

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

31

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Our business is highly seasonal.Typically, our WPs operate on an approximate 110-day operating season,generally from Memorial Day through Labor Day, and though our FECs are openyear-round, there is also significantly greater attendance at our FECs duringthis period and other periods when children are out of school. In 2005, our WPwith the longest operating period was open for 141 days while our parkwith the shortest operating period was open for 79 days. As a result, morethan 75% of our revenues are generated during the second and third calendarquarters of each year. We believe that the spending at our Parks varies widelyamong our customers based on age and other demographic factors, and thelocation and nature of the attractions of the park.

Our business is concentratedgeographically and by the size of our Parks. Sixteen of our Parks are locatedin California and accounted for 49% and 48% of our revenue for the six monthsended June 30, 2006 and June 30, 2005, respectively. In addition, two of ourWPs accounted for 18% and 17% of our revenue for the six months ended June 30,2006 and June 30, 2005, respectively.

Our strategic initiatives afterthe acquisition of FFP by the Company and related transactions includeimplementing several near-term expense reduction initiatives. As part of theseinitiatives we plan to shift to a regional organizational structure as well asfocus on better leveraging our full time WP employees on a year-round basis. Webelieve these two initiatives will allow us to reduce our park level managementexpenses. Additionally, we plan to relocate the corporate offices to a lessexpensive location, or sublet a portion thereof, which we expect will reducecorporate office rent expense. We expect general and administrative expenses toincrease due to additional headcount in finance and additional audit and legalfees as a result of our becoming a reporting company in connection with theregistration of the notes. We also intend to increase spending on marketing,including concerts and other events.

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

The period April 13, 2006 to June 30, 2006 reflect the results ofoperations by the Company following the acquisition of FFP while the periodsApril 13, 2006 reflect the operations of FFP under the ownership of PAL.  Therefore, the periods are notcomparable.  However, for the purpose ofcomparing the operations for the three and six months ended June 30, 2006 and2005, the pre-acquisition and post-acquisition periods in 2006 have beencombined in the discussions below:

**Comparison of Three Months Ended June30, 2006 and 2005**

We incurred net losses of $12.5 million (combined) and$4.5 million for the three months ended June 30, 2006 and 2005, respectively.The following table sets forth statement of operations data and other data forthe periods indicated:
|                                     | ** ** | **(1) Three months ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                          | ** ** | **Combined**                                            | ** ** | ** ** | ** ** |
| **$ in thousands**        | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| **Statement  of operations:**       | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| **Revenues**                        |       |                                                    |       |   |   |
| FECs                                |       | $                                                       | 24,317     |   | $ | 23,404 |   |
| WPs                                 |       | 17,746                                                  |       | 18,063 |   |
| Total revenues                      |       | 42,063                                                  |       | 41,467 |   |
| **Operating  costs and expenses**   |       |                                                    |       |   |   |
| Cost of revenue                     |       | 32,123                                                  |       | 29,664 |   |
| % of Revenues                       |       | 76.4                                                    | %          | 71.5 | % |
| (Gain) / Loss on disposal of assets |       | —                                                  |       | 195 |   |
| Selling, general and administrative |       | 5,868                                                   |       | 5,838 |   |
| % of Revenues                       |       | 13.9                                                    | %          | 14.0 | % |
| Depreciation and amortization       |       | 4,599                                                   |       | 4,420 |   |
| Total operating costs and expenses  |       | 42,590                                                  |       | 40,117 |   |
| Operating profit  (loss)            |       | (527                                                    | )          | 1,350 |   |
| Interest and  other expense, net    |       | 4,825                                                   |       | 5,859 |   |
| Income tax  expense                 |       | 44                                                      |       | — |   |
| Net loss                            |       | $                                                       | (5,396     | ) | $ | (4,509 | ) |

 

----

(1) Combined is defined as the cumulative total of the pre and postacquisition results of operations for the three months ended June 30, 2006.

32

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We have two reportable segments, WP’s and FEC’s. The accounting policiesof the segments are the same as those described in critical accounting policiesbelow. Net loss of segments does not include interest income or expense andprovision for income taxes. The following table sets forth certain statement ofoperations data by segment and other data for the periods indicated:
|                                     | ** ** | **Three months ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **WPs**                                             | ** ** | **FECs** | ** ** |
| ** **                          | ** ** | **Combined**                                        | ** ** | ** ** | ** ** | **Combined** | ** ** | ** ** | ** ** |
| **($ in thousands)**      | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues, net                       |       | $                                                   | 17,746     |   | $ | 18,063 |   | $ | 24,317 |   | $ | 23,404 |   |
| Segment-level  EBITDA(1)            |       | 160                                                 |       | 1,817 |   | 6,418 |   | 6,368 |   |
| Segment-level  capital expenditures |       | 2,558                                               |       | 1,964 |   | 1,333 |   | 2,499 |   |
|                                     |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |

----

(1)  Segment-level EBITDA information(defined as Earnings Before Interest, Taxes, Depreciation, and Amortization) ispresented because we believe such measure is useful for assessing theperformance of our ongoing activities and certain investors may use suchmeasure as supplemental information to evaluate our ability to generate cash.We believe that Segment-level EBITDA is a meaningful measure ofpark-level operating profitability of our business segments because we use itfor measuring returns on capital investments, and evaluating potential acquisitions.The definition of Segment-level EBITDA used in this quarterly report maynot be comparable to the definitions of similarly titled measures used by othercompanies.
|                                                      | ** ** | **Three months ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **Combined**                                        | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **WP  operating data:**                              | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| WP attendance                                        |       | 657,601                                             |       | 686,896 |   |
| Revenue per guest (“Per  Capita Spending”) |       | $                                                   | 26.99      |   | $ | 26.29 |   |
|                                                      |            |                                                     |            |  |  |  |  |

 

*Revenue.*  Revenuefor the three months ended June 30, 2006 totaled $42.1 million compared to$41.5 million for the same period in 2005, an increase of $0.6 million or1.5%. The increase in 2006 resulted primarily from a 3.9% increase in FECrevenues which were driven by improved service levels and the overall parkappearance.  This increase is offset by adrop in revenues due to slightly lower attendance in our WP’s caused primarilyby inclement weather in the first few weeks of the season.

*Cost ofrevenue.*  Our park level operating expenses totaled$32.1 million for the three months ended June 30, 2006 compared to $29.7million for the same period in 2005, an increase of $2.4 million or 8.1%. Theincrease in operating expenses was largely driven by management’s plannedacceleration of spending prior to the summer operating season to catch-up ondeferred maintenance and other one-time expenditures at the WP’s and FECs.  We believe that the Company’s performanceshould continue to benefit from these expenditures over the remainder of thesummer and fall seasons. The primary drivers in each expense category were asfollows:

·                  Cost of products sold increased $0.1million or2.6% for the three months ended June 30, 2006 compared to the same period in2005 primarily due to costs for incremental food, beverage and merchandiserelating to the increase in revenues.

·                  Salaries and benefits increased $0.2 millionor 1.5% for the three months ended June 30, 2006 compared to the same period in2005 due primarily to increased man hours of hourly employees to service higherattendance levels and to strengthen customer service efforts in the FEC’s.  In addition, in the water park division webegan pre-opening preparations earlier in 2006 than in 2005 in order to bebetter prepared for the summer season.

