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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended October 3, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission File No. 0-24993 WPT ENTERPRISES, INC. 
  Delaware
    
    77-06390000(State or other jurisdiction
    
    (I.R.S. Employerof incorporation or organization)
    
    Identification No.)1041 North Formosa Ave.Formosa Building, Suite 99West Hollywood, California
    
    90046(Address of principal executive offices)
    
    (Zip Code)
 (323) 850-2888
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes þ
    
    No o
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o
    
    No þ
 As of November 8, 2004, there were 19,480,000 shares of Common Stock, $0.001
par value per share, outstanding.




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WPT ENTERPRISES, INC. INDEX Page ofForm 10-QPART I. FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTS (UNAUDITED)Condensed Balance Sheets as of October 3, 2004 and December 28, 2003
    
    
    3Condensed Statements of Loss for the three months ended October 3, 2004 and September 28, 2003
    
    
    4Condensed Statements of Earnings for the nine months ended October 3, 2004 and September 28, 2003
    
    
    5Statements of Shareholders Equity for the nine months ended October 3, 2004
    
    
    6Condensed Statements of Cash Flows for the nine months ended October 3, 2004 and December 28, 2003
    
    
    7Notes to Condensed Financial Statements
    
    
    8ITEM
2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    16ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    24ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    24PART II. OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    25ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    26ITEM 6.
    
    EXHIBITS AND REPORTS ON FORM 8-K
    
    
    26EX-10.1 - Office LeaseEX-10.2 - Amendment to No. 5 Travel Channel AgreementEX-31.1 - Certification of CEO Pursuant to Section 302EX-31.2 - Certification of CFO Pursuant to Section 302EX-32.1 - Certification of CEO Pursuant to Section 906EX-32.2 - Certification of CFO Pursuant to Section 906
  2




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WPT ENTERPRISES, INC. 
 Condensed Balance Sheets
 (In thousands)
 (Unaudited)
 October 3, 2004
    
    December 28, 2003AssetsCurrent Assets:Cash and cash equivalents
    
    $
    27,603
    
    
    $
    Short-term investments
    
    
    6,013
    
    
    
    Accounts receivable, net
    
    
    485
    
    
    
    332Income taxes receivable
    
    
    150
    
    
    
    Inventory
    
    
    10
    
    
    
    10Television Costs
    
    
    1,155
    
    
    
    1,979Other current assets
    
    
    618
    
    
    
    113Total Current Assets
    
    
    36,034
    
    
    
    2,434Property and Equipment-Net
    
    
    479
    
    
    
    112Other Assets:Cash and cash equivalents-restricted
    
    
    244
    
    
    
    Investments
    
    
    207
    
    
    
    Total Other Assets
    
    
    451
    
    
    
    Total Assets
    
    $
    36,964
    
    
    $
    2,546Liabilities and Shareholders EquityCurrent Liabilities:Outstanding checks in excess of bank balance
    
    $
    
    
    
    $
    184Accounts payable
    
    
    574
    
    
    
    74Due to parent
    
    
    53
    
    
    
    240Deferred revenue
    
    
    4,067
    
    
    
    505Accrued payroll and related
    
    
    49
    
    
    
    40Accrued expenses
    
    
    230
    
    
    
    243Total Current Liabilities
    
    
    4,973
    
    
    
    1,286Note Payable to Parent
    
    
    
    
    
    
    3,429Total Liabilities
    
    
    4,973
    
    
    
    4,715Common Shares Subject to Repurchase
    
    
    608
    
    
    
    Commitments and ContingenciesShareholders EquityClass A Units  par value of $.001Authorized 93 units; 93 issued and
outstanding
    
    
    
    
    
    
    119Class B Units  par value of $1.28Authorized 7 units; 0 issued and outstanding
    
    
    
    
    
    
    Common Stock, $0.001 par value authorized 100,000 shares;19,480 issued and outstanding
    
    
    19
    
    
    
    Additional paid-in-capital
    
    
    32,115
    
    
    
    361Accumulated deficit
    
    
    (746
    )
    
    
    (2,637
    )Accumulated other comprehensive earnings
    
    
    3
    
    
    
    Deferred compensation
    
    
    (8
    )
    
    
    (12
    )Total Shareholders Equity
    
    
    31,383
    
    
    
    (2,169
    )Total Liabilities and Shareholders Equity
    
    $
    36,964
    
    
    $
    2,546
 The accompanying notes are an integral part of these condensed financial statements. 3




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WPT ENTERPRISES, INC. 
 Condensed Statements of Loss
 (In thousands, except
earnings per share)
(Unaudited)
 Three Months EndedOctober 3, 2004
    
    September 28, 2003Revenues:License fees:Domestic television
    
    $
    2,350
    
    
    $
    334International television
    
    
    345
    
    
    
    Product licensing
    
    
    159
    
    
    
    Total License fees
    
    
    2,854
    
    
    
    334Host fee
    
    
    50
    
    
    
    Sponsorship
    
    
    42
    
    
    
    Merchandise
    
    
    28
    
    
    
    43Total Revenues
    
    
    2,974
    
    
    
    377Cost of Revenues
    
    
    1,942
    
    
    
    280Gross Profit
    
    
    1,032
    
    
    
    97Expenses:Selling and
administrative
    
    
    1,508
    
    
    
    486Depreciation
    
    
    44
    
    
    
    24Total Expenses
    
    
    1,552
    
    
    
    510Loss From Operations
    
    
    (520
    )
    
    
    (413
    )Other Income (Expense):Interest
income
    
    
    56
    
    
    
    Interest expense
    
    
    (4
    )
    
    
    (29
    )Net Loss
    
    
    ($468
    )
    
    
    ($442
    )Net Earnings Per Common Share  Basic
    
    
    ($0.03
    )
    
    
    ($0.03
    )Net Earnings Per Common Share  Diluted
    
    
    ($0.03
    )
    
    
    ($0.03
    )Weighted Average
Common Shares
Outstanding  Basic
    
    
    16,748
    
    
    
    13,360Dilutive Effect of Restricted Stock
    
    
    
    
    
    
    Dilutive Effect of Stock Options
    
    
    
    
    
    
    Dilutive Effect of Common Shares Subject to Repurchase
    
    
    
    
    
    
    Weighted Average Common Shares Outstanding  Diluted
    
    
    16,748
    
    
    
    13,360
 The accompanying notes are an integral part of these condensed financial statements. 4




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WPT ENTERPRISES, INC. 
 Condensed Statements of Earnings
 (In thousands, except
earnings per share)(Unaudited)
 Nine Months EndedOctober 3, 2004
    
    September 28, 2003Revenues:License fees:Domestic television
    
    $
    9,545
    
    
    $
    3,584International television
    
    
    510
    
    
    
    Product licensing
    
    
    212
    
    
    
    Total License fees
    
    
    10,267
    
    
    
    3,584Host fee
    
    
    850
    
    
    
    250Sponsorship
    
    
    510
    
    
    
    Merchandise
    
    
    205
    
    
    
    47Total Revenues
    
    
    11,832
    
    
    
    3,881Cost of Revenues
    
    
    7,059
    
    
    
    2,370Gross Profit
    
    
    4,773
    
    
    
    1,511Expenses:Selling and
administrative
    
    
    3,473
    
    
    
    1,193Depreciation
    
    
    111
    
    
    
    63Total Expenses
    
    
    3,584
    
    
    
    1,256Earnings From Operations
    
    
    1,189
    
    
    
    255Other Income (Expense):Interest
income
    
    
    56
    
    
    
    Interest
expense
    
    
    (34
    )
    
    
    (103
    )Net Earnings
    
    $
    1,211
    
    
    $
    152Net Earnings Per Common Share  Basic
    
    $
    0.08
    
    
    $
    0.01Net Earnings Per Common Share  Diluted
    
    $
    0.07
    
    
    $
    0.01Weighted Average
Common Shares
Outstanding  Basic
    
    
    14,868
    
    
    
    13,164Dilutive Effect of Restricted Stock
    
    
    1,333
    
    
    
