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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION    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 4, 2004 OR [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to  WPT ENTERPRISES, INC. 
 Delaware
    
    77-06390000(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
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 [  ]
    
    No [X]
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [  ]
    
    No [X]
 As of September 17, 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 July 4, 2004 and December 28, 2003
    
    
    3Condensed Statements
of Operations for the three months ended July 4, 2004 and June 29, 2003
    
    
    4Condensed Statements
of Operations for the six months ended July 4, 2004 and June 29, 2003
    
    
    5Condensed Statements
of Cash Flows for the six months ended July 4, 2004 and June 29, 2003
    
    
    6Notes to Condensed Financial Statements
    
    
    7ITEM 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
    
    
    27Amendment to No.3 to Travel Channel AgreementCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906
 2




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WPT ENTERPRISES, INC. 
 Condensed Balance Sheets
 (In thousands)
 (Unaudited)
 Proforma Members DeficitJuly 4, 2004
    
    December 28, 2003
    
    July 4, 2004AssetsCurrent Assets:Accounts receivable
    
    $
    247
    
    
    $
    332Inventory
    
    
    3
    
    
    
    10Television costs
    
    
    911
    
    
    
    1,979Offering costs
    
    
    950
    
    
    
    Other current assets
    
    
    22
    
    
    
    113Total Current Assets
    
    
    2,133
    
    
    
    2,434Property and Equipment-Net
    
    
    207
    
    
    
    112Other Assets:Investments
    
    
    201
    
    
    
    Total Other Assets
    
    
    201
    
    
    
    Total Assets
    
    $
    2,541
    
    
    $
    2,546Liabilities and Members DeficitCurrent Liabilities:Outstanding checks in excess of bank balance
    
    $
    270
    
    
    $
    184Accounts payable
    
    
    32
    
    
    
    74Due to parent
    
    
    
    
    
    
    240Deferred revenue
    
    
    1,558
    
    
    
    505Accrued payroll and related
    
    
    141
    
    
    
    40Accrued expenses
    
    
    651
    
    
    
    243Total Current Liabilities
    
    
    2,652
    
    
    
    1,286Note Payable to Parent
    
    
    176
    
    
    
    3,429Total Liabilities
    
    
    2,828
    
    
    
    4,715Commitments and Contingencies (Note 11)Members DeficitClass A
Units  par value of $ 1.28Authorized 93,000 units; 93,000 issued and
outstanding
    
    
    119
    
    
    
    119
    
    
    
    Class B
Units  par value of $ 1.28Authorized 7,000 units; 0 issued and outstanding
    
    
    
    
    
    
    
    
    
    
    Preferred Stock, $0.001 par valueAuthorized 20,000,000 shares; 0 issued and
outstanding on a pro forma basis
    
    
    
    
    
    
    
    
    
    
    Common Stock, $0.001 par valueAuthorized 100,000,000 shares; 14,880,000 issued and
outstanding on a pro forma basis
    
    
    
    
    
    
    
    
    
    
    15Additional paid-in-capital
    
    
    561
    
    
    
    361
    
    
    
    Accumulated deficit
    
    
    (958
    )
    
    
    (2,637
    )
    
    
    (293
    )Deferred compensation
    
    
    (9
    )
    
    
    (12
    )
    
    
    (9
    )Total Members Deficit
    
    
    (287
    )
    
    
    (2,169
    )
    
    
    (287
    )Total Liabilities and Members Deficit
    
    $
    2,541
    
    
    $
    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 Operations
 (In thousands, except earnings per share)
 (Unaudited)Three Months EndedJuly 4, 2004
    
    June 29, 2003Revenues:License fee
    
    $
    3,770
    
    
    $
    2,750Host fee
    
    
    550
    
    
    
    200Sponsorship
    
    
    340
    
    
    
    Merchandise
    
    
    59
    
    
    
    4Total Revenues
    
    
    4,719
    
    
    
    2,954Cost of Revenues
    
    
    2,645
    
    
    
    1,170Gross Profit
    
    
    2,074
    
    
    
    1,784Expenses:Selling and administrative
    
    
    1,165
    
    
    
    402Depreciation
    
    
    33
    
    
    
    21Total Expenses
    
    
    1,198
    
    
    
    423Earnings From Operations
    
    
    876
    
    
    
    1,361Other Income (Expense):Interest
    
    
    11
    
    
    