·                  Operating and maintenance costs increased$2.0 million or 27.0% for the three months ended June 30, 2006 compared tothe same period in 2005 due primarily to accelerated park opening preparationsin our WP division, and costs incurred to improve the appearance of our FECs aspreviously mentioned.  Further exaggeratingthe comparison was the lower spending at the WP’s during the 2005 three monthperiod which were primarily driven by the liquidity constraints of the priorcapital structure.

·                  Rent and property taxes increased $0.1 million or2.6% due primarily to increases in rent tied to inflation or park performance,as well as slight increases in property taxes tied to statutory rateincreases.  Included in rent and propertytax expense were $0.1 million and $0.1 million for the three months ended June30, 2006 and 2005, respectively, of rent expense not currently due.

33

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*Selling,general and administrative expenses.*  Selling, general andadministrative expenses totaled $5.9 million for the three months ended June30, 2006 compared to $5.8 million for the same period in 2005, an increase of$0.1 million or 1.7%. The increase was primarily driven by the $.5 millionstock compensation expense recorded in the period April 13 to June 30, 2006 andcosts associated with corporate reorganization and transition costs followingthe acquisition.  This was offset by adecrease in marketing costs of $0.3 million related mostly to the FEC Segment.  Selling, general and administrative costs in2005 included costs associated with preparing FFP for sale.

*Depreciationand amortization. *Depreciation andamortization expenses increased $.2 million or 4.0% for the three months endedJune 30, 2006 compared to the same period in 2005 primarily related to theadjustments of property and equipment as well as intangibles to fair marketvalue as a result of the acquisition.

*Interestexpense, net*.  Interest expense, net totaled$4.8 million for the three monthsended June 30, 2006 compared to $5.9 millionduring the same period in 2005, a decrease of $1.1 million or 18.6%.  The decrease in interest expense resultedprimarily from the debt levels as compared to the prior year.

*Loss from operation. *The foregoing resulted in a loss fromoperations of $5.4 million for the three months ended June 30, 2006 and$4.5 million for the same period in 2005.

**Comparison ofSix Months ended June 30, 2006 and 2005**

We incurred net losses of $21.9 million and $19.6 millionfor the six months ended June 30, 2006 and 2005, respectively. The followingtable sets forth statement of operations data and other data for the periodsindicated:
|                                     | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **Combined**                                      | ** ** | ** ** | ** ** |
| **$ in thousands**        | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **Statement  of operations:**       | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Revenues**                        |       |                                              |       |   |   |
| FECs                                |       | $                                                 | 41,421     |   | $ | 39,998 |   |
| WPs                                 |       | 21,438                                            |       | 21,449 |   |
| Total revenues                      |       | 62,859                                            |       | 61,447 |   |
| **Operating  costs and expenses**   |       |                                              |       |   |   |
| Cost of revenue                     |       | 55,397                                            |       | 51,147 |   |
| % of Revenues                       |       | 88.1                                              | %          | 83.2 | % |
| (Gain) / Loss on disposal of assets |       | 0                                                 |       | 173 |   |
| Selling, general and administrative |       | 9,680                                             |       | 9,438 |   |
| % of Revenues                       |       | 15.4                                              | %          | 15.4 | % |
| Depreciation and amortization       |       | 8,779                                             |       | 8,722 |   |
| Total operating costs and expenses  |       | 73,856                                            |       | 69,480 |   |
| Operating loss                      |       | $                                                 | (10,997    | ) | (8,033 | ) |
| Interest and  other expense, net    |       | 10,827                                            |       | 11,599 |   |
| Income tax  expense                 |       | 44                                                |       | 0 |   |
| Net loss                            |       | $                                                 | (21,868    | ) | $ | (19,632 | ) |

 

We have two reportable segments,FECs and WPs. The accounting policies of the segments are the same as thosedescribed in critical accounting policies below. Net loss of segments does notinclude interest income or expense and provision for income taxes. Thefollowing table sets forth certain statement of operations data by segment andother data for the periods indicated:
|                                     | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|
| ** **                          | ** ** | **WPs**                                           | ** ** | **FECs** | ** ** |
| ** **                          | ** ** | **Combined**                                      | ** ** | ** ** | ** ** | **Combined** | ** ** | ** ** | ** ** |
| **($ in thousands)**      | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues, net                       |       | $                                                 | 21,438     |   | $ | 21,449 |   | $ | 41,421 |   | $ | 39,998 |   |
| Segment-level  EBITDA(1)            |       | (4,972                                            | )          | (2,644 | ) | 8,040 |   | 8,148 |   |
| Segment-level  capital expenditures |       | 4,843                                             |       | 2,500 |   | 2,405 |   | 3,420 |   |
|                                     |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |

 

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(1)  Segment-level EBITDA information(defined as Earnings Before Interest, Taxes, Depreciation, Amortization), ispresented because we believe such measure is useful for assessing theperformance of our ongoing activities and certain investors may use suchmeasure as supplemental information to evaluate our ability to generate cash.We believe that Segment-level EBITDA is a meaningful measure of park-leveloperating profitability of our business segments because we use it formeasuring returns on capital investments, and evaluating potentialacquisitions. The definition of Segment-level EBITDA used in this quarterlyreport may not be comparable to the definitions of similarly titled measuresused by other companies.

 

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|                                                      | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **Combined**                                      | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **WP  operating data:**                              |       |                                              |       |   |   |
| WP attendance                                        |       | 833,164                                           |       | 846,885 |   |
| Revenue per guest (“Per  Capita Spending”) |       | $                                                 | 25.73      |   | $ | 25.32 |   |
|                                                      |            |                                                   |            |  |  |  |  |

 

*Revenue.*  Revenuefor the six months ended June 30, 2006 totaled $62.9 million compared to$61.4 million for the same period in 2005, an increase of $1.5 million or2.4%. The increase in 2006 resulted primarily from a 3.6% increase in FECrevenues which were driven by improved service levels and the overall parkappearance.  This increase is offset by adrop in revenues due to slightly lower attendance in our WP’s caused byinclement weather in the first few weeks of the season.

*Cost ofrevenue.*  Our park level operating expenses totaled$55.4 million for the six months ended June 30, 2006 compared to $51.1 millionfor the same period in 2005, an increase of $4.3 million or 8.4%. The increasein operating expenses was largely driven by management’s planned accelerationof spending prior to the summer operating season to catch-up on deferredmaintenance and other one-time expenditures at the WP’s and FECs.  We believe that the Company’s performance shouldcontinue to benefit from these expenditures over the remainder of the summerand fall seasons. The primary drivers in each expense category were as follows:

·                  Cost of products sold increased $0.2 million or3.9% for the six months ended June 30, 2006 compared to the same period in 2005primarily due to costs for incremental food, beverage and merchandise relatingto the increase in revenues.

·                  Salaries and benefits increased $0.8 millionor 3.1% for the six months ended June 30, 2006 compared to the same period in2005 due primarily to increased man hours of hourly employees to service higherattendance levels and to strengthen customer service efforts in the FECs.  In addition, in our WPs we began pre-openingpreparations earlier in 2006 than in 2005 in order to be better prepared forthe summer season.