    1,931Dilutive Effect of Stock Options
    
    
    684
    
    
    
    901Dilutive Effect of Common Shares Subject to Repurchase
    
    
    15
    
    
    
    Weighted Average Common Shares Outstanding  Diluted
    
    
    16,900
    
    
    
    15,996
 The accompanying notes are an integral part of these condensed financial statements. 5




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WPT ENTERPRISES, INC.
Statements of Shareholders Equity
For the Nine Months Ended October 3, 2004
(In thousands)
(Unaudited) Class A Units
    
    Common Stock
    
    AdditionalPaid in
    
    Accumulated
    
    Deferred
    
    OtherComprehensiveShares
    
    Amount
    
    Shares
    
    Amount
    
    Capital
    
    Deficit
    
    Compensation
    
    Income
    
    TotalBALANCES AT DECEMBER 28, 2003
    
    
    93
    
    
    $
    119
    
    
    
    
    
    
    
    
    
    
    $
    361
    
    
    $
    (2,637
    )
    
    $
    (12
    )
    
    
    
    
    
    $
    (2,169
    )Reduction of deferred
compensation (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    4Vesting of Class B units
to consultants (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    537
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    537Conversion of LLC to
C-Corporation (Unaudited)
    
    
    (93
    )
    
    
    (119
    )
    
    
    14,880
    
    
    $
    15
    
    
    
    (561
    )
    
    
    680
    
    
    
    
    
    
    
    
    
    
    
    15Net proceeds from issuance
of common stock (Unaudited)
    
    
    
    
    
    
    
    
    
    
    4,600
    
    
    
    4
    
    
    
    32,386
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,390Common shares subject to
repurchase (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (602
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (602
    )Interest on common shares
subject to repurchase (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6
    )Other comprehensive income (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3Net earnings (Unaudited)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,211
    
    
    
    
    
    
    
    
    
    
    
    1,211BALANCES AT OCTOBER 3, 2004 (Unaudited)
    
    
    
    
    
    $
    
    
    
    
    19,480
    
    
    $
    19
    
    
    $
    32,115
    
    
    $
    (746
    )
    
    $
    (8
    )
    
    $
    3
    
    
    $
    31,383
 The accompanying notes are an integral part of these condensed financial statements. 6




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WPT ENTERPRISES, INC. 
 Condensed Statements of Cash Flows
 (In
thousands)(Unaudited)
 Nine Months EndedOctober 3, 2004
    
    September 28, 2003OPERATING ACTIVITIES:Net Earnings
    
    $
    1,211
    
    
    $
    152Adjustments to reconcile net earnings to
net cash
provided by (used in) operating activities:Depreciation
    
    
    111
    
    
    
    63Unit-based compensation expense
    
    
    545
    
    
    
    45Changes in operating assets and liabilities:Accounts receivable
    
    
    (153
    )
    
    
    (54
    )Income taxes
    
    
    (150
    )
    
    
    Inventory
    
    
    
    
    
    
    (27
    )Television costs
    
    
    824
    
    
    
    (307
    )Other current assets
    
    
    (505
    )
    
    
    (10
    )Accounts payable
    
    
    500
    
    
    
    (42
    )Due to parent
    
    
    (187
    )
    
    
    Deferred revenue
    
    
    3,562
    
    
    
    (55
    )Accrued expenses
    
    
    (5
    )
    
    
    (37
    )Net Cash Provided by (Used in) Operating Activities
    
    
    5,753
    
    
    
    (272
    )INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (478
    )
    
    
    (21
    )Short-term investments, purchases
    
    
    (6,013
    )
    
    
    Increase in restricted cash
    
    
    (244
    )
    
    
    Investment in unconsolidated affiliate
    
    
    (207
    )
    
    
    Net Cash Used in Investing Activities
    
    
    (6,942
    )
    
    
    (21
    )FINANCING ACTIVITIES:(Decrease) Increase in cash provided by checks drawn in excess of
bank balances
    
    
    (184
    )
    
    
    117Net proceeds from issuance of common stock
    
    
    32,405
    
    
    
    Proceeds from (repayments of) notes payable to parent
    
    
    (3,429
    )
    
    
    176Net Cash Provided by Financing Activities
    
    
    28,792
    
    
    
    293Net decrease in cash and cash equivalents
    
    
    27,603
    
    
    
    Cash and cash equivalents  beginning of period
    
    
    
    
    
    
    Cash and cash equivalents  end of period
    
    $
    27,603
    
    
    $
    SUPPLEMENTAL
DISCLOSURES OF CASH
FLOW INFORMATION:Noncash operating activities:Capitalized television costs related to unit options issued to
consultants
    
    $
    4
    
    
    $
    Cash paid during the period for interest
    
    $
    (229
    )
    
    $
    Cash paid
during the period for income taxes
    
    $
    (150
    )
    
    $
    
 The accompanying notes are an integral part of these condensed financial statements. 7




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Notes to Condensed Financial Statements WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements
(Unaudited) 1. BUSINESS WPT Enterprises, Inc. (WPTE or the Company) is a media and entertainment
company engaged in the creation of branded entertainment through the
development, production and marketing of televised programming based on poker
and other gaming themes. To date, our operations have principally revolved
around the creation of our World Poker Tour brand through the production and
licensing of a reality television series exhibited on the Travel Channel that
is based on the circuit of previously-established high-stakes poker tournaments
that we have affiliated under the World Poker Tour name. Organization-World Poker Tour, LLC was formed on March 1, 2002 as a
majority-owned indirect subsidiary of Lakes Entertainment, Inc. (Lakes or
Parent) through Lakes Poker Tour, LLC, Lakes wholly-owned subsidiary. On
July 28, 2004, World Poker Tour, LLC converted into a Delaware corporation, WPT
Enterprises, Inc. The company concluded its initial public offering in August 2004 and sold
4,000,000 shares of WPTE common stock while raising approximately
$28.0 million,
net of offering expenses and underwriting discounts. In September
2004, the underwriters exercised their over-allotment option to acquire an
additional 600,000 common shares resulting in additional net proceeds of $4.4
million to the Company. Lakes remains as the companys majority
shareholder. In March 2003, WPTE entered into an agreement with the Travel Channel, L.L.C.
(TRV), granting TRV the right to broadcast the first season of the WORLD POKER
TOUR® (WPT) series which has now been completed. Under the agreement, TRV has
the exclusive right, license, and privilege to exhibit, market, distribute,
transmit, perform and otherwise exploit each of the first seasons thirteen
two-hour programs produced by WPTE for an unlimited number of times over a four
year period within the United States. During July 2003, WPTE reached an
agreement with TRV for a second season with TRV being granted options for five
additional seasons. In July 2004, WPTE began filming Season Three, which will
include 15 regular tour stops and 6 specials. Substantially all of WPTEs
revenues are derived from television license fees and related casino hosting
fees and accordingly WPTE is presented as a single segment. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The condensed financial statements have been prepared
by the Company in accordance with accounting principles generally accepted in
the United States of America for interim financial information, in accordance
with the rules and regulations of the Securities and Exchange Commission.
Pursuant to such rules and regulations, certain financial information and
footnote disclosures normally included in the condensed financial statements
have been condensed or omitted. In the opinion of management, the unaudited financial statements have been
prepared on the same basis as the audited financial statements and include all
adjustments, consisting of normal recurring adjustments, necessary for the fair
presentation of the financial position and the results of operations as of the
date and for such periods. Results of interim periods are not necessarily
indicative of the results to be expected for the entire fiscal year. The
condensed financial statements should be read in conjunction with the financial
statements and notes thereto on pages F-1 to F-17 included in the Companys
Registration Statement No. 333-114479 dated August 9, 2004 filed with the
Securities Exchange Commission. Investments The cost method of accounting is used for investments in which WPTE has less
than a 20% ownership interest and the Company does not have the ability to
exercise significant influence. Significant influence is generally deemed to
exist when the Company has an ownership interest in the voting stock of the
investee of between 20% and 50%, although other factors, such as representation
on the investees Board of Directors, voting rights and the impact of
commercial arrangements, are considered in determining whether the cost or
equity method of accounting is appropriate. WPTEs investments are carried at
cost and are adjusted only for other-than-temporary declines in fair value. The
carrying value of these investments is reported in other assets. Investments represent the
Companys equity investment with PokerTek, a company that offers
PokerPro, an automated poker system. As WPT has less than
20% ownership interest and does not have the ability to exercise
significant influence over PokerTek, this investment is accounted for
under the cost method. At October 3, 2004, the carrying value of
this investment is approximately $207,000, and is reported in other
assets. 8