    (37
    )Net Earnings
    
    $
    887
    
    
    $
    1,324Net Earnings Per Common Share  Basic
    
    $
    0.06
    
    
    $
    0.10Net Earnings Per Common Share  Diluted
    
    $
    0.06
    
    
    $
    0.08Weighted Average Common Shares Outstanding  Basic
    
    
    14,240
    
    
    
    13,360Dilutive Effect of Restricted Stock
    
    
    1,198
    
    
    
    1,797Dilutive Effect of Stock Options
    
    
    559
    
    
    
    839Weighted Average Common Shares Outstanding  Diluted
    
    
    15,997
    
    
    
    15,996
 The accompanying notes are an integral part of these condensed financial statements. 4




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WPT ENTERPRISES, INC. 
 Condensed Statements of Operations
 (In thousands, except earnings per share)
 (Unaudited)Six Months EndedJuly 4, 2004
    
    June 29, 2003Revenues:License fee
    
    $
    7,413
    
    
    $
    3,250Host fee
    
    
    800
    
    
    
    250Sponsorship
    
    
    468
    
    
    
    Merchandise
    
    
    177
    
    
    
    4Total Revenues
    
    
    8,858
    
    
    
    3,504Cost of Revenues
    
    
    5,117
    
    
    
    2,090Gross Profit
    
    
    3,741
    
    
    
    1,414Expenses:Selling and
administrative
    
    
    1,965
    
    
    
    707Depreciation
    
    
    67
    
    
    
    39Total Expenses
    
    
    2,032
    
    
    
    746Earnings From Operations
    
    
    1,709
    
    
    
    668Other Income (Expense):Interest
    
    
    (30
    )
    
    
    (74
    )Net
Earnings
    
    $
    1,679
    
    
    $
    594Net Earnings Per Common Share  Basic
    
    $
    0.12
    
    
    $
    0.05Net Earnings Per Common Share  Diluted
    
    $
    0.10
    
    
    $
    0.04Weighted Average Common Shares Outstanding  Basic
    
    
    13,947
    
    
    
    13,067Dilutive Effect of Restricted Stock
    
    
    1,398
    
    
    
    1,997Dilutive Effect of Stock Options
    
    
    652
    
    
    
    932Weighted Average Common Shares Outstanding  Diluted
    
    
    15,997
    
    
    
    15,996
 The accompanying notes are an integral part of these condensed financial statements. 5




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WPT ENTERPRISES, INC. 
 Condensed Statements of Cash Flows
(In thousands)
 (Unaudited)Six Months EndedJuly 4, 2004
    
    June 29, 2003OPERATING ACTIVITIES:Net Earnings
    
    $
    1,679
    
    
    $
    594Adjustments to reconcile net income to net
cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    67
    
    
    
    39Unit-based compensation expense
    
    
    270
    
    
    
    30Changes in operating assets and liabilities:Accounts receivable
    
    
    85
    
    
    
    (487
    )Inventory
    
    
    7
    
    
    
    (2
    )Television costs
    
    
    1,001
    
    
    
    (17
    )Other current assets
    
    
    (859
    )
    
    
    (10
    )Accounts payable
    
    
    (42
    )
    
    
    (33
    )Due to parent
    
    
    (240
    )
    
    
    72Deferred revenue
    
    
    1,052
    
    
    
    Accrued expenses
    
    
    510
    
    
    
    (283
    )Net Cash Provided by (Used in) Operating Activities
    
    
    3,530
    
    
    
    (97
    )INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (162
    )
    
    
    5Investment in unconsolidated affiliate
    
    
    (201
    )
    
    
    Net Cash Provided by (Used in) Investing Activities
    
    
    (363
    )
    
    
    5FINANCING ACTIVITIES:Increase in cash provided by checks drawn in excess of
bank balances
    
    
    86
    
    
    
    116Proceeds from (repayments of) notes payable to parent
    
    
    (3,253
    )
    
    
    (21
    )Net Cash Provided by (Used in) Financing Activities
    
    
    (3,167
    )
    
    
    95Net decrease in cash and cash equivalents
    
    
    
    
    
    
    3Cash and cash equivalents  beginning of period
    
    
    
    
    
    
    Cash and
cash equivalents  end of period
    
    $
    
    
    
    $
    3SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Noncash operating activities:Capitalized television costs related to unit options issued to
consultants
    
    $
    67
    
    
    
    Cash paid during the period for interest
    
    ($
    214
    )
    
    
    