·                  Operating and maintenance costs increased $2.9million or 21.0% for the six months ended June 30, 2006 compared to the sameperiod in 2005 due primarily to accelerated park opening preparations in the WPdivision, and costs incurred to improve the appearance of our FEC s aspreviously mentioned.  Further exaggeratingthe comparison was the lower spending at the WP’s during the 2005 six monthperiod which were primarily driven by the liquidity constraints of the priorcapital structure.

·                  Rent and property taxes increased $0.4 million or3.1% due primarily to increases in rent tied to inflation or park performance,as well as slight increases in property taxes tied to statutory rateincreases.  Included in rent and propertytax expense were $0.1 million and $0.1 million for the three months ended June30, 2006 and 2005, respectively, of rent expense not currently due.

*Selling,general and administrative expenses.*  Selling, general andadministrative expenses totaled $9.7 million for the six months ended June 30,2006 compared to $9.4 million for the same period in 2005, an increase of $0.2million or 2.1%. The increase was primarily driven by the $.5 million stockcompensation expense recorded in the period April 13 to June 30, 2006 and costsassociated with corporate reorganization and transition costs following theacquisition.  This was offset by adecrease in marketing costs of $0.3 million related mostly to the FECSegment.  Selling, general andadministrative costs in 2005 included costs associated with preparing FFP forsale.

*Depreciationand amortization. *Depreciation andamortization expense was $8.7 million in both periods ended June 30, 2006 andJune 30, 2005.

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*Interestexpense, net*.  Interest expense, net totaled$10.6 million for the six monthsended June 30, 2006 compared to $11.6million during the same period in 2005, a decrease of $1.0 million or 8.8%.  The decrease in interest expense resultedprimarily from the debt levels as compared to the prior year.

*Loss from operation. *The foregoing resulted in a loss fromoperations of $21.9 million for the sixmonths ended June 30, 2006 and $19.6million for the same period in 2005.

**Liquidity andcapital resources**

During the six months ended June30, 2006 and 2005, net cash (used) by operating activities was $2.4 million and$2.3 million, respectively. Because our business is seasonal and involvessignificant levels of cash transactions, factors impacting our net operatingcash flows are the same as those impacting our cash-based revenues and expensesdiscussed above.

Net cash used in investingactivities was $44.9 million and $6.0 million for the six months ended June 30,2006 and 2005, respectively, primarily driven by funds disbursed for theacquisition.

Net cash provided by financingactivities for the six months ended June 30, 2006 and 2005 was $31.5 millionand $12.1 million, respectively, driven mainly by issuance of long term debt tofund the acquisition, capital expenditures and operating losses.

We plan to increase our spendingon capital expenditures as compared to prior periods as we continue to investto improve the appearances and facilities at some of our Parks and to drivegrowth at WPs and FECs. Capital spending through June 30, 2006 has focused onthe WPs in advance of the operating season. During 2006, we expect to spendbetween $10.0 and $12.0 million on capital expenditures, and any amountsnot spent in 2006 may be carried over to the 2007 capital expenditure budget.

In connection with theacquisition of FFP by the Company, we incurred substantial amounts of debt,including amounts outstanding under the Notes and our senior secured revolvingcredit facility. As of the closing of the acquisition, we had total debt ofapproximately $163.6 million comprised of $150.0 million of Notes, $12.0million of seasonal borrowings on our new revolving credit facility, and $1.6million of capital leases. Interest payments on this indebtedness willsignificantly reduce our cash flow from operations. However, as a result of therefinancing of our debt in connection with the acquisition from the proceeds ofthe equity contribution and the Notes, we expect our annual interest expense todecrease and we will no longer be subject to annual debt amortization payments;these debt amortization payments totaled approximately $5.2 million in 2005.

Our new senior secured revolvingcredit facility consists of a $40.0 million revolving credit facility (suchavailability reduced by the $4.5 million of issued but undrawn letters ofcredit), with $12.0 million drawn at close to fund the operations of FFPbetween February 1, 2006 and the closing of the acquisitions. Due to theseasonal nature of our business, we are dependent upon our revolving creditfacility to fund off-season expenses with seasonal borrowings typically peakingduring our fiscal second quarter. Our ability to borrow under the revolvingcredit facility is dependent upon compliance with certain conditions, includingsatisfying certain financial ratios and the absence of any material adversechange.

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

We believe, based on historicaland anticipated operating results, that cash flows from operations, availablecash and available amounts under the new senior secured revolving creditfacility will be adequate to meet our future liquidity needs, includinganticipated requirements for working capital, capital expenditures andscheduled debt requirements for the forseeable future.

**Off balancesheet arrangements**

We have no off-balance sheetarrangements.

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**Contractualobligations**

The following table summarizesthe timing of our required payments due under various contractual obligationsas of June 30, 2006 on a pro forma basis, giving effect to the acquisition andthe offering of the notes:
| **($ in thousands)**               | ** ** | **Less than  One Year** | ** ** | **One Year  to Three Years** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|----------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------|------------|----------------|------------|-----------|------------|
|                                         |       |                              |       |                                        |       |           |       |      |       |
| As of June 30,  2006 (pro forma):            |       |                              |       |                                        |       |           |       |      |       |
| Long-term debt including interest            |       | $                                 | 8,156      |                                        | $          | 40,781         |       | $         | 198,938    |   | $ | 247,875 |   |
| Revolving Line of Credit                     |       | —                            |       | 9,169                                       |       | —         |       | 9,169     |       |
| Capital lease obligations including interest |       | 902                               |       | 718                                         |       | —         |       | 1,620     |       |
| Park and office leases(1)                    |       | 14,428                            |       | 39,981                                      |       | 238,581        |       | 292,990   |       |
|                                         |       | $                                 | 23,486     |                                        | $          | 90,649         |       | $         | 437,519    |   | $ | 551,654 |   |

 

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(1)  Does not include annual rent escalationsassociated with the consumer price index or any percentage rent in excess ofminimum levels. In 2005, our total rent payments were $15.7 million. Seefootnote 12 in Notes to Condensed Consolidated Financial Statements.Commitments and contingencies” in the financial statements included in Item 1.

**Impact of inflation**

Substantial increases in costsand expenses could affect our operating results to the extent it may not bepossible to pass such increases along to our guests. In particular, increasesin labor, supplies and utility expenses could have an impact on our operatingresults. The majority of our employees are seasonal and are paid hourly rates,which, although not tied directly to federal and state minimum wage laws,experience incremental increases as minimum wage rates increase. Our history ofbeing able to pass along cost increases to guests through increases inadmission, food, merchandise and other prices is limited. We believe that theeffects of inflation, if any, on our operating results and financial conditionhave been and will continue to be minor over the next 12 months.

**Recently issued accountingpronouncements**

In May 2005, the FASB issuedSFAS No. 154, *Accounting Changes andError Corrections*. SFAS No. 154 replaces APB OpinionNo. 20, *Accounting Changes*,and FASB Statement No. 3, *ReportingAccounting Changes in Interim Financial Statements*, and changes therequirements for the accounting for and reporting of a change in accountingprinciple. SFAS No. 154 applies to all voluntary changes in accountingprinciple. APB No. 20 previously required that most voluntary changes inaccounting principle be recognized by including in net income of the period ofthe change the cumulative effect of changing to the new accounting principle.SFAS No. 154 requires retrospective application to prior periods’financial statements of changes in accounting principle, unless it isimpracticable to determine either the period-specific effects or thecumulative effect of the change. When it is impracticable to determine theperiod-specific effects of an accounting change on one or more individualprior periods presented, SFAS No. 154 requires that the new accountingprinciple be applied to the balances of assets and liabilities as of thebeginning of the earliest period for which retrospective application ispracticable and that a corresponding adjustment be made to the opening balanceof retained earnings (or other appropriate components of equity or net assets inthe statement of financial position) for that period rather than being reportedin an income statement. When it is impracticable to determine the cumulativeeffect of applying a change in accounting principle to all prior periods, thisstatement requires that the new accounting principle be applied as if it wereadopted prospectively from the earliest date practicable. The adoption of SFASNo. 154 is not expected to have an impact on our financial statements.