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) Revenue Recognition Domestic Television:Revenue from the distribution of the
domestic television series to the Travel Channel (TRV) is recognized as earned
under the following criteria established by the American Institute of Certified
Public Accountants Statement of Position (SOP) No. 00-2, Accounting by
Producers or Distributors of Films:  
    
    Persuasive evidence of an arrangement exists
    
    The show/episode is complete, and in accordance with the terms
of the arrangement, has been delivered or is available for immediate
and unconditional delivery
    
    The license period has begun and the customer can begin its exploitation, exhibition or sale
    
    The sellers price to the buyer is fixed and determinable
    
    Collectibility is reasonably assured Revenue is recognized upon the receipt and acceptance of completed episodes by
TRV in accordance with the terms of the contract. International Television: Revenue for international distribution of the
television series is recognized as earned under the criteria of SOP 00-2, which
is noted above. WPTE
presents international distribution license fee revenues net of the
distributors fees. Product Licensing: Product licensing revenues are recognized when the
underlying royalties from the sales of the related products are earned. The
Company recognizes minimum revenue guarantees ratably over the term of the
license or as earned royalties based on actual sales of the related products,
if greater. Host Fees: Host fee revenues paid by host casinos are recognized as episodes
are aired. Sponsorship: Sponsorship revenues are recognized as episodes are aired. Cash Equivalents and Short-Term InvestmentsThe Company considers all highly
liquid investments with an original maturity of three months or less at the
date of purchase to be cash equivalents. Cash and cash equivalents consist of
short-term U.S. Treasury debt securities, municipal bonds and notes, preferred
securities and money market funds. Short-term investments consist of Federal
Agency debt securities and notes with original maturities beyond three months. All of the Companys cash equivalents and short-term investments are considered
available-for-sale. Such securities are carried at fair market value based on
market quotes. Unrealized gains and losses, net of tax, on securities in this
category are reported as a separate component of shareholders equity.
Interest earned on securities is included in interest income. Restricted cash of $244,000
at October 3, 2004 represents collateral for a letter of credit to guarantee new office space. Television Costs The Company accounts for its television costs pursuant to
SOP No. 00-2. Television costs include capitalizable direct costs, production
overhead and development costs and are stated at the lower of cost or net
realizable value based on anticipated revenue. Production overhead costs
include costs that are directly related to production and are incremental
costs. These costs primarily include office facilities and insurance related to
production. Production overhead office facilities costs are determined based on
percentage of space used and are allocated to television costs based on number
of episodes. Production overhead insurance costs are allocated to television
costs based on number of episodes. The Company has not currently anticipated
any revenues in excess of those subject to existing contractual relationships.
Capitalized television 9




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) production costs for each episode are expensed as revenues are recognized upon
delivery and acceptance of the completed episode. Capitalized television costs at October 3, 2004 and December 28, 2003 consist
of the following: October 3, 2004
    
    December 28, 2003Television Costs:In-production
    
    $
    1,069,000
    
    
    $
    1,838,000Development and pre-production
    
    
    86,000
    
    
    
    141,000Total television costs
    
    $
    1,155,000
    
    
    $
    1,979,000
 Overhead costs of $81,000 and $103,726 were included in the above capitalized
television costs at October 3, 2004 and December 28, 2003, respectively.
Management currently estimates that approximately 95% and 100% of capitalized
television costs at October 3, 2004 are expected to be expensed by the end of
fiscal 2004 and 2005, respectively. Income Taxes Prior to the Companys conversion from World Poker Tour, LLC to
a C-Corporation, the Company was not a tax-paying entity for federal and state
income tax purposes. The members allocable share of the Companys taxable
income (loss) was taxed on the members income tax returns. Therefore, no
provision or liability for federal or state income taxes had been included in
the financial statements. Upon conversion, the Company became liable for
federal and state taxes on taxable income earned  to the conversion.
Losses accumulated prior to the conversion have been passed-through to the unit
holders. The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this
method, the Company determines deferred tax assets and liabilities based upon
the difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. The tax consequences of most
events recognized in the current years consolidated financial statements are
included in determining income taxes currently payable. However, because tax
laws and financial accounting standards differ in their recognition and
measurement of assets, liabilities, equity, revenue, expenses, gains and
losses, differences arise between the amount of taxable income and pretax
financial income for a year and between the tax bases of assets or liabilities
and their reported amounts in the consolidated financial statements. Because it
is assumed that the reported amounts of assets and liabilities will be
recovered and settled, respectively, a difference between the tax basis of an
asset or a liability and its reported amount in the balance sheet will result
in a taxable or a deductible amount in some future years when the related
liabilities are settled or the reported amounts of the assets are recovered,
hence giving rise to deferred tax assets and liabilities. The Company must then
assess the likelihood that deferred tax assets will be recovered from future
taxable income and to the extent management believes that recovery is not
likely, they must establish a valuation allowance. No income tax
benefit has been recorded for losses subsequent to the conversion due to the
uncertainty of realizability. Deferred Revenue Licensing advances and guaranteed payments collected,
but not yet earned by the Company, as well as host fee and
sponsorship receipts, collected prior to the airing of episodes, are
classified as deferred revenue in the accompanying balance sheets. Deferred revenue is derived from three primary sources:
Domestic Television, Product Licensing and Host Fees. Deferred revenue
represents advanced payments received from TRV and product licensees, and
deposits paid by casinos in order to secure a poker tournament date with the
World Poker Tour as a host site. Deferred revenue was $4,067,000 and $505,000
at October 3, 2004 and December 28, 2003, respectively. Deferred revenue at
October 3, 2004 included $3,230,000 from domestic television, $537,000 from
product licensing and $300,000 from host fees. The $505,000 balance at
December 28, 2003 related to host fees. 10




