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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 April 3, 2005 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. (Exact name of registrant as specified in its charter)
 Delaware
    
    77-06390000(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification No.)5700 Wilshire Boulevard
Suite 350
Los Angeles, California
    
    90036(Address of principal executive offices)
    
    (Zip Code)
 (323) 330-9900
(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 May 1, 2005, there were 20,120,000 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 April 3, 2005 and January 2, 2005
    
    
    3Condensed
Statements of Earnings (Loss) for the three months ended April 3, 2005 and April 4, 2004
    
    
    4Condensed Statement of Shareholders Equity for the three months ended April 3, 2005
    
    
    5Condensed Statements of Comprehensive Earnings (Loss) for the three months ended April 3, 2005 and April 4, 2004
    
    
    6Condensed Statements of Cash Flows for the three months ended April 3, 2005 and April 4, 2004
    
    
    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
    
    
    22ITEM
4.  CONTROLS AND PROCEDURES
    
    
    22PART II. OTHER INFORMATIONITEM
1.  LEGAL PROCEEDINGS
    
    
    23ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    23ITEM
6.  EXHIBITS
    
    
    24SIGNATURES

    
    
    25Exhibit 10.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
 2






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WPT ENTERPRISES, INC. 
 Condensed Balance Sheets
 April 3, 2005 and January 2, 2005
 (unaudited)
 April 3,
    
    
    January 2,2005
    
    
    2005(In thousands)AssetsCurrent Assets:Cash and cash equivalents
    
    $
    12,163
    
    
    $
    4,525Short-term investments
    
    
    19,447
    
    
    
    27,755Accounts receivable, net
    
    
    1,204
    
    
    
    1,950Deferred tax assets
    
    
    166
    
    
    
    136Inventory
    
    
    55
    
    
    
    52Television costs
    
    
    1,428
    
    
    
    917Other current assets
    
    
    688
    
    
    
    624Total Current Assets
    
    
    35,151
    
    
    
    35,959Property and Equipment-Net
    
    
    1,096
    
    
    
    703Cash and cash equivalents-restricted
    
    
    246
    
    
    
    244Investment
    
    
    207
    
    
    
    207Other long-term assets
    
    
    167
    
    
    
    Total Assets
    
    $
    36,867
    
    
    $
    37,113Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    77
    
    
    $

    17Due to parent
    
    
    5
    
    
    
    16Deferred revenue
    
    
    3,601
    
    
    
    3,280Accrued payroll and related
    
    
    259
    
    
    
    292Accrued expenses
    
    
    1,952
    
    
    
    1,321Total Current Liabilities
    
    
    5,894
    
    
    
    4,926Total Liabilities
    
    
    5,894
    
    
    
    4,926Common Shares Subject to Repurchase
    
    
    629
    
    
    
    618Commitments and ContingenciesShareholders EquityPreferred
Stock, par value of $0.001
Authorized 20,000 shares; 0 issued and outstanding
    
    
    
    
    
    
    Common
Stock, $0.001 par value authorized 100,000 shares;
20,120 and 19,480 issued and outstanding, respectively
    
    
    20
    
    
    
    19Additional paid-in-capital
    
    
    33,184
    
    
    
    32,767Accumulated deficit
    
    
    (2,807
    )
    
    
    (1,205
    )Accumulated other comprehensive loss
    
    
    (48
    )
    
    
    (6
    )Deferred compensation
    
    
    (5
    )
    
    
    (6
    )Total Shareholders Equity
    
    
    30,344
    
    
    
    31,569Total Liabilities and Shareholders Equity
    
    $
    36,867
    
    
    $
    37,113
 The accompanying notes are an integral part of these condensed financial statements. 3




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WPT ENTERPRISES, INC. 
 Condensed Statements of Earnings (Loss)
 Three months ended April 3, 2005 and April 4, 2004
 (unaudited)
 2005
    
    
    2004(In thousands, except
per share data)Revenues:License fees:Domestic television
    
    $
    1,963
    
    
    $
    3,540International television
    
    
    419
    
    
    
    103Product licensing
    
    
    1,079
    
    
    
    Total License Fees
    
    
    3,461
    
    
    
    3,643Casino host fees
    
    
    250
    
    
    
    250Sponsorship
    
    
    293
    
    
    
    128Merchandise
    
    
    68
    
    
    
    119Home Entertainment
    
    
    31
    
    
    
    Total Revenues
    
    
    4,103
    
    
    
    4,140Cost of Revenues
    
    
    3,188
    
    
    
    2,472Gross Profit
    
    
    915
    
    
    
    1,668Expenses:Selling and administrative
    
    
    2,753
    
    
    
    801Depreciation
    
    
    20
    
    
    
    34Total Expenses
    
    
    2,773
    
    
    
    835Earnings (Loss) From Operations
    
    
    (1,858
    )
    
    
    833Other Income (Expense):Interest income
    
    
    256
    
    
    
    Interest expense
    
    
    
    
    
    
    (41
    )Net Earnings (Loss)
    
    ($
    1,602
    )
    
    $
    792Net Earnings (Loss) Per Common Share  Basic
    
    ($
    0.08
    )
    