In December 2005, theCompany adopted FASB Interpretation No. 47 (“FIN 47”), *Accounting for Conditional Asset RetirementObligations – an interpretation of FASB Statement No. 143*,which clarifies that the term “conditional asset retirement obligation” refersto a legal obligation to perform an asset retirement activity. Thisinterpretation 

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also states that the fairvalue of a liability for the conditional asset obligation should be recognizedwhen incurred. The initial adoption of FIN 47 was not material to theCompany’s financial statements.

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

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

In July 2006, theFASB issued EITF 06-3, *How Taxes Collected fromCustomers and Remitted to Governmental Authorities Should Be Presented in theIncome Statement (That Is, Gross versus Net Presentation)* thatrequires disclosure of the accounting policy related to any tax assessed by agovernment authority in a revenue pro during transaction (either gross or net)and the amount of such taxes in both interim and annual financial statements ifthe amounts are significant.  This EITFbecomes effective for reporting periods beginning after December 15, 2006. TheCompany is currently assessing the impact of the adoption of EITF 06-3 and itsimpact on the Company’s consolidated financial statements.

**Criticalaccounting policies**

In the ordinary course ofbusiness, we make a number of estimates and assumptions relating to thereporting of results of operations and financial condition in the preparationof our consolidated financial statements in conformity with accountingprinciples generally accepted in the United States. Results could differsignificantly from those estimates under different assumptions and conditions.We believe that the following discussion addresses our most critical accountingpolicies, which are those that are most important in the portrayal of ourconsolidated financial condition and results and require management’s mostdifficult, subjective and complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain.

*Revenuerecognition.*  We recognize revenue at the point of sale toa customer or over the period that the customer receives the benefit. Certainof our Parks sell season tickets and annual passes. Revenue from season ticketsales is recognized on a straight-line basis over the period of time that therelated park is open and revenue from annual passes is recognized on astraight-line basis over 12 months. All other revenues are generallyrecognized on a daily basis on actual guest spending at our facilities.

*Self-insurancereserves.*  Reserves are recorded for the estimatedamounts of guest and employee claims and expenses incurred, but not paid, eachperiod that are not covered by third-party insurance. These estimates areestablished based upon historical claims data and third-party estimatesof settlement costs for incurred claims, and are recorded only when a loss isprobable and reasonably estimatable, in accordance with SFAS No.5, *Accounting for Contingencies*. These reserves areperiodically reviewed for changes in these factors and adjustments are made asneeded.

*Property andequipment.*  Property and equipment is recorded at costand is depreciated on a straight-line basis over the estimated useful lives ofthe assets. Changes in circumstances such as technological advances, changes toour business model or changes in our capital strategy could result in theactual useful lives differing from our estimates. In those cases in which wedetermine that the useful life of property and equipment should be shortened,we depreciate the net book value in excess of the salvage value over therevised remaining useful life, thereby increasing depreciation expense.

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*Valuation oflong-lived and intangible assets and goodwill.*  Long-livedassets are carried at the lower of historical cost less accumulateddepreciation or estimated fair value. Long-lived assets are evaluated forpotential impairment whenever events or changes in circumstances indicate thattheir carrying amounts may not be recoverable. In the event that periodicassessments reflect that the carrying amount of a long-lived asset exceeds thesum of the undiscounted cash flows (excluding interest) that are expected toresult from the use and eventual disposition of the long-lived asset, werecognize an impairment loss to the extent the carrying amount exceeds the fairvalue of the long-lived asset. We estimate the fair value using availablemarket information or other industry valuation techniques such as present-valuecalculations. We did not record any impairment losses for the six months endedJune 30, 2006 and 2005.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

*InterestRates.*  Our marketrisks relate primarily to changes in interest rates. Our new senior securedrevolving credit facility carries floating interest rates that are tied to theLIBOR rate and the Prime rate and therefore, the consolidated financialstatements will be exposed to changes in interest rates. A 1.0% interest rateincrease would increase interest expenses between $0 and $0.4 million annually,depending on the average carrying balance of the facility. We historically havenot engaged in interest rate hedging activities.

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

Item 4. CONTROLS AND PROCEDURES

The Company’smanagement, with the participation of the Company’s Chief Executive Officer andChief Financial Officer, has evaluated the effectiveness of the Company’sdisclosure controls and procedures as of June 30, 2006.  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, 2006.  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 significant 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

From time to time, we are involved in routine claims and lawsuitsarising in the ordinary course of business. In particular, we face numerousclaims relating to personal injuries purported to have been received as aresult of incidents occurring at our Parks, such as at our water attractionsand on our miniature race cars, high speed batting cages, bumper boats andlaser tag venues at our FECs. A number of personal injury claims also involvepurported “slip and fall” type incidents. We also have a number of workerscompensation claims pending at a given time as a result of the nature of ouremployees’ work. We are not currently subject to any proceedings that webelieve will materially adversely affect our business.

We received written notice inDecember 2004 concerning the Texas Department of Transportation’sintention to seize, through the eminent domain process, a portion of the realproperty leased by us at our Dallas SpeedZone® FEC in connection with thewidening of Interstate 35 E. We are currently reviewing our options and haveretained legal counsel to advise and assist us through this process. Inaddition, the city of Riverside, California is currently in the process ofseizing a portion of roadside property at our Castle Park FEC under thedoctrine of eminent domain in connection with the construction of a freewayaccess ramp. While we do not believe that any of our attractions at this FECwill be affected, our landlord has claimed the full amount of damages incurredbecause of the condemnation and our lease does not provide for rent abatement.

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Item 1A. RISK FACTORS

**Risks related toour business**

***Adverseweather conditions result in reduced attendance at our Parks, which materiallyreduces our revenues and profitability.***

Adverse weather conditionssignificantly reduce our guests’ attendance because most of the attractions atour Parks are outdoors. Attendance at our Parks is the key driver of ourrevenues and profitability, and reduced attendance directly and negativelyaffects revenues and profitability. Prolonged bad weather and forecasts of bad ormixed weather conditions can reduce the number of people who come to our Parks,which materially and adversely affects our revenues and profitability.

***Majorearthquakes, hurricanes and other instances of severe weather or other naturalphenomena would cause significant losses.***

Our Parks are subject tointerruption in their operating season, decreases in consumer entertainmentspending and damage and destruction to park property as a result of severelocal weather conditions or other natural phenomena. Many of our Parks arelocated in California and could be materially and adversely affected by damageresulting from a major earthquake. The occurrence of hurricanes, whichtypically occur in the summer months, particularly in the Southeast U.S., couldcause significant damage to our Parks in that area of the country, which couldmaterially and adversely affect our overall business. For example, in 2005 ourDestin, Florida water park experienced an interruption in its operations whichcost us approximately $1.0 million (before insurance) due to hurricaneDennis and our Dania, Florida FEC suffered damage of approximately$1.0 million (before insurance) due to hurricane Wilma. Our insurance maynot be sufficient to cover the costs of repairing or replacing damagedequipment and we may suffer a significant decline in revenues if any of ourParks or attractions is closed for an extended period of time. In addition,prolonged drought conditions may subject us to restrictions on our use ofwater, which is essential for the operation of our WPs. Any such restrictionscould materially and adversely affect our business and our results ofoperations.