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) Common Shares Subject to Repurchase The Company violated certain securities laws in
connection with its initial public offering by sending out written e-mail
communications to individuals that did not contain all of the information
required to be in a prospectus and were not preceded or accompanied by a
prospectus meeting the requirements for a prospectus. These violations could require the
Company to repurchase shares sold in the offering to direct recipients of the
e-mail communications for a period of up to one year at the offering price plus
interest. The Company sold 75,200 shares in the offering that are subject to
such repurchase rights, and these shares are classified as common shares
subject to repurchase. It is possible that indirect recipients of the written e-mail communications
would assert that they have shares subject to repurchase rights with respect to
shares purchased in the offering. Management believes that the repurchase
rights do not extend to indirect recipients and would contest any such
assertion vigorously; therefore, no such shares have been recorded in the
common shares subject to repurchase. Related Party Transactions Lakes provides general and administrative
services to the Company that include accounting, finance and treasury, tax,
human resources/personnel, employee benefits, retail, systems support and
marketing support. As reimbursement for these services, Lakes bills the Company
an amount equal to the gross wages of the Lakes employees that provide
services to the Company based upon the actual time incurred on Company matters.
Costs of these services totaled $241,000 for the nine months ended
October 3, 2004 and
are included as selling and administrative expenses and due to parent of
$53,000 as of October 3, 2004 in the
accompanying financial statements. Operations of the Company may not be
indicative of those that would have occurred if it had operated as an
independent company. The Company has entered into an exclusive license agreement with Lakes. Under
this agreement, Lakes obtained a license to utilize the World Poker Tour name
and logo in connection with casino table games developed by Lakes using certain
intellectual property rights of Sklansky Games, LLC. Under the terms of the
proposed agreement, if Lakes elects to proceed with its development of casino
table games, the Company would be entitled to receive a specified minimum
annual royalty payment or 10% of the gross revenue received by Lakes from its
sale or lease of the game, whichever is greater. Stock-Based
Compensation The Companys predecessor entity,
World Poker Tour, LLC, adopted the 2002 Option Plan (the 2002 Plan)
which was approved to issue up to an aggregate of 1,120,000 shares in connection
with option grants to employees and consultants. The options become
exercisable in quarterly installments on each of the first four anniversaries
of the date of the grant and expire six years after being exercisable. The
employee must be employed by the Company on the anniversary date in order to
vest in any shares that year. If the employee is terminated (voluntarily or
involuntarily) prior to vesting of any unit option, any options remaining to
vest as of the date of termination will be forfeited. In connection with the conversion to a corporation, the Company adopted the
2004 Stock Incentive Plan that is authorized to grant stock awards to purchase
up to 3,120,000 shares of common stock, including the options to purchase up to
1,120,000 shares of common stock issued to employees and consultants that were
previously outstanding under the 2002 Plan at the time of conversion.
Under the stock options granted in 2004 under the 2004 option plan, the options vest in equal installments over a three
year period, beginning on the first anniversary of the date of each grant and
will continue on each subsequent anniversary date until the option is fully
vested. The employee must be employed by the Company on the anniversary date
in order to vest in any shares that year. If the employee is terminated
(voluntarily or involuntarily) prior to vesting of any stock option, any
options remaining to vest as of the date of termination will be forfeited. To
the extent options are vested, the option shall be exercisable for ten years
from the date of grant. On August 9, 2004, WPTE granted stock options to purchase an additional
1,372,000 shares, including 1,300,000 shares to employees and 72,000 shares to
non-employee directors. On September 17, 2004, WPTE granted stock options to
purchase an additional 40,000 shares to employees. 11




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) The company accounts for equity-based employee compensation under APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related Interpretations.
For unit options and stock options issued to employees, deferred stock
compensation for the options is measured at the stocks fair value in excess of
the exercise price on the date of grant and is being amortized over the vesting
period of four years. In connection with these grants, the Company recorded
deferred compensation of $2,500, as options granted under the 2002 plan had an
exercise price less than the fair value of the underlying share on the date of
grant. Deferred equity-based employee compensation cost of $469 in
the nine months ended October 3, 2004 is included in selling and administrative expenses in the
statement of operations. The fair value of each award under the option plans are estimated on the date
of grant using the Black-Scholes option-pricing model. The following
assumptions were used to estimate the fair value of the options granted during
2002 and 2004 under the Statement of Financial Accounting Standards (SFAS) No.
123, Accounting for Stock-Based Compensation, method of accounting for the
purpose of the pro forma expense disclosure below: 2002
    
    2003
    
    2004Risk-free interest rate
    
    
    4.49
    %
    
    
    
    
    
    
    4.21
    %Expected life
    
    5 years
    
    
    
    
    
    5 yearsExpected dividend yield
    
    
    
    
    
    
    
    
    
    
    Weighted average fair value
    
    $
    0.63
    
    
    
    
    
    
    $
    4.85Annualized Volatility
    
    
    
    
    
    
    
    
    
    
    64.22
    %
 The Company accounts for equity-based consultant compensation according to the
recognition and measurement principles of EITF 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Compensation expense
for stock option grants issued to consultants is recorded at the fair market value of the
options at the measurement date, defined as the date the options vest and
services have been provided. Fair value is measured when the options vest in
annual installments on each of the first four anniversaries of the date of the
grant. Compensation expense is estimated in periods prior to vesting based on
the then current fair value. Changes in the estimated fair value of unvested
options are recorded in the periods the change occurs. Compensation expense
for options issued to consultants was $537,000 during the nine months
ended October 3, 2004. All of these expenses are capitalized television costs and are included
as costs of revenue upon delivery and acceptance of completed episodes. 12




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of SFAS No. 123 to equity-based
compensation. Three Months Ended
    
    Nine Months EndedOctober 3, 2004
    
    September 28, 2003
    
    October 3, 2004
    September 28, 2003Net earnings (loss) as reported
    
    $
    (468,000
    )
    
    $
    (442,000
    )
    
    $
    1,211,000
    
    
    $
    152,000Add: Equity-based compensation
expense included in
reported net earnings (loss)
    
    
    276,000
    
    
    
    8,000
    
    
    
    545,000
    
    
    
    35,000Deduct: Total equity-based
compensation expense
determined under the fair
value method
    
    
    (597,000
    )
    
    
    (8,000
    )
    
    
    (867,000
    )
    
    
    (35,000
    )Net earnings (loss) as pro
forma under SFAS No. 123
    
    $
    (789,000
    )
    
    $
    (442,000
    )
    
    $
    889,000
    
    
    $
    152,000Net (loss) earnings per common
share  basic  as reported
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    0.08
    
    
    $
    0.01Net (loss) earnings per common
share  diluted  as reported
    
    $
    (0.03
    )
    
    $
    (0.03
    )
    
    $
    0.07
    
    
    $
    0.01Net earnings (loss) per common
share  basic  pro forma
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    0.06
    
    
    $
    0.01Net earnings (loss) per common
share  diluted  pro forma
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    0.05
    
    
    $
    0.01
 The number of shares issued to the consultants and the value of such shares
were based on negotiation between the Companys management and its parent
corporation, Lakes. After determining that Lakes would receive a 78%
fully-diluted equity interest in the Company in exchange for an initial
investment of $100,000, the remaining 22% equity interest was valued at $28,000
which management believes was appropriate since all of these instruments were
issued at approximately the same time. This remaining 22% equity interest was
issued in the form of restricted units and unit options and was allocated to
five key individuals (three employees and two consultants) involved in the
Companys formation and/or initial operations based on the individuals
relative perceived value to the enterprise. On March 4, 2002, the Company granted 2,400,000 shares to its president under a
management agreement. The units vest in four equal installments annually
beginning February 25, 2003. If there is a change of control all non-vested
units vest immediately. In connection with this grant, the Company recorded
deferred compensation of $19,200. The Company recognized compensation expense
of $3,600 in 2004 for shares earned based upon services provided under the
management agreement. 3. CONCENTRATIONS The Company has entered into agreements with the Travel Channel, LLC pursuant
to which it granted the Travel Channel an exclusive license to broadcast and
telecast its programs on television in the United States during Seasons One and
Two of the World Poker Tour television series and options to acquire similar
licenses for the episodes comprising each of the Seasons Three through Seven,
which will not be completed until 2009. On May 20, 2004, TRV exercised its
option with respect to Season Three. Under the agreements, the Company is required to deliver each episode of the
World Poker Tour television series by a specific delivery date. If the Company
fails to timely deliver an episode, TRV has the right to reject that episode
and be reimbursed for the related per-episode license fee. As a result, untimely delivery
of one or more episodes by the Company may have a material adverse effect on
the Companys financial condition, results of operations and cash flow. TRVs decision to exercise its options may be affected by, among other things,
the Companys ability to deliver episodes in a timely manner, as well as the
quality of the Companys programming and its continued acceptance by the 13