 The accompanying notes are an integral part of these condensed financial statements. 6




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WPT ENTERPRISES, INC. 
 Notes to Condensed Financial Statements
 (Unaudited)
 1. Business Organization  World Poker Tour, LLC (WPT or the Company) 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. Lakes is the Companys majority shareholder and has control over
the Companys operations and management. WPT has established a global series of
poker tournaments at locations in the United States and various other
countries, to be filmed and broadcast on television. In March 2003, WPT 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 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 WPT for an unlimited number of times over a three
year period within the United States. During July 2003, WPT reached an
agreement with TRV for a second season with TRV being granted options for five
additional seasons. Substantially all of WPTs revenues are derived from
license fees and related host fees and accordingly WPT is presented as a single
segment. 2. 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. The cost method of accounting is used for investments in which WPT 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. WPT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. See Note
6. 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. 7




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) 3. Television Costs 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. 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 production costs for each episode are expensed as
revenues are recognized upon delivery and acceptance of the completed episode. Capitalized television costs at July 4, 2004 and December 28, 2003 consist of
the following: July 4, 2004
    
    December 28, 2003Television Costs:In-production
    
    $
    910,720
    
    
    $
    1,837,990Development and pre-production
    
    
    
    
    
    
    141,277Total television costs
    
    $
    910,720
    
    
    $
    1,979,267
 Overhead costs of $30,462 and $103,726 were included in total capitalized
television costs of $910,720 and $1,979,267 at July 4, 2004 and December 28,
2003, respectively. Based upon managements estimates as of July 4, 2004
approximately 100% of capitalized television costs are expected to be
recognized during fiscal 2004. 4. Deferred Offering Costs Deferred offering costs incurred by the Company consist of legal and accounting
fees and expenses, reimbursable expenses paid or payable to the representative
of the underwriters, printing expenses and fees related to the Companys Nasdaq
listing application and the registration of Company shares with the Securities
and Exchange Commission. These offering costs are being deferred and will be
charged to additional paid-in-capital when the proceeds from the offering are
received by the Company. 5. Income Taxes The Company is not a tax-paying entity for federal and state income tax
purposes. The members allocable share of the Companys taxable income (loss)
is 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. Subsequent to the conversion of World Poker Tour, LLC to
a corporation, the Company
will become a tax paying entity (see Note 12). Deferred tax assets and liabilities will be
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities will be
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. A deferred tax asset valuation allowance will be recorded if it is
more likely than not that all or a portion of the recorded deferred tax assets
will not be realized. 8




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) 6. Investments 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 July 4, 2004, the carrying value of this investment is
approximately $200,000, and is reported in other assets. 7. 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 $123,000 for the first six months of 2004 and are included as selling
and administrative expenses and due to parent 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 a license agreement with Lakes. Under this
agreement, Lakes obtained a license to utilize the World Poker Tour name and
logo in connection with a casino table game that Lakes is developing 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 the
casino table game, 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. 8. Note Payable to Parent Note payable to Parent of $3.4 million at December 28, 2003 represents a
working capital loan from Lakes based on an agreement dated on March 4, 2002.
The loan agreement provides for funding of up to $4 million, which accrues
interest quarterly at a rate of 6.2% and is due on March 4, 2005. Lakes has the
ability to terminate the agreement at its discretion. In the event Lakes
terminates the agreement, all amounts advanced and accrued are due one year
subsequent to the termination. All assets of the Company are pledged as
collateral for this note. As of July 4, 2004, there was $0.2 million in
principal and interest due under the promissory note. 9. Stock-Based Compensation The Company has a 2002 Option Plan (the 2002 Plan) which is 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. 9




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) The Company granted 800,000 options to employees and 320,000 options to
consultants on March 1, 2002 at an exercise price of $0.0049. The number of
options exercisable was 280,000 as of December 28, 2003 and 0 as of December
29, 2002. No options have been canceled or exercised under the 2002
Plan. For 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 that 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 $313 in the first six months of 2004 is included
in selling and administrative expenses in the statement of operations. The fair value of each award under the option plan is 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 under
the SFAS No. 123 method of accounting for the purpose of the pro forma expense
disclosure below: 2002Risk-free interest rate
    