***Accidentsand disturbances at our Parks could cause materially decreased attendance,revenues and profitability.***

Because all of our WPs feature “thrillrides,” attendance at the WPs and, consequently, revenues may be adverselyaffected by any serious accident or similar occurrence with respect to a ride.Our FECs feature attractions such as miniature race cars, high speed battingcages, bumper boats and laser tag that pose a possible risk of serious personalinjury. If a serious personal injury were to occur at one of our Parks,attendance at the Parks and, consequently, revenues might be materiallyadversely affected. We cannot assure you that such accidents and injuries willnot occur, that attendance will not be adversely affected if they do occur, orthat our insurance will adequately cover the costs stemming from such accidentsand injuries, or other disturbances and incidents. Any of such disturbances orincidents could also adversely affect our image or the public’s perception ofour Parks’ safety, leading to decreased attendance, revenues and profitability.In addition, accidents or injuries at WPs or other FECs or similar amusementParks operated by our competitors may create a perception that our Parks andFECs are unsafe, which could cause a decline in attendance, revenues andprofitability.

***Instancesof illness, as well as related negative publicity, could result in reducedguest attendance and materially and adversely impact our business.***

Instances of waterborne illness,whether or not traced to our WPs, could naturally reduce guest attendance atour Parks materially. Claims of illness or injury relating to food quality orhandling at the restaurants and food preparation centers at our Parks couldalso cause us to lose attendance materially. In addition, any negativepublicity relating to these and other health related matters might affectconsumers’ perceptions of our Parks and reduce guest visits to our Parksmaterially. Any of these events would materially and adversely impact ourbusiness.

***Theoperating season at many of our Parks is of limited duration, which magnifiesthe impact of adverse conditions or events.***

Our WPs generally operate duringan approximate 110-day operating season, generally from Memorial Day throughLabor Day, and, though our FECs are open year-round, there is alsosignificantly greater attendance at our FECs during this period and otherperiods when children are out of school. As a result, more than 75% of ourrevenues are generated during the second and third calendar quarters of eachyear. Thus, when adverse conditions or events, including those described in therisk factors above, occur during these periods, particularly during the peakmonths of July and August, there is only a limited period of time which theimpact of those conditions or events can be offset. Accordingly, suchconditions or events occurring during these periods may have a disproportionatelyadverse effect upon our annual revenues.

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***Attendanceand revenues at our Parks are subject to changing consumer preferences, and wemust make investments in our Parks in order to attract consumers.***

As with other types ofrecreational facilities and forms of entertainment, our Parks are subject tochanging consumer tastes, preferences and demands. In general, we competeindirectly with all phases of the entertainment and recreation industry withinour primary markets in California, Florida, Georgia, New Hampshire, New Jersey,New York, North Carolina and Texas, including movie theaters, bowling alleys,skating rinks, sporting events, restaurants, zoos, museums, carnivals,aquariums, resorts, natural and historical attractions and playgrounds. Anyshifts in consumer preferences for alternative forms of entertainment to ourParks could materially and adversely affect attendance and our business.

In order to anticipate and adaptto the changing consumer preferences, we must continually invest in new andnovel rides, amusements, arcade games and attractions. Such investments requirecapital availability and spending on our part, such as estimated costs rangingfrom $500,000 to $1.5 million for a significant new ride at one of ourWPs. Under our previously existing capital structure, we had limited ability tomake additional investments in certain our Parks, including the appearance andfacilities of some of our FECs and in the attractions at some of our WPs andFECs. When we add new rides, attractions and games at our Parks, we may not besuccessful in predicting which of these rides, attractions and games will bepopular. In addition, we may not have the funds necessary to make suchinvestments.

***Asignificant portion of our revenue is generated by our Parks in California anda small number of our WPs.***

Sixteen of our Parks are locatedin California and accounted for 48 and 43% of our revenue for the six monthsended June 30, 2006 and year ended December 31, 2005, respectively. Inaddition, five of our WPs accounted for 19% and 35% of our revenue during thesame periods. As a result, if any of the events noted in these risk factorswere to occur at our Parks in California as a whole, or at one of our fivelargest Parks by revenue, it could significantly reduce our revenue and EBITDAand materially and adversely affect us.

***Ourbusiness may be harmed by general economic conditions and demographic factors.***

Periods of economic slowdown orrecession, whether national, regional or industry-related, may decreasethe entertainment expenditures of our customer base. These periods may also beaccompanied by decreased consumer demand for WPs and FECs. Our financialresults may be adversely affected by changes in prevailing economic conditions,changes in interest rates, inflation, adverse employment conditions, themonetary and fiscal policies of the federal government and of state governments(with respect to any state in which one of our Parks is located) and othersignificant external events as well as changes in demographics in our markets.Actual or perceived fear of recession may also adversely affect our businesssince such fears tend to lead to increased savings by our target guest demographic,which leads to decreased discretionary spending, adversely affecting attendanceat our Parks and our results of operations.

***Significantcompetition in the amusement park industry could force us to reduce prices orlose market share.***

Our Parks compete directly withother amusement and theme parks and indirectly with all other types ofrecreational facilities and forms of entertainment, including movie theatres,sports attractions and vacation travel within their market areas. All of theseindustries and the companies therein compete for the public’s limited leisuretime and limited disposable income. To compete successfully, we may be requiredto reduce prices, increase our operating costs or take other measures thatcould have an adverse effect on our financial condition, results of operations,margins and cash flow. Certain of our existing competitors and potentialcompetitors are larger and have substantially greater financial, marketing andother resources than we do. We might encounter competition from new FECs or WPsdeveloped in the same geographic areas from which our Parks draw attendance.

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***Increasesin losses for general liability and workers compensation claims couldmaterially and adversely affect our business and operating results.***

We utilize a combination ofself-insurance and insurance coverage programs for property, casualty, workers’compensation and health care insurance. Pursuant to such programs, we areresponsible for a specified amount of claims (currently $1,000 per occurrence inself insurance for general liability and currently $500 per occurrence in selfinsurance for workers compensation claims) and we insure for claims above suchlimits. Any claims that we self-insure or for which we buy commercial insurancecould increase. In addition, insurance may not be available to us oncommercially acceptable terms or at all, or we could experience increases inthe cost of such insurance. Any increase in the number of claims or amount perclaim or increase in the cost of insurance could materially and adverselyaffect our results of operations.

We record a reserve for the self-insuredportion of these risks based on estimates using known facts and historicalindustry trends. Changes in claims and our estimates result in increases in ourself-insurance reserve in general, including for prior accounting periods. Suchchanges would require us to record expenses that could be material and adverseto our operating results.