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) viewing public. Since the Companys revenue from the TRV has represented
approximately 83% of the Companys total historical revenue, a decision by TRV
not to exercise its options for future seasons would have a material adverse
effect on the Companys financial condition, results of operations and cash
flow, especially if this decision were made prior to the material growth of
other Company revenue streams (for example, from the sale of branded
merchandise). Even following the growth of other revenue streams, the failure
to maintain a broadcast license agreement would be detrimental to the
visibility and viability of the World Poker Tour brand. 4. COMMITMENTS AND CONTINGENCIES The Companys contractual purchase obligations to consultants include a monthly
retainer of $5,000 payable to Brandgenuity, LLC through December 15, 2004.
Brandgenuity is a brand licensing company that pursues brand licensing
activities and negotiates licensing agreements on behalf of the Company. Lakes has agreed that it and its subsidiaries, which includes the Company, will
not pay dividends until the December 28, 2004 expiration of an indemnification
agreement that Lakes entered into with Grand Casinos, Inc., a subsidiary of
Caesars Entertainment, Inc. Subject to the dividend restriction, the payment
of cash dividends in the future, if any, will be at the discretion of the
Companys Board of Directors. On March 28, 2003, the Company entered into a Settlement Agreement and Release
with HSOR, LLC. Pursuant to the terms of this settlement agreement, the
Company pays HSOR a fee upon the initial domestic television exhibition (by our
domestic licensee, currently the Travel Channel) of each program the Company
produces using cameras to show players hole or down cards. The Company is
also obligated to pay an additional fee for the initial exhibition of each such
program pursuant to a second license entered into subsequent to the term of the
license granted to our initial domestic licensee (the Travel Channel), if any.
The initial fee for each program ranges from $1,500 to $3,000, depending upon
which network initially exhibits the program within the United States (i.e.
$1,500 if the network initially exhibiting the program is a network other than
ESPN or Fox Sports Network, and $3,000 if the network initially exhibiting the
program is ESPN or Fox Sports Network), and the additional fee for each program
ranges from $750 to $1,500, depending upon which network subsequently exhibits
the program within the United States, if any, with a total cap on the amount of
fees paid to HSOR in connection with each program of $3,750. There is no fee
associated with subsequent exhibitions of the program during the term of either
the first or the second license agreements. In other words, once the $1,500 fee
is paid to HSOR in connection with the initial exhibition of each program on
the Travel Channel, Travel Channel can exhibit the program as many times as
Travel Channel elects in accordance with the terms of the license to Travel
Channel without the Company having to pay any additional fees to HSOR. During
the nine months ended October 3, 2004, the Company made total payments to
HSOR, LLC of $27,000. The total amounts required to be paid under the settlement agreement for each
year will depend on the number of episodes produced by the Company and
exhibited domestically during that year. The term of the settlement agreement
extends for the life of the HSOR patent, which expires in May 2014; provided
that, the settlement agreement is terminable by the Company upon 30 days
written notice. On March 4, 2002, the Company entered into a written employment agreement with
Steven Lipscomb pursuant to which he served as Chief Executive Officer. In
connection with entering into the agreement, the Company issued 15,000 limited
liability company membership units to Mr. Lipscomb that are subject to
forfeiture restrictions which lapse in equal installments over four years,
subject to acceleration in the event Mr. Lipscombs employment is terminated
without Cause or there is a Change of Control (each as defined). Until the
restrictions have lapsed with respect to any portion of Mr. Lipscombs
membership units, the units will be immediately forfeited to the Company if Mr.
Lipscombs employment is terminated for Cause (as defined) or a gaming
authority determines that Mr. Lipscomb is unsuitable or unqualified to be
associated with Lakes or a subsidiary of Lakes. Upon conversion into the
corporation, these limited liability company membership units converted into
2,400,000 shares of common stock and the forfeiture restrictions
lapsed on 1,200,000
shares. The forfeiture restrictions on the remaining 1,200,000 shares will
lapse in 600,000 share installments on February 25, 2005 and February 25, 2006,
respectively. See also Note 2. 14




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) On April 14, 2004, the Company entered into a letter agreement outlining the
terms of a three year employment agreement for Mr. Lipscomb that the Company
plans to enter into in the fourth quarter of 2004. Under this letter
agreement, the Company has agreed to pay Mr. Lipscomb an annualized base salary
of $500,000 commencing as of December 29, 2003 (which includes back pay for Mr.
Lipscombs salary shortfall from January through March 2004) and Mr. Lipscomb
will be eligible for an annual bonus of up to 10% of the Companys net profits
and an additional bonus equal to a percentage of the Companys annual net
profits above certain levels. The Company also granted Mr. Lipscomb options to
purchase 600,000 shares of the Companys common stock at $8.00 per share on
August 9, 2004, which options will vest in equal installments over three years. The Company is involved in various other inquiries, administrative proceedings,
and litigation relating to matters arising in the normal course of business.
While any proceeding or litigation has an element of uncertainty, management
currently believes that the final outcome of these matters is not likely to
have a material adverse effect upon the Companys financial position or results
of operations. 15




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WPT ENTERPRISES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview WPT Enterprises, Inc. (WPTE or the Company) is a media and entertainment
company engaged in the creation of branded entertainment through the
development, production and marketing of televised programming based on poker
and other gaming themes. To date, our operations have principally revolved
around the creation of our World Poker Tour brand through the production and
licensing of a reality television series exhibited on the Travel Channel (TRV)
that is based on the circuit of previously-established high-stakes poker
tournaments that we have affiliated under the World Poker Tour name. Our
immediate business plan involves continuing to build our World Poker Tour
concept into a highly-recognizable brand from which we can generate revenues
through license fees, retail sales, corporate sponsorships and other sources.
We are pursuing this plan through three operating business units, described in
greater detail below:  
    
    WPTE Studios, a multi-media entertainment division.
    
    WPTE Consumer Products, a branded consumer products division.
    
    WPTE Corporate Alliances, a sponsorship and event management division. By far, our principal source of revenues has been and continues to be the
license fees we receive under our agreements with the Travel Channel covering
the episodes of the World Poker Tour television series. We have recognized
some revenues from our WPTE Consumer Products and WPTE Corporate Alliances
business units, and we intend to use the proceeds of our initial public
offering, described below, to expand our business in each of our three business
units. On August 9, 2004, the Securities and Exchange Commission declared effective
our registration statement that registered the offer and sale of up to
4,000,000 shares of our common stock, at $8.00 per share, in our initial public
offering and an additional 600,000 shares of our common stock that may be sold
if the underwriters involved in the offering exercise their over-allotment
option. Our common stock was approved for trading on The Nasdaq Stock Market
and began trading on August 10, 2004. The initial closing of the offering, at
which we sold 4,000,000 shares of common stock, occurred on August 13, 2004,
and we received proceeds of approximately $28.0 million, net of offering expenses and underwriting discounts. The underwriters over-allotment
option was exercised on September 17, 2004, resulting in additional net
proceeds of $4.4 million to the Company. Proceeds from the offering have been
used and are expected to be used to expand our entertainment production
business and for our working capital. See Part II, Item 2. There were no
selling shareholders participating in the offering. WPTE Studios.Our multi-media entertainment division generates revenue through
the domestic and international licensing of broadcast and telecast rights and
casino memberships from casinos and cardrooms that host the televised World
Poker Tour events. Season One of the World Poker Tour consisted of 15 total
episodes that were exhibited on the Travel Channel beginning in the spring of
2003. Season Two consisted of 25 total episodes (14 regular tour stops and 11
specials). We completed production of the episodes comprising our Season Two
programming during June 2004. We recognized an aggregate of $9.9 million in
revenues from Season Two episode from the fourth quarter of 2003 through the
third quarter of 2004. Our production of Season Three began in the third
quarter, and we will begin to deliver episodes in the fourth quarter of 2004.
The completion of production and the final delivery of Season Three episodes
are currently scheduled to occur in the second quarter of fiscal 2005. Since
our inception, the WPT Studios division has been responsible for approximately
93% of our companys total revenue, and fees from the licensing of the World
Poker Tour episodes to the Travel Channel for distribution in the United States
have been responsible for approximately 83% of our companys total revenue. Under our agreements with the Travel Channel, we receive fixed license fees for
each episode we produce. The license fees for each episode are payable at
various times during the pre-production, production and post-production process
and are recognized upon the Travel Channels receipt and acceptance of the
completed episode. Television production costs are generally capitalized and
charged to the Statements of Earnings and Loss as revenues are recognized. 16