    
    4.49
    %Expected life
    
    5 yearsExpected dividend yield
    
    
    Weighted average fair value
    
    $
    0.63
 For options issued to consultants, compensation expense is measured at the
options fair value. 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 $200,000 during the first six months of 2004. All of
these expenses are capitalized television costs and are included as costs of
revenue upon delivery and acceptance of completed episodes. 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 Entertainment, Inc. After determining that Lakes
Entertainment 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 $28,205, 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 shares 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. There have been no options granted under the 2002 Plan since March 1, 2002.  10




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) 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 unit
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. The following table illustrates the effect on net income if the Company had
applied the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation, to equity-based compensation. Three Months Ended
    
    Six Months EndedJuly 4, 2004
    
    June 29, 2003
    
    July 4, 2004
    
    June 29, 2003Net earnings as reported
    
    $
    887,260
    
    
    $
    1,323,448
    
    
    $
    1,678,823
    
    
    $
    593,928Add: Equity-based compensation
expense included in reported net
earnings
    
    
    175,820
    
    
    
    9,689
    
    
    
    269,823
    
    
    
    29,796Deduct: Total equity-based
compensation expense determined
under the fair value method
    
    
    (175,869
    )
    
    
    (9,738
    )
    
    
    (269,919
    )
    
    
    (29,892
    )Net earnings as pro forma
under SFAS No. 123
    
    $
    887,211
    
    
    $
    1,323,399
    
    
    $
    1,678,727
    
    
    $
    593,832Net earnings per common
share  basic  as reported
    
    $
    0.06
    
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.05Net earnings per common
share  diluted  as reported
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.04Net earnings per common
share  basic  pro forma
    
    $
    0.06
    
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.05Net earnings per common
share  diluted  pro forma
    
    $
    0.06
    
    
    $
    0.08
    
    
    $
    0.10
    
    
    $
    0.04
 Restricted Shares Issued 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 $2,400 in 2004 for shares earned based upon services provided under the
management agreement. 10. 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 our 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, the Travel Channel
exercised its option with respect to Season Three. 11




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) 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, the Travel Channel has the right to reject
that episode and retain the related per-episode license fee. As a result,
untimely delivery of one or more episode by the Company may have a material
adverse effect on the Companys financial condition, results of operations and
cash flow. The Travel Channel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 viewing public. Since the Companys revenue from the Travel Channel has
represented approximately 84% of the Companys total historical revenue, a
decision by the Travel Channel 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. 11. 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 and a
monthly retainer of $10,000 per month to be paid to Gilco Sports &
Entertainment Marketing LLC through August 2004. Brandgenuity is a
brand licensing company that pursues brand licensing activities and negotiates
licensing agreements on behalf of the Company. Gilco Sports & Entertainment
Marketing is a sports promotions agency that the Company utilizes to broker
agreements with its sponsors. 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 12




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) 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 us
having to pay any additional fees to HSOR. During the first two quarters of
fiscal 2004, the Company made total payments to HSOR, LLC of $13,500. 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 us upon 30 days written notice. On March 4, 2002, we entered into a written employment agreement with Steven
Lipscomb pursuant to which he served as our Chief Executive Officer. In
connection with the entering into the agreement, we 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 our conversion into a
corporation, these limited liability company membership units will be
automatically converted into 2,400,000 shares of our common stock and the
forfeiture restrictions will have lapsed on 1,200,000 shares as of the
conversion date. 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. 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 third 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 will also grant Mr. Lipscomb options
to purchase 600,000 shares of the Companys common stock at the initial public
offering price, 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. 13




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) 12. Subsequent Events On July 28, 2004, the Company converted into a Delaware corporation. As part of
the conversion each unit was converted into 160 common shares. Restricted units
and unit options were converted using the same ratio. After conversion, there
were 14,880,000 shares outstanding including 2,400,000 shares, which vest in
four equal installments annually beginning February 25, 2003 and are subject to
restriction under a management agreement. Upon conversion, the Company became
liable for federal and state taxes on taxable income earned subsequent to the
conversion. Losses accumulated prior to the conversion have been passed-through
to the unit holders. Had the Company been a taxable entity prior to the conversion, no tax benefits
would have been recognized for the cumulative losses due to uncertainties about
their realizability. However, such losses would have been used to eliminate
completely the Companys provision for income taxes related to the earnings
recorded for the six months ended July 4, 2004. In connection with this conversion, 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 options to purchase up to 1,120,000
shares of common stock issued to employees and consultants that were
outstanding under World Poker Tour, LLCs 2002 plan at the time of conversion. On August 9, 2004, the Securities and Exchange Commission declared effective a
registration statement of WPTE that registered the offer and sale of up to
4,000,000 shares of WPTE common stock, at $8.00 per share, in the Companys
initial public offering and an additional 600,000 shares of WPTE common stock
that may be sold if the underwriters involved in the offering exercise their
over-allotment option. The Companys 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 WPTE sold 4,000,000 shares of common stock,
occurred on August 13, 2004, with WPTE receiving proceeds of approximately
$28.5 million, net of estimated offering expenses and underwriting discounts.
On September 17, 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. Proceeds from the
offering have been used and are expected to be used to expand our
entertainment production business and for our working capital. The Company has 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
was not preceded or accompanied by a prospectus meeting these requirements.
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
will be 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. 14