***Futureacquisitions and/or park openings may expose us to unanticipated negativeconsequences.***

We may explore opportunities forthe acquisition or construction of WPs or FECs in the future. We may not beable to integrate effectively any WPs or FECs we acquire or build orsuccessfully implement appropriate operational, financial and managementsystems and controls to achieve the benefits expected to result from suchacquisitions or new parks. We may also be subject to unexpected claims andliabilities arising from such acquisitions or new parks. These claims andliabilities could be costly to defend, could be material to our financialposition and might exceed either the limitations of any applicableindemnification provisions or the financial resources of the indemnifyingparties. The diversion of management’s attention and any delays or difficultiesencountered in connection with the integration of the businesses we acquire ordevelop could negatively impact our business and results of operations.Further, the benefits that we anticipate from these acquisitions or new parksor FECs may not be realized.

***Ifwe decide to close a facility, we would still be obligated to perform ourobligations under the facility’s lease.***

We lease all 32 of our existing Parks,and 30 of the 32 are under long-term leases that are not cancelable except inlimited circumstances. In most of these leases, we are not permitted to cancelthe lease if we close our operations at the Park because it is not profitable,if we are required to terminate our operations at that location due to changesin the laws or regulations applicable to our operations, or, subject to certainlimited exceptions, if we suffer significant damage to our facilities as aresult of a natural disaster or inclement weather. We expect additional FECsand WPs that we may acquire in the future to be subject to similar long-term,non-cancelable leases. If we decide to close an existing or future facility, wemay nonetheless be committed to perform our obligations under the applicablelease which would include, among other things, payment of the base rent for thebalance of the lease term, which would reduce our profitability and limit ourability to expand in other locations.

***Ourleases contain default provisions and certain of the leases relating to ourpark properties contain early termination provisions that, if enforced orexercised by the landlord, could significantly and adversely affect ouroperations at those Parks.***

Each of our leases permit thelandlord to terminate the lease if there is a default under the lease,including, for example, our failure to pay rent, utilities and applicable taxesin a timely fashion or to maintain certain insurance. The leases for ourMountain Creek water park in Vernon, New Jersey and our MountasiaÔ FEC in Kingwood, Texas also contain termination provisions that allowthe landlord to terminate the lease at the landlord’s option. Although, upontermination of the lease at its option, the landlord under our Mountain Creeklease must pay us the unamortized cost of the improvements that we constructedon the property plus four times EBITDA, as defined therein, for the park seasonthat ended immediately prior to the date of termination, we cannot guaranteethat such payments will be sufficient to compensate us for the loss of theMountain Creek park. If a landlord were to terminate its lease on one of ourParks, it would halt our operations at that park and, depending on the size ofthe park, could have a negative impact on our financial condition and resultsof operations. In addition, any disputes that may result from such atermination may be expensive to pursue and may divert money and management’sattention from our other operations and adversely affect our financialcondition and results of operations.

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***Weare subject to environmental requirements that may adversely affect us.***

We are subject to variousfederal, state and local environmental laws, ordinances and regulations,including those governing wastewater discharges, the storage, handling, anddisposal of hazardous materials and petroleum, and employee health and safety.We incur costs to comply with these laws which may require us to, for example,install and operate pollution control and hazardous material storage equipment,obtain permits, and file reports relating to our operations. From time to time,we may also be subject to fines and penalties for noncompliance with theserequirements. As a lessee of real property and a generator of hazardous wastes,we are also subject to laws imposing liability for the investigation andcleanup of contaminated property, including our currently operated Parks aswell as our formerly owned or operated properties and any offsite locations towhich we have sent our wastes for disposal. These laws may impose liabilitywithout regard to whether we, as the lessee or generator, knew of or wereresponsible for the presence of the contamination. Soil and groundwatercontamination by petroleum or other hazardous substances has been detected atseveral of our current park properties, and we cannot guarantee that we will notincur material costs related to these conditions or other conditions that maybe discovered in the future. Building materials known or presumed to containasbestos are present in structures, equipment and elsewhere at certain of ourproperties, and environmental laws may require us to incur costs relating tothe removal or encapsulation of such material when it is in poor condition orin the event of construction, demolition, remodeling or renovation. All suchenvironmental remediation and compliance costs may be significant and, ifincurred, will negatively impact our profitability. Noncompliance with these orother environmental, health or safety requirements may result in the need tocease or alter operations at one or more of our Parks, which would result inthe decreased attendance, revenues and profitability of those Parks. Failure tocomply with environmental requirements could lead to administrative or judicialenforcement actions resulting in monetary sanctions, and/or orders to implementspecific environmental protection measures.

***Compliancewith the Americans with Disabilities Act could require us to incur significantcapital expenditures and litigation costs in the future.***

The Americans with DisabilitiesAct of 1990, referred to as the ADA, and certain state statutes and localordinances require, among other things, that places of public accommodation,including both existing and newly constructed parks, be accessible to customerswith disabilities. The ADA generally requires that parks be constructed topermit persons with disabilities full use of a park and its facilities. Whilemost of our Parks were constructed before the enactment of the ADA and are notsubject to most of the requirements of the ADA, any change in law orinterpretation of the ADA may require that certain modifications be made toexisting Parks in order to make them accessible to patrons and employees whoare disabled. In addition, when we make improvements at our Parks we may berequired to comply with the ADA, which increases the cost of the improvements.Regulations have been proposed that would require that miniature golf coursessuch as those at some of our FECs be made accessible to wheel-chair boundguests. Although we have invested, and continue to invest, amounts in connectionwith ADA-required upgrades to our Parks, some of our Parks may be found to notcomply with the ADA. We have been involved in some litigation related to one ofour Parks and we are aware of several lawsuits that have been filed againstother park operators by disabled guests alleging that certain park designsviolated the ADA. If we fail to comply with the ADA, remedies could includeimposition of injunctive relief, fines, awards for damages to private litigantsand additional capital expenditures to remedy non-compliance. Imposition ofsignificant fines, damage awards or capital expenditures to cure non-compliancecould adversely affect our business and operating results.

***Undereminent domain laws and regulations of the various states in which our Parksare located, the government may seize all or a portion of the real property onwhich our Parks are located.***

Pursuant to the eminent domainlaws and regulations that exist in the states in which each of our Parks arelocated, state government authorities may seize all or a portion of the realproperty on which our Parks are located. This risk is increased due to thelocation of many of our Parks on real estate located near major highways. Sucha seizure could result in considerable disruption and expense to us and causeus to shut down one or more of our attractions and/or could result in one ormore of our Parks being forced to close or relocate. This may result indecreased attendance at or closure of the affected park, thereby negativelyaffecting our ability to generate revenues. The funds received from the stategovernment as compensation for the seizure of the land may be inadequate tocover our losses resulting from any such seizure of land.

For example, our DallasSpeedZone® FEC in Dallas, Texas received notice from the State of TexasDepartment of Transportation in 2004 of its intention to seize, for a statehighway expansion project, a portion of the real property on which the Park islocated. Though the seizure of the real property has not yet occurred, when itdoes, it will result in a disruption of our business and will force us torelocate one or more of our go-kart attractions to a place elsewhere on 

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the property and force us torelocate the entrance to the Park. In addition, the city of Riverside,California is currently in the process of seizing a portion of roadsideproperty at our Castle Park FEC under the doctrine of eminent domain in connectionwith the construction of a freeway access ramp. While we do not believe thatany of our attractions at this FEC will be affected, our landlord has claimedthe full amount of damages incurred because of the condemnation and our leasedoes not provide for rent abatement.