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) Our future revenue growth from the U.S. broadcasts of the series will be
limited by our agreement with the Travel Channel, which grants the Travel
Channel options for the next four seasons (Seasons Four through Seven) under
which we would receive fixed license fees for each episode we produce. The
options, if exercised, will give the Travel Channel exclusive rights to exhibit
our programs an unlimited number of times on its television network (or any
other television network owned by the Discovery Channel) in the United States
for four years. In addition to licensing our programming to the Travel Channel for domestic
exhibition, we currently have agreements for international distribution of our
programming into a number of countries. Our international distributor remits
to us license fees net of a distribution fee and agreed upon sales and
marketing expenses. The Travel Channel has the right to receive a portion of
our adjusted gross revenues from international television licenses and certain
other sources after specified minimum amounts are met. We also generate revenue from annual membership fees payable by the casinos and
card clubs that host World Poker Tour events (our member casinos). We
currently have written agreements with 12 member casinos and one member casino
participating under an unwritten arrangement. In October 2004, we announced the formation of the Professional Poker Tour
(PPT). The PPT is an invitation only tournament restricted to pokers
professional elite, including champions from WPT and other major poker competitions. The PPT currently includes five major stops:
Foxwoods, Bellagio, Goldstrike Casino, Commerce Casino and the Mirage. WPTE
will produce these five episodes and contribute certain allocated amounts to
the event fees. We intend to license the series for network broadcast or cable
telecast. WPTE Consumer Products.During the second quarter of fiscal 2004, we began to
derive revenues from the WPTE Consumer Products business unit principally
through royalties from the licensing of our brand to companies seeking to use
the World Poker Tour brand and logo in the retail sales of their consumer
products. In addition, this business unit generates revenue from direct sales
of company-produced merchandise featuring our World Poker Tour brand. The
Travel Channel has the right to receive a percentage of our adjusted gross
revenues above certain levels from our product licensing and merchandising
activities. We have signed or are in the process of negotiating licensing agreements with
various licensees for a variety of consumer products in the United States and
abroad. In addition, we have entered into a license agreement with our parent
company, Lakes Entertainment, Inc. (Lakes), pursuant to which we are licensing
the World Poker Tour name and logo to Lakes in connection with casino table
games that Lakes intends to distribute using certain intellectual property
rights of Sklansky Games, LLC. We have entered into an agreement with IGT, a
slot machine manufacturer, to license the World Poker Tour brand in connection
with the development of electronic, casino-based, poker-related gaming
machines. We also sell company-produced consumer merchandise, including a DVD
collection of the World Poker Tours Season One and several items of apparel
featuring the World Poker Tour logo. We have also entered into a non-binding
letter of intent to work with online gaming company WagerWorks Inc. to offer a
WPT-branded, international, real-money gaming website in countries where it is
legal for U.S. companies to operate gaming businesses. WPTE Corporate Alliances.Our sponsorship and event management division
generates revenue through corporate sponsorship and management of televised and
live events. Our sponsorship program uses the professional sports model as a
method to foster entitlement sponsorship opportunities and naming rights to
major corporations. 17




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##### Table of Contents



WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) The following discussion and analysis should be read in conjunction with the
condensed financial statements and notes thereto. Nine Months Ended October 3, 2004 Compared to the Nine Months Ended September 28, 2003 Revenues Total revenues were $11.8 million for the nine months ended October 3, 2004
compared to $3.9 million for the same period in the prior year. Revenues for
the current and prior years were derived primarily from television license fees
related to the WORLD POKER TOUR® (WPT) series. The increase in revenue is
primarily due to an increase in the number of episodes delivered to the Travel
Channel, LLC (TRV) during the first nine months of 2004 compared to the number
of episodes delivered to TRV during the first nine months of 2003. Also
contributing to the increase was revenue of approximately $2.3 million related
to international television licensing, product licensing, host fees,
sponsorship, and merchandise included in total revenue for the nine months
ended October 3, 2004. In April 2004, TRV exercised its option to broadcast
Season Three, the first of a possible five additional seasons of WPT covered by
the option. WPT Season Three episodes are currently in production, and are
scheduled to begin airing in March 2005. We receive fixed license payments
from TRV subject to satisfaction of production milestones and other conditions.
Domestic television license revenue is recognized upon delivery of completed
episodes to TRV. We will begin to deliver completed Season Three episodes
starting in the fourth quarter of 2004 and expect to begin to recognize
revenues at that time. Costs and Expenses Our costs of revenues increased from $2.4 million for the nine months ended
September 28, 2003 to $7.1 million for the nine months ended October 3, 2004.
Cost of revenues for the current and prior year periods were derived primarily
from production costs related to the WPT series. The increase was due
primarily to a greater number of episodes being delivered to TRV during the
2004 period compared to the comparable 2003 period. Production costs for the
nine months ended September 28, 2003 excluded a significant amount of costs
related to episodes delivered in that period that were expensed as incurred in
2002 prior to the signing of the TRV contract in March 2003. Overall gross
margins were comparable for the respective nine month periods due to higher
international licensing, product licensing, host, sponsorship and merchandise
revenue during the 2004 period that were offset by the exclusion of production
costs in the comparable 2003 period. Selling and administrative expenses increased from $1.2 million for the nine
months ended September 28, 2003 to $3.5 million for the nine months ended
October 3, 2004. This increase is primarily due to additional legal and
consulting fees incurred during the 2004 period associated with business
development, an increase in distribution costs associated with product
licensing, and an increase in payroll costs resulting from growth related to
becoming a public company. Other Interest income, net of interest expense, was $22,000 for the nine months ended October 3, 2004 compared
to $103,000 of interest expense for the same period in the prior year. This
difference is primarily due the payoff of the credit line with Lakes during the
current year period and higher investment balances in the current year from the
proceeds of the initial public offering. Earnings Per Common Share and Net Earnings For the nine months ended October 3, 2004, basic and diluted earnings per
common share were $0.08 and $0.07, respectively, compared to basic and diluted
earnings of $0.01 per common share for the same period in the prior year. Net
income for the period ended October 3, 2004 was $1.2 million compared to $0.2
million for the nine months ended September 28, 2003. 18




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) Three Months Ended October 3, 2004 Compared to the Three Months Ended September 28, 2003 Revenues Total revenues were $3.0 million for the three months ended October 3, 2004,
compared to $0.4 million in the prior year period. Revenues for the current
and prior year quarters were derived primarily from television license fees
related to the WPT series. The increase in revenue is primarily due to an
increase in the number of episodes delivered to TRV during the third quarter of
2004 compared to the number of episodes delivered to TRV during the third
quarter of 2003. Also contributing to the increase was revenue of
approximately $0.6 million related to international television licensing,
product licensing, host fees, sponsorship, and merchandise included in total
revenue for the three months ended October 3, 2004. In April 2004, TRV
exercised its option to broadcast Season Three, the first of a possible five
additional seasons of WPT covered by the option. WPT Season Three episodes are
currently in production, and are scheduled to begin airing in March 2005. Costs and Expenses Production costs increased from $0.3 million for the three months ended
September 28, 2003 to $1.9 million for the three months ended October 3, 2004.
The increase in production costs is primarily due to an increase in the number
of episodes delivered to TRV during the third quarter of 2004 compared to the
number of episodes delivered to TRV during the third quarter of 2003. Overall
gross margins were 35% for the three months ended October 3, 2004 compared to
26% for the three months ended September 28, 2003. The higher gross margins in
the current year period were due primarily to higher international television
and product licensing revenues in 2004 compared to the same quarter in 2003. Selling and administrative expenses increased from $0.5 million for the three
months ended September 28, 2003 to $1.5 million for the three months ended
October 3, 2004. This increase is primarily due to additional legal and
consulting fees incurred during the 2004 period associated with business
development and an increase in payroll costs resulting from growth related to
becoming a public company. Other Interest income, net of interest expense, was $52,000 for the three months ended October 3, 2004 compared
to interest expense of $29,000 for the same period in the prior year. This
difference is primarily due the payoff of the credit line with Lakes
Entertainment, Inc. during the current year period and higher investment
balances in the current year from the proceeds of the initial public offering. Losses Per Common Share and Net Losses For the three months ended October 3, 2004, basic and diluted losses per common
share were $0.03 compared to basic and diluted losses of $0.03 per common share
for the same period in the prior year. Net loss for the quarter ended October
3, 2004 was $0.5 million compared to a $0.4 million loss for the quarter ended
September 28, 2003. 19