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) Following is summarized pro forma balance sheet data as of July 4, 2004. This
data has been adjusted to reflect the offering at the initial public offering
price of $8.00 per share of common stock. July 4, 2004(In thousands)
    
    December 28, 2003
    
    Actual
    
    Pro Forma(1)Current Assets
    
    $
    2,434
    
    
    $
    2,133
    
    
    $
    34,863Total Assets
    
    
    2,546
    
    
    
    2,541
    
    
    
    35,271Current Liabilities
    
    
    1,286
    
    
    
    2,652
    
    
    
    2,652Note Payable to Parent
    
    
    3,429
    
    
    
    176
    
    
    
    Common Shares Subject to
Repurchase
    
    
    
    
    
    
    
    
    
    
    602Class A Units
    
    
    119
    
    
    
    119
    
    
    
    Common Stock
    
    
    
    
    
    
    
    
    
    
    19Additional
paid-in-capital
    
    
    361
    
    
    
    561
    
    
    
    32,303Accumulated Deficit
    
    
    (2,637
    )
    
    
    (958
    )
    
    
    
  (1)
    
    Data has been adjusted to reflect the conversion of World
Poker Tour, LLC to a corporation and the issuance of 4,524,800 common
shares in the offering and 75,200 common shares subject to repurchase,
and the receipt of the net proceeds therefrom and the application of such
net proceeds. 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. 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. 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:  
    
    WPT Studios, a multi-media entertainment division.
    
    WPT Consumer Products, a branded consumer products division.
    
    WPT 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 WPT Consumer Products and WPT 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 $28.5 million, net of estimated
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. WPT 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. The inaugural season 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 will consist 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. Our 16




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) production of Season Three began in the third quarter. 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 94% 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 84% 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
recognized as revenues are recognized. 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 is
entitled to retain a portion of our gross receipts from these international
licenses after recouping up to a certain amount of its 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, with one member
casino participating under an unwritten arrangement. WPT Consumer Products.During the second quarter of fiscal 2004, we began to
derive revenues from the WPT 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 either 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., pursuant to which we are licensing
the World Poker Tour name and logo to Lakes Entertainment in connection with a
casino table game that Lakes Entertainment is developing using certain
intellectual property rights of Sklansky Games, LLC. We are also in
negotiations with several slot machine manufacturers to license the World Poker
Tour brand in connection with the development of an electronic poker-related
gaming machine. 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. 17




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) WPT Corporate Alliances.Our sponsorship and event management division
generates revenue through corporate sponsorship and management of televised and
live events. We recently launched a sponsorship program using the professional
sports model to grant entitlement sponsorship opportunities and naming rights
to major corporations. The following discussion and analysis should be read in conjunction with the condensed financial statements and notes thereto. Six Months Ended July 4, 2004 Compared to the Six Months Ended June 29, 2003 Revenues Total revenues were $8.9 million for the six months ended July 4, 2004 compared
to $3.5 million for the same period in the prior year. Revenues for the
current and prior year periods were derived primarily from license fees related
to the World Poker Tour series. The increase in revenue is primarily due to an
increase in license fees related to Season Two episodes delivered to TRV during
2004, compared to license fees related to Season One episodes delivered to TRV
during 2003. Also contributing to the increase was revenue of approximately
$1.4 million related to host fees, sponsorship and merchandise included in
total revenue for the six months ended July 4, 2004. In April 2004, TRV
exercised its option to broadcast the first of a possible five additional
seasons (Season Three). WPT receives fixed license payments from TRV subject
to satisfaction of production milestones and other conditions. Costs and Expenses Our production costs increased from $2.1 million for the six months ended June
29, 2003 to $5.1 million for the six months ended July 4, 2004. The increase
was due primarily to a greater number of episodes being delivered to the Travel
Channel during the 2004 period compared to the comparable 2003 period.
Production costs for the six months ended June 29, 2003 excluded a significant
amount of costs related to episodes delivered in that period that were expensed
as incurred prior to the signing of the Travel Channel contract in March 2003.
The gross margins were comparable for the respective six month periods due to
higher 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 $0.7 million for the six
months ended June 29, 2003 to $2.0 million for the six months ended July 4,
2004. This increase is primarily due to increases in professional fees and
headcount related to the expansion of our entertainment production
business. Other Interest expense was $30,000 for the six months ended July 4, 2004 compared to
$74,000 for the same period in the prior year. This decrease is primarily due
to a lower average balance on the credit line with Lakes Entertainment, Inc.
during the current year period. 18