***Weare dependent on hiring an adequate number of hourly employees to run ourbusiness and are subject to government regulations concerning these and ourother employees, including minimum wage and child labor laws.***

Our workforce consists primarilyof high-school aged young adults and teachers who work on an hourly basisduring our operating season for our WPs and year round with peak summeremployment for our FECs. The lack of availability of an adequate number ofhourly employees during these times of peak employment and operation wouldadversely affect our operations.

We are subject to applicablerules and regulations relating to our relationship with our employees,including minimum wage requirements, child labor laws, health benefits,unemployment and sales taxes, overtime and working conditions and citizenshiprequirements. A significant number of our hourly personnel at our facilities arepaid at rates related to the federal minimum wage. Under federal and statechild labor laws, we are regulated in the number of hours, the times and thetypes of jobs that youths up to the age of 18 are permitted to work.Accordingly, legislated increases in the federal minimum wage, as well asincreases in additional labor cost components, such as employee benefit costs,workers’ compensation insurance rates, compliance costs and fines for violationsof child labor laws or any other costs associated with employees, wouldincrease the labor costs at our Parks, which could have a material adverseeffect on our business.

***Ourbusiness is subject to various other government regulations, non-compliancewith which could result in park or attraction closures and/or fines.***

We are subject to federal, stateand local government regulation relating to the operation of our amusement parkrides and food service facilities (including the sale of alcohol at certain ofour Parks), as well as regulations relating to building and zoningrequirements. For example, all the states in which we operate have agencies,such as the Division of Occupational Safety and Health in California and theDepartment of Agriculture and Consumer Services in Florida, that periodicallyexamine our rides and attractions for compliance with safety regulations andwill issue citations, assess fines and close rides and attractions ifviolations are found. In addition, we are subject to local health ordinancesfor the manufacture, handling, storage and labeling of food products in ourrestaurants. If we do not obtain or retain required licenses or permits, do notpass inspections of our attractions or comply with future changes in existingregulations, we may be required to close our Parks or attractions, prevented ordelayed from opening new parks or attractions or subject to fines.

***Weare subject to liabilities and costs associated with our intellectual property.***

We rely on trademarks and servicemarks to protect our brand name in our markets around the country. Many ofthese trademarks and service marks have been a key part of establishing ourbusiness in the community. We believe these trademarks and service marks havesignificant value and are important to the marketing of our Parks. There can beno assurance that the steps we have taken or will take to protect ourproprietary rights will be adequate to prevent misappropriation of our rightsor the use by others of features based upon, or otherwise similar to, ours. Inaddition, although we believe we have the right to use our trademarks andservice marks, there can be no assurance that our trademarks and service marksdo not or will not violate the proprietary rights of others, that ourtrademarks and service marks will be upheld if challenged, or that we will notbe prevented from using our trademarks and service marks, any of whichoccurrences could harm our business. From time to time, we enter intoagreements with third parties that permit us to use the intellectual propertyof such third parties at our Parks. There can be no assurance that if we enterinto such agreements, we will be able to continue using such intellectualproperty past the expiration of such agreements. The third parties owning suchintellectual property may not renew such agreements with us or may increase thecost for us to use such intellectual property to levels that make it costprohibitive or economically unfavorable for us to continue such arrangements.

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***Weare highly dependent upon key personnel to manage our business effectively andif we are unable to hire additional personnel or retain existing personnel, ouroperating results could suffer.***

We are highly dependent on theprincipal members of our management, operations, sales and marketing andtechnical staff. The loss of any number of these members of management couldhave a material adverse effect on our operations. We do not have “key-man” lifeinsurance relating to any of our executives. We believe that our future successwill depend in large part upon our ability to attract and retain highly skilledmanagerial and marketing personnel. We face competition for such personnel fromother companies and organizations. There is no assurance that we will besuccessful in hiring or retaining the personnel we require for continuedgrowth.

***Weare owned by MidOcean Partners and their interests as equity holders mayconflict with yours as a creditor.***

MidOcean Partners and certain members of our senior managementown us. Through their ownership, they will be able to cause, among otherthings, the election of a majority of the members of our board of directors.The interests of our equity holders might conflict with those of the holders ofthe Notes as under certain circumstances the holders of the Notes might want usto raise additional equity from our equity holders or other investors to reduceour leverage and pay our debts, while our equity holders might not want toincrease their investment in us or have their ownership diluted and may insteadchoose to take other actions, such as selling our assets.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS
| Exhibit No. | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 1.2         |       | Joinder  Agreement, dated as of April 12, 2006, by Festival Fun Parks, LLC, Palace  Finance, Inc., Palace Entertainment Holdings, Inc., Splish Splash at  Adventureland Inc., Family Fun Center Holdings LLC, Smartparks-San Jose Inc.,  Smartparks-Riverside Inc., Smartparks-San Dimas Inc., Raging Waters Group  Inc., Wet N Wild Nevada Inc., Smartparks-Carolina Inc., Smartparks-Florida  Inc., Smartparks-Silver Springs Inc. and Palace Management Company LLC (1) |
| 3.1         |       | Certificate of  Formation of Festival Fun Parks, LLC. (1)                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2         |       | Second Amended  and Restated Limited Liability Company Agreement of Festival Fun Parks, LLC (1)                                                                                                                                                                                                                                                                                                                                                                            |
| 3.5         |       | Amended and  Restated Certificate of Incorporation of Palace Entertainment Holdings, Inc.  (1)                                                                                                                                                                                                                                                                                                                                                                             |
| 3.6         |       | By-laws of  Palace Entertainment Holdings, Inc. (1)                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1         |       | Indenture, dated  as of April 12, 2006, by and among Festival Fun Parks, LLC, Palace Finance,  Inc., Palace Entertainment Holdings, Inc. and Wells Fargo Bank, National  Association. (1)                                                                                                                                                                                                                                                                                  |
| 4.2         |       | Registration Rights  Agreement, dated as of April 12, 2006, by and among Festival Fun Parks, LLC,  Palace Finance, Inc., Palace Entertainment Holdings, Inc., the other guarantors  listed in Schedule 1 thereto, J.P. Morgan Securities Inc. and Jefferies &  Company, Inc. (1)                                                                                                                                                                                       |
| 10.1        |       | License  Agreement, dated as of April 12, 2006, by and between Festival Fun Parks, LLC  and Vision Maker, LLC. (1)                                                                                                                                                                                                                                                                                                                                                         |
| 10.2        |       | Employment  Agreement, dated as of April 12, 2006, by and among Festival Fun Parks, LLC,  Palace Entertainment Holdings, Inc. and John A. Cora. (1)(2)                                                                                                                                                                                                                                                                                                                     |
| 10.3        |       | Employment  Agreement, dated as of April 12, 2006, by and among Festival Fun Parks, LLC,  Palace Entertainment Holdings, Inc. and Daniel S. Martinez. (1)(2)                                                                                                                                                                                                                                                                                                               |
| 10.4        |       | Amended and  Restated Agreement, dated as of April 12, 2006, by and between Festival Fun  Parks, LLC and James Cleary. (1)(2)                                                                                                                                                                                                                                                                                                                                              |
| 10.5        |       | Credit  Agreement, dated as of April 12, 2006, among Festival Fun Parks, LLC, as  Borrower Representative, the Borrowers signatory thereto, the other Credit  Parties signatory thereto, the Lenders party thereto from time to time and  General Electric Capital Corporation as Agent and Lender. (1)                                                                                                                                                                    |
| 10.6        |       | Professional  Services Agreement, dated as of May 30, 2006, by and among James A. Burk,  Festival Fun Parks, LLC and Palace Entertainment Holdings, Inc. (1)(2)                                                                                                                                                                                                                                                                                                            |
| 10.29       |       | Employment  Agreement, dated as of May 22, 2006, by and between Festival Fun Parks, LLC  and Todd R. Wulffson. (1)(2)                                                                                                                                                                                                                                                                                                                                                      |
| 10.30       |       | Letter  Agreement, dated as of May 22, 2006, by and between Festival Fun Parks, LLC  and Todd R. Wulffson. (1)(2)                                                                                                                                                                                                                                                                                                                                                          |
| 31.1        |       | Rule  13a-14(a)/15d-14(a) Certification by the Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley  Act  of 2002                                                                                                                                                                                                                                                                                                                                   |
| 31.2        |       | Rule  13a-14(a)/15d-14(a) Certification by the Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                          |
| 32.1        |       | Section 1350  Certification of Periodic Report by the Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (3)                                                                                                                                                                                                                                                                                                  |