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) Outlook We currently anticipate generating revenues of approximately $10.8 million from
Season Three license fees under the Travel Channel agreement, depending on the
number of episodes that ultimately comprise that season. We expect to
recognize approximately $3.1 million of this revenue during the fourth quarter
of fiscal 2004, with the rest being recognized in fiscal 2005. Other sources
of expected revenues during the fourth quarter of fiscal 2004 include
international television licensing revenues resulting from the distribution of
the World Poker Tours Season One and Two and product licensing fees. Liquidity and Capital Resources From our inception through August 13, 2004, we funded our startup costs,
operating costs and capital expenditures through loans from our majority equity
owner, Lakes Poker Tour, LLC (Lakes Poker Tour), a wholly owned subsidiary of
Lakes Entertainment, Inc. At October 3, 2004, we had an accumulated deficit of
$0.7 million and $4.0 million of available borrowings under our working capital
loan, which we do not intend to utilize in the future. For the nine months
ended October 3, 2004, we realized net earnings of approximately $1.2 million
and generated $5.8 million of cash from operating activities. On August 13, 2004, we completed an initial public offering of our common stock.
The aggregate gross proceeds of the shares offered and sold by us,
including shares sold under the over-allotment option, totaled
$36.8 million. In connection with the offering, we paid an
aggregate of $2.9 million in underwriting discounts and
commissions to the underwriters, and $1.5 million
in other expenses in connection with the offering. After deducting the underwriting discounts and commissions
and the total offering expenses, we received net proceeds from our
initial public offering of approximately $32.4 million. We
used $0.2 million of the proceeds to repay the balance of the loans from Lakes
Poker Tour, and we have retained almost all of the net proceeds from the offering in
cash, cash equivalents and short-term investments, and intend to use the net proceeds
for working capital and capital expenditures associated with the expansion of our
media and other businesses and for general corporate purposes. The generation of cash flow
sufficient to meet
the Companys cash needs is dependent not only on the continuance of the World
Poker Tour television series, but also on the Companys ability to expand
revenue channels, control production costs, and manage expansion initiatives.
We believe the proceeds of the offering, along with anticipated revenues, will
be sufficient to support our operations for the foreseeable future. The table below sets forth our known contractual obligations as of October 31,
2004: Payments due by periodLess Than
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsOperating lease(1)
    
    $
    3,043,000
    
    

    $
    273,000
    
    
    $
    936,000
    
    
    $
    998,000
    
    
    $
    836,000Purchase obligations(2)
    
    
    10,000
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    Employee obligation(3)
    
    
    1,833,000
    
    
    
    1,000,000
    
    
    
    833,000
    
    
    
    
    
    
    
    Total
    
    $
    4,886,000
    
    
    $
    1,283,000
    
    
    $
    1,769,000
    
    
    $
    998,000
    
    
    $
    836,000
   (1)
    
    We have a month-to-month lease for our current office space. The monthly lease payment
fluctuates from month to month based on the amount of space we utilize. The average amount
paid per month under the lease is approximately $21,000.WPTE has signed a new lease and is expected to move into the new
office space in March 2005 where the monthly lease payments will
start at approximately $38,000 and escalate up to approximately
$45,000. The
amount set forth in the table above assumes monthly lease payments through May 2011.(2)
    
    Purchase obligations include a monthly retainer of $5,000 payable to Brandgenuity, LLC through
December 15, 2004.(3)
    
    Employee obligation includes the base salaries payable to Steven Lipscomb, Audrey Kania and
Robyn Moder under their respective employment agreements. 20




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) Significant Accounting Policies The significant accounting policies, which WPTE believes are the most critical
to aid in fully understanding and evaluating its reported financial results,
include the following: revenue recognition, television costs, deferred revenue and stock-based
compensation. Revenue recognition:Domestic and international television license fee
revenues are recognized as earned by the American Institute of Certified Public
Accountants Statement of Position (SOP) No. 00-2, Accounting by Producers or
Distributors of Films. Revenue is recognized upon receipt and acceptance of
episodes by the ultimate customer once the license period has begun.
Currently, for international television license fees the company does
not consider collectibility to be reasonably assured until the
distributor has received payment. WPTE
presents international distribution license fee revenues net of the
distributors fees, as the distributor is the primary obligator
in the transaction with the ultimate customer. Product licensing revenues are recognized when the underlying royalties from
the sales of the related products are earned. The Company recognizes minimum
revenue guarantees ratably over the term of the license or as earned royalties
based on actual sales of the related products, if greater. Host fee revenues paid by host casinos are recognized as episodes are aired. Sponsorship revenues are recognized as episodes are aired. Deferred revenue: Licensing advances and
guaranteed payments collected, but not yet earned by the Company, as
well as host fee and sponsorship receipts collected prior to the
airing of episodes, are classified as deferred revenue in the
accompanying balance sheets. Television costs:Television costs include capitalizable direct costs,
production overhead and development costs and are stated at the lower of cost
or net realizable value based on anticipated revenue. We have not currently
anticipated any revenues in excess of those subject to existing contractual
relationships. Marketing, distribution, and general and administrative costs
are expensed as incurred. Capitalized television production costs for each
episode are expensed as revenues are recognized upon delivery and acceptance by
TRV of the completed episode. Management currently estimates that
approximately 95% and 100% of capitalized television costs at October 3, 2004
are expected to be expensed by the end of fiscal 2004 and 2005, respectively Stock-based compensation:We account for equity-based employee
compensation under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and Related Interpretations.
Compensation expense for stock option grants issued to employees is recorded to
the extent the fair market value of the stock on the date of grant exceeds the
option price. Compensation expense for restricted stock grants is measured
based on the fair market value of the stock on the date of grant. The
compensation expense is amortized ratably over the vesting period of the
awards. We account for equity-based consultant compensation according to the
recognition and measurement principles of EITF 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services. Compensation expense for stock option grants issued to consultants is recorded at the fair market value of the
options at the measurement date, defined as the date the options vest and
services have been provided. 21




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) Recently issued accounting pronouncements:In March 2004, the FASB issued an
exposure draft of a proposed standard entitled Share Based Payment, which
would amend existing accounting rules. The proposed standard, if adopted,
would require expensing stock options issued by the Company based on their
estimated fair value at the date of grant and would be effective for the third
quarter of 2005. Upon issuance of a final standard, which is expected in late
2004, we will evaluate the impact on our consolidated financial
position and results of operations. Transition to Independent Management of Accounting System and Development of
Internal Support of Disclosure Controls and Procedures and Internal Controls. Since our inception, our personnel have been responsible for initiating
financial and business transactions, making related bookkeeping entries and
verifying the accuracy of our financial reports. However, the personnel of our
majority shareholder, Lakes, have historically been responsible for the
operation of our financial accounting systems and preparation of our financial
reports as part of an arrangement under which Lakes provides us with general
and administrative services. In addition, some of our disclosure controls and procedures and internal
controls have been implemented jointly with and supported by Lakes own
internal controls. We have been transitioning to an independent operation of
accounting systems, and we continue to develop the internal support of our
disclosure controls and procedures and internal controls. We anticipate that
our systems will be independently operational within the next several months.
Until such time, however, Lakes will continue to support our accounting
systems. Off-Balance Sheet Arrangements The Company has no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on its financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors. Private Securities Litigation Reform Act The foregoing discussion and other statements in this report contain various
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements are based on the Companys
current expectations or beliefs concerning future events. These statements can
be identified by the use of terminology such as anticipate, believe,
estimate, expect, intend, may, could, possible, plan, project,
will, forecast and similar words or expressions. Forward looking information involves important risks and uncertainties that
could significantly affect the Companys anticipated future results and,
accordingly, actual results may differ materially from those expressed in any
forward-looking statement. The Companys forward-looking statements generally
relate to plans for future expansion and other business development activities,
expected levels of capital spending, potential sources of future financing and
the possible effects on the Companys business of gaming, tax and other
regulation and of competition. Although it is not possible to foresee all of
the factors that may cause actual results to differ from the Companys
forward-looking statements, these factors include, among others, the following
risk factors: 22