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) Earnings Per Common Share and Net Earnings For the six months ended July 4, 2004, basic and diluted earnings per common
share were $0.12 and $0.10, respectively, compared to basic and diluted
earnings of $0.05 and $0.04 per common share, respectively, for the same period
in the prior year. Net income for the period ended July 4, 2004 was $1.7
million compared to $0.6 million for the six months ended June 29, 2003. Three Months Ended July 4, 2004 Compared to the Three Months Ended June 29,
2003 Revenues Total revenues were $4.7 million for the three months ended July 4, 2004,
compared to $3.0 million in the prior year period. Revenues for the current
and prior year periods were primarily derived from license fees related to the
World Poker Tour series. The increase in revenue is primarily due to an
increase in license fees related to Season Two episodes delivered to TRV during
the second quarter of 2004, compared to license fees related to Season One
episodes delivered to TRV during the second quarter of 2003. Also contributing
to the increase was revenue of approximately $0.9 million related to host fees,
sponsorship and merchandise included in total revenue for the three months
ended July 4, 2004. Costs and Expenses Our production costs increased from $1.2 million for the three months ended
June 29, 2003 to $2.6 million for the three months ended July 4, 2004.
Production costs for the three months ended June 28, 2003 excluded a
significant amount of costs related to episodes delivered in that period that
were expensed as incurred prior to the signing of the Travel Channel contract
in March 2003. This resulted in a gross margin of 60% for the three months
ended June 29, 2003 compared to 44% for the last three months ended July 4,
2004. Selling and administrative expenses increased from $0.4 million for the three
months ended June 29, 2003 to $1.2 million for the three months ended July 4,
2004. This increase is primarily due to increases in professional fees and
headcount related to the expansion of our entertainment production
business. Other Interest income was $11,000 for the three months ended July 4, 2004 compared to
interest expense of $37,000 for the same period in the prior year. 19




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) Outlook We completed production of Season Two of the World Poker Tour television series
in June 2004 and expect to recognize aggregate revenues of $9.9 million from
license fees related to the Season Two episodes under the Travel Channel
agreement. We recognized $300,000 and $3.5 million of this amount in the fourth
quarter of 2003 and the first quarter of 2004, respectively. We recognized $3.7
million during the second quarter of fiscal 2004, and expect to
recognize $1.1 million and $1.3 million during the third and fourth
quarters of 2004, respectively. 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 third and fourth quarters of fiscal 2004 include international license
fees resulting from the distribution of the World Poker Tours Season One and
Two and brand licensing fees. Liquidity and Capital Resources Since our
inception, we have 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 July 4, 2004, we had an accumulated deficit of $1.0 million and $3.8 million
of available borrowings under our working capital loan (see Note 8).
For the six months ended July 4, 2004, we realized net earnings of
approximately $1.7 million and generated $3.5 million of cash from operating
activities. In August 2004, we raised approximately $28.5 million in cash proceeds from our
initial public offering, net of underwriting discounts and estimated offering
expenses. The underwriters over-allotment option was exercised on September
17, 2004, resulting in additional net proceeds of $4.4 million to the Company.
We used $0.2 million of the proceeds to repay the balance of the loans
from Lakes Poker Tour and intend to use the remaining net proceeds from the offering for working capital for
our operations, capital expenditures and for general corporate purposes. We
expect that the majority of these expenses will be for production fees,
professional fees and payroll. We may use a portion of the proceeds for capital
equipment, including studio production equipment, editing equipment for video
production and other electronic equipment. 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. 20




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) The table below sets forth our known contractual obligations as of August 29,
2004: Payments due by periodLess Than
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsOperating lease(1)
    