 

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| (1)    |   | Incorporated by  reference to the Registration Statement on Form S-4 filed June 16, 2006, File  No. 333-135091.                                                                                                                                                                                                                                                                                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)    |   | Denotes  management contract or compensatory plan or arrangement.                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    |   | This  certification will not be deemed “filed” for purposes of Section 18 of the  Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the  liability of that section. Such certification will not be deemed to be  incorporated by reference into any filing under the Securities Act or  Securities Exchange Act, except to the extent that the Company specifically  incorporates it by reference. |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | FESTIVAL FUN PARKS, LLC                    |
|--------|--------------------------------------------|
|   |                                       |
|   | /s/ John A. Cora                           |
|   | By: John A. Cora                           |
|   | Its: Chief Executive Officer and President |
|   |                                       | (Principal Executive Officer) |
|   | Dated: August 16, 2006                     |

 

 
|   | FESTIVAL FUN PARKS, LLC      |
|--------|------------------------------|
|   |                         |
|   | /s/ James A. Burk            |
|   | By: James A. Burk            |
|   | Its: Chief Financial Officer |
|   |                         |
|   | Dated: August 16, 2006       |

 

 

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**EXHIBITINDEX**

 
| Exhibit No. | ** ** | **Description of Document**                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|-------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 1.2         |       | Joinder  Agreement, dated as of April 12, 2006, by Festival Fun Parks, LLC, Palace  Finance, Inc., Palace Entertainment Holdings, Inc., Splish Splash at  Adventureland Inc., Family Fun Center Holdings LLC, Smartparks-San Jose Inc.,  Smartparks-Riverside Inc., Smartparks-San Dimas Inc., Raging Waters Group  Inc., Wet N Wild Nevada Inc., Smartparks-Carolina Inc., Smartparks-Florida  Inc., Smartparks-Silver Springs Inc. and Palace Management Company LLC (1) |
| 3.1         |       | Certificate of  Formation of Festival Fun Parks, LLC. (1)                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2         |       | Second Amended  and Restated Limited Liability Company Agreement of Festival Fun Parks, LLC  (1)                                                                                                                                                                                                                                                                                                                                                                           |
| 3.5         |       | Amended and  Restated Certificate of Incorporation of Palace Entertainment Holdings, Inc.  (1)                                                                                                                                                                                                                                                                                                                                                                             |
| 3.6         |       | By-laws of  Palace Entertainment Holdings, Inc. (1)                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 4.1         |       | Indenture, dated  as of April 12, 2006, by and among Festival Fun Parks, LLC, Palace Finance,  Inc., Palace Entertainment Holdings, Inc. and Wells Fargo Bank, National  Association. (1)                                                                                                                                                                                                                                                                                  |
| 4.2         |       | Registration  Rights Agreement, dated as of April 12, 2006, by and among Festival Fun  Parks, LLC, Palace Finance, Inc., Palace Entertainment Holdings, Inc., the  other guarantors listed in Schedule 1 thereto, J.P. Morgan Securities Inc.  and Jefferies & Company, Inc. (1)                                                                                                                                                                                       |
| 10.1        |       | License  Agreement, dated as of April 12, 2006, by and between Festival Fun Parks, LLC  and Vision Maker, LLC. (1)                                                                                                                                                                                                                                                                                                                                                         |
| 10.2        |       | Employment  Agreement, dated as of April 12, 2006, by and among Festival Fun Parks, LLC,  Palace Entertainment Holdings, Inc. and John A. Cora. (1)(2)                                                                                                                                                                                                                                                                                                                     |
| 10.3        |       | Employment  Agreement, dated as of April 12, 2006, by and among Festival Fun Parks, LLC,  Palace Entertainment Holdings, Inc. and Daniel S. Martinez. (1)(2)                                                                                                                                                                                                                                                                                                               |
| 10.4        |       | Amended and  Restated Agreement, dated as of April 12, 2006, by and between Festival Fun  Parks, LLC and James Cleary. (1)(2)                                                                                                                                                                                                                                                                                                                                              |
| 10.5        |       | Credit  Agreement, dated as of April 12, 2006, among Festival Fun Parks, LLC, as  Borrower Representative, the Borrowers signatory thereto, the other Credit  Parties signatory thereto, the Lenders party thereto from time to time and  General Electric Capital Corporation as Agent and Lender. (1)                                                                                                                                                                    |
| 10.6        |       | Professional  Services Agreement, dated as of May 30, 2006, by and among James A. Burk,  Festival Fun Parks, LLC and Palace Entertainment Holdings, Inc. (1)(2)                                                                                                                                                                                                                                                                                                            |
| 10.29       |       | Employment  Agreement, dated as of May 22, 2006, by and between Festival Fun Parks, LLC  and Todd R. Wulffson. (1)(2)                                                                                                                                                                                                                                                                                                                                                      |
| 10.30       |       | Letter  Agreement, dated as of May 22, 2006, by and between Festival Fun Parks, LLC  and Todd R. Wulffson. (1)(2)                                                                                                                                                                                                                                                                                                                                                          |
| 31.1        |       | Rule  13a-14(a)/15d-14(a) Certification by the Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley  Act  of 2002                                                                                                                                                                                                                                                                                                                                   |
| 31.2        |       | Rule  13a-14(a)/15d-14(a) Certification by the Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                                          |
| 32.1        |       | Section 1350  Certification of Periodic Report by the Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (3)                                                                                                                                                                                                                                                                                                  |

 

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| (1)    |   | Incorporated by  reference to the Registration Statement on Form S-4 filed June 16, 2006, File  No. 333-135091.                                                                                                                                                                                                                                                                                                                     |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)    |   | Denotes  management contract or compensatory plan or arrangement.                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    |   | This  certification will not be deemed “filed” for purposes of Section 18 of the  Securities Exchange Act of 1934 (15 U.S.C. 78r), or otherwise subject to the  liability of that section. Such certification will not be deemed to be  incorporated by reference into any filing under the Securities Act or  Securities Exchange Act, except to the extent that the Company specifically  incorporates it by reference. |

 

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