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued)  
    
    We remain heavily reliant upon our agreements with TRV as a source of revenue and any termination or
impairment of these agreements would materially and adversely affect the results of our operations;
    
    The termination or impairment of our relationships with key licensing and strategic partners could
harm our business performance;
    
    Our television programming may fail to maintain a sufficient audience for a variety of reasons, many
of which are beyond our control;
    
    Our ability to create and license our television programming profitably may be negatively affected
by adverse trends that apply to the television production business generally;
    
    Our competitors (many of whom have greater financial resources or marketplace presence) may develop
television programming that would directly compete with our television programming;
    
    A decline in general economic conditions or the popularity of our brand of televised poker
tournaments may negatively impact our business;
    
    We may be unable to protect our entertainment concepts, our current and future brands and our other
intellectual property rights;
    
    We may be unable to successfully expand into foreign markets or into new or complementary businesses;
    
    The regulatory environment for online gaming is currently uncertain, and despite our efforts to
comply with applicable laws, we may be unable to pursue this business fully or our activities may be
claimed or found to be in violation of applicable United States or foreign regulations; and
    
    The loss of our President or another member of our senior management team may negatively impact the
success of our business. Investors are cautioned that all forward-looking statements involve risks and
uncertainties. 23




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WPT ENTERPRISES, INC.
Quantitative and Qualitative Disclosures about Market Risk; Controls and Procedures 
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Companys financial instruments include cash and cash equivalents,
marketable securities and long-term debt. The Companys main investment
objectives are the preservation of investment capital and the maximization of
after-tax returns on its investment portfolio. Consequently, the Company
invests with only high-credit-quality issuers and limits the amount of credit
exposure to any one issuer. The Company does not use derivative instruments
for speculative or investment purposes. The Companys cash and cash equivalents are not subject to significant interest
rate risk due to the short maturities of these instruments. As of October 3,
2004, the carrying value of the Companys cash and cash equivalents
approximates fair value. The Company has in the past and may in the future
obtain marketable debt securities (principally consisting of commercial paper,
corporate bonds, and government securities) having a weighted average duration
of one year or less. Consequently, such securities would not be subject to
significant interest rate risk. 
 ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) or Rule 15d  15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act), as of the end of the
period covered by this quarterly report. Based on their evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that WPT Enterprises,
Inc.s disclosure controls and procedures are effective. There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced above. 24




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Part II Other Information WPT ENTERPRISES, INC.
Part II
Other Information 
 ITEM 1. LEGAL PROCEEDINGS On March 28, 2003, we entered into a Settlement Agreement and Release with
HSOR, LLC. The agreement resulted from HSORs claim that we were infringing
upon an HSOR patent by using small television cameras to reveal players hole
cards or down cards to a television audience in connection with the televised
exhibition of poker tournaments. Pursuant to the terms of the agreement, we pay
HSOR a fee upon the initial domestic television exhibition (by our domestic
licensee, currently the Travel Channel) of each program we produce using
cameras to show players hole or down cards. We are also obligated to pay
an additional fee for the initial exhibition of each such program pursuant to a
second license entered into subsequent to the term of the license granted to
our initial domestic licensee (the Travel Channel), if any. The initial fee
for each program ranges from $1,500 to $3,000, depending upon which network
initially exhibits the program within the United States ($1,500 if the network
initially exhibiting the program is a network other than ESPN or Fox Sports
Network, and $3,000 if the network initially exhibiting the program is ESPN or
Fox Sports Network), and the additional fee for each program ranges from $750
to $1,500, depending upon which network subsequently exhibits the program
within the United States, if any, with a total cap on the amount of fees paid
to HSOR in connection with each program of $3,750. There is no fee associated
with subsequent exhibitions of the program during the term of either the first
or the second license agreements. In other words, once the $1,500 fee is paid
to HSOR in connection with the initial exhibition of each program on the Travel
Channel, Travel Channel can exhibit the program as many times as it elects in
accordance with the terms of the license to Travel Channel without us having to
pay any additional fees to HSOR. The term of the settlement agreement extends
for the life of the HSOR patent, which expires in May 2014; provided that, the
settlement agreement is terminable by us upon 30 days written notice. On May 21, 2004, we filed a lawsuit against Reece Powers II, Janice Powers, R&J
Partnership, Ltd. d/b/a Reeces Las Vegas Supplies, Virgil Dale Rockwell and
Does 1 through 50 in the United States District Court  Southern District of
Ohio asserting that the defendants infringed upon our trademark rights in the
marks WORLD POKER TOUR and WPT (and related logos) when they organized an
unaffiliated poker tournament and advertised the tournament as a WPT satellite
event. We obtained a stipulated permanent injunction against the defendants
future use of the WPT marks and are seeking to recover damages and legal costs
associated with this matter. On August 25, 2004, we filed a lawsuit against TVi Media, LLC, Passport
International Productions of California and Does 1-10 in the United States
District Court, Central District of California asserting that defendants use of
certain video footage infringed upon WPTEs copyrighted materials and that
defendants engaged in unfair competition through the use of WPTEs copyrighted
materials and trademarks. On September 7, 2004, the Honorable Dale S. Fischer
entered a stipulated preliminary injunction
enjoining defendants and all those acting in concert with them
from infringing our copyrighted materials and trademarks. Expedited
discovery is proceeding. On November 4, 2004,
we amended the complaint to add additional parties, who are still in the process of being served.
They include Dante Pugliese, Michelle Pugliese, Sam Riddle, Sam Riddle & Associates,
Inc., and International Poker Championship Series, Inc. We are not currently a party to any material litigation and are not aware of
any threatened litigation that would have a material adverse effect on our
business. 25




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WPT ENTERPRISES, INC.
Part II
Other Information (Continued) 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a)Unregistered Sales of Equity Securities.Not applicable. (b)Use of Proceeds. On August 13, 2004, we completed an initial public offering of our common
stock. The aggregate gross
proceeds of the shares offered and sold by us, including shares sold under the
over-allotment option, totaled $36.8 million. In connection with the offering,
we paid an aggregate of $2.9 million in underwriting discounts and commissions
to the underwriters, and $1.5 million in other expenses in connection with the
offering. After deducting the underwriting discounts and commissions and the
total offering expenses, we received net proceeds from our initial public
offering of approximately $32.4 million. We used $0.2 million of the proceeds to repay the balance
of the loans from Lakes Poker Tour, and we have retained almost all of the net proceeds from the offering in cash, cash equivalents and short-term investments, and intend to use the net proceeds
for working capital and capital expenditures associated with
the expansion of our media and other businesses and for general corporate
purposes. (c)Issuer Purchases of Equity Securities.Not applicable. 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1
    
    Office Lease, dated as of September 24, 2004, by and between Wilshire Courtyard L.L.C. and WPT Enterprises, Inc.10.2
    
    Amendment Number 5, dated August 18, 2004 to Acquisition Master Agreement dated August 22, 2003, by and
between The Travel Channel, L.L.C. and WPT Enterprises, Inc. (f/k/a World Poker Tour, LLC) (portions of this exhibit have been omitted pursuant to a request for confidential treatment and have been filed separately with the Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934)31.1
    
    Certification of CEO pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of CFO pursuant to Securities Exchange Act Rules
13a-15(e) and 15d-15(e) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 26




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized. Dated: November 17, 2004
    
    WPT ENTERPRISES, INC.Registrant/s/ Lyle BermanLyle Berman
Chairman of the Board and
Chief Executive Officer/s/ W. Todd SteeleW. Todd Steele
Chief Financial Officer
 27