    
    226,500
    
    
    
    226,500
    
    
    
    
    
    
    
    
    
    
    
    Purchase
obligations(2)
    
    
    54,000
    
    
    
    54,000
    
    
    
    
    
    
    
    
    
    
    
    Employee
obligation(3)
    
    
    2,000,000
    
    
    
    1,000,000
    
    
    $
    1,000,000
    
    
    
    
    
    
    
    Total
    
    $
    2,280,500
    
    
    $
    1,280,500
    
    
    $
    1,000,000
    
    
    $
    
    
    
    $
    
   (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 $18,875, based on the September 2004
lease. The amount set forth in the table above assumes that we remain in our current office and make monthly lease payments of
$18,875 through August 2005.(2)
    
    Purchase obligations include amounts to be paid to several of our consultants including a monthly retainer of $5,000 payable to
Brandgenuity, LLC through December 15, 2004; $34,000 payable to Harryman/Lesley Corp. for services in relation to radio features.(3)
    
    Employee obligation includes the base salaries payable to Steven Lipscomb, Audrey Kania and Robyn Moder under their respective
employment agreements. Significant Accounting Policies The significant accounting policies, which WPT Enterprises, Inc. believes are
the most critical to aid in fully understanding and evaluating its reported
financial results, include the following: revenue recognition, television costs
and equity-based compensation. Revenue recognition:License fee revenue from the World Poker Tour series is
recognized upon receipt and acceptance of completed episodes by the Travel
Channel in accordance with the terms of the contract. The contract sets forth
the number and type of episodes that are required to be delivered to the Travel
Channel and the fee that the World Poker Tour will receive for each. World
Poker Tour receives written communication from the Travel Channel verifying
acceptance of episodes prior to revenue recognition by the World Poker Tour.
The Travel Channel makes payments in accordance with an agreed upon schedule.
Differences in timing between payments received and episodes delivered and
accepted are recorded as deferred revenue or accounts receivable as
appropriate. Host fees paid by host casinos are recognized as episodes are
aired. Merchandise revenue is recognized upon delivery. Fees paid to resellers
are reflected as a reduction of revenues. 21




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) 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
the Travel Channel of the completed episode. Based upon managements estimates,
approximately 100% of television costs capitalized as of July 4, 2004 are
expected to be recognized during fiscal 2004. Equity-based compensation:We have equity-based employee and consultant
compensation, which is described more fully in Note 9 to the financial
statements. 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 unit option grants issued to employees is recorded to the extent the fair
market value of the units on the date of grant exceeds the option price.
Compensation expense for restricted unit grants is measured based on the fair
market value of the units 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 unit
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. 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 Entertainment, Inc., 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 Entertainment 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
Entertainments own internal controls. We have been transitioning to
independent operation of our 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 Entertainment
will continue to operate our accounting systems. 22




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) 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:  
    
    We remain heavily reliant upon our agreements with the Travel
Channel 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; 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 July 4,
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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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. 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
pursuant to a registration statement on Form S-1 (File No. 333-114479) that was
declared effective by the SEC on August 9, 2004. A total of 4,000,000 shares of
common stock were offered by us under the final prospectus, all of which were
sold at a price per share of $8.00. The managing underwriters of our offering
were Feltl and Company. The aggregate gross proceeds of the shares offered and
sold by us totaled $32.0 million. In connection with the offering, we paid an
aggregate of $2.2 million in underwriting discounts and commissions to the
underwriters, and other expenses in connection with the offering. After deducting the underwriting discounts and commissions and the estimated
offering expenses, we received net proceeds from our initial public offering of
approximately $28.5 million. We used $0.2 million of the net proceeds to repay
amounts outstanding under our promissory note to our majority stockholder. On
September 17, 2004, the underwriters over-allotment option was exercised,
resulting in additional net proceeds of $4.4 million to the Company. We intend
to use the remaining net proceeds to us from the offering 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. 26




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WPT ENTERPRISES, INC.
Part II
Other Information (Continued) 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1
    
    Amendment Number 3, dated
June 23, 2004 to Acquisition Master Agreement dated August 22, 2003, by and between The Travel
Channel, LLC 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
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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:
September 23, 2004
    
    WPT ENTERPRISES, INC.Registrant/ s/ Lyle BermanLyle BermanChairman of the Board andChief Executive Officer/s/ W. Todd SteeleW. Todd SteeleChief Financial Officer
 28