    $
    0.06Net Earnings (Loss) Per Common Share  Diluted
    
    ($
    0.08
    )
    
    $
    0.05Weighted Average Common Shares Outstanding  Basic
    
    
    19,058
    
    
    
    13,653Dilutive Effect of Restricted Stock
    
    
    
    
    
    
    1,598Dilutive Effect of Stock Options
    
    
    
    
    
    
    746Weighted Average Common Shares Outstanding  Diluted
    
    
    19,058
    
    
    
    15,997
 The accompanying notes are an integral part of these condensed financial statements. 4




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WPT ENTERPRISES, INC. 
 Condensed Statement of Shareholders Equity
 Three months ended April 3, 2005
 (unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid in
    
    
    Accumulated
    
    
    Deferred
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Compensation
    
    
    Loss
    
    
    Total(In thousands)BALANCES AT JANUARY 2, 2005
    
    
    19,480
    
    
    
    $  19
    
    
    $
    32,767
    
    
    
    $  (1,205
    )
    
    
    $  (6
    )
    
    
    $    (6
    )
    
    $
    31,569Reduction of deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    1

    

    
    
    
    

    
    
    1Common stock issued
    
    
    640
    
    
    
    1
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3Stock-based compensation expense
    
    
    
    
    
    
    
    
    
    
    425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    425Interest on common shares subject
to repurchase
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (42
    )
    
    
    (42
    )Net earnings (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,602
    )
    
    
    
    
    
    
    
    
    
    
    (1,602
    )BALANCES AT APRIL 3, 2005
    
    
    20,120
    
    
    
    $  20
    
    
    $
    33,184
    
    
    
    $  (2,807
    )
    
    
    $  (5
    )
    
    
    $  (48
    )
    
    $
    30,344
 The accompanying notes are an integral part of these condensed financial statements. 5




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##### Table of Contents



WPT ENTERPRISES, INC. 
 Condensed Statements of Comprehensive Earnings (Loss)
 Three months ended April 3, 2005 and April 4, 2004
 (unaudited)
 April 3,
    
    
    April 4,2005
    
    
    2004(In thousands)Net earnings (loss)
    
    
    ($1,602
    )
    
    $
    792Other comprehensive earnings (loss), net of tax:Unrealized losses on securities:Unrealized holding losses during the period
    
    
    (48
    )
    
    
    (6
    )Comprehensive earnings (loss)
    
    
    ($1,650
    )
    
    $
    786
 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
 Three months ended April 3, 2005 and April 4, 2004
 (unaudited)
 April 3,
    
    
    April 4,2005
    
    
    2004(In thousands)OPERATING ACTIVITIES:Net earnings (loss)
    
    ($
    1,602
    )
    
    $
    792Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:Depreciation
    
    
    20
    
    
    
    34Production depreciation
    
    
    55
    
    
    
    Stock-based compensation expense
    
    
    423
    
    
    
    94Changes in operating assets and liabilities:Accounts receivable
    
    
    746
    
    
    
    68Inventory
    
    
    (3
    )
    
    
    4Television costs
    
    
    (508
    )
    
    
    145Other assets
    
    
    (231
    )
    
    
    (293
    )Accounts payable
    
    
    60
    
    
    
    (21
    )Due to parent
    
    
    (11
    )
    
    
    (240
    )Deferred revenue
    
    
    321
    
    
    
    1,646Accrued expenses
    
    
    598
    
    
    
    384Net Cash Provided by (Used in) Operating Activities
    
    
    (132
    )
    
    
    2,613INVESTING ACTIVITIES:Purchase of property and equipment
    
    
    (467
    )
    
    
    (76
    )Decrease in short-term investments
    
    
    8,236
    
    
    
    Net Cash Used in Investing Activities
    
    
    7,769
    
    
    
    (76
    )FINANCING ACTIVITIES:(Decrease) Increase in cash provided by checks drawn in excess of bank balances
    
    
    
    
    
    
    15Increase in restricted cash
    
    
    (2
    )
    
    
    Stock option exercise
    
    
    3
    
    
    
    Proceeds from (repayments of) notes payable to parent
    
    
    
    
    
    
    (2,552
    )Net Cash Provided by Financing Activities
    
    
    1
    
    
    
    (2,537
    )Net increase in cash and cash equivalents
    
    
    7,638
    
    
    
    Cash and cash equivalents  beginning of period
    
    
    4,525
    
    
    
    Cash and cash equivalents  end of period
    
    $
    12,163
    
    
    $
    0SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Noncash operating activities:Capitalized television costs related to stock options issued to consultants
    
    ($
    3
    )
    
    ($
    7
    )Cash paid during the period for interest
    
    
    
    
    
    
    (214
    )Cash paid during the period for income taxes
    
    
    (17
    )
    
    
    
 The accompanying notes are an integral part of these condensed financial statements. 7




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##### Table of Contents



WPT ENTERPRISES, INC. 
 Notes to Condensed Financial Statements
 (Unaudited)
 1. BUSINESS WPT Enterprises, Inc. (WPTE or the Company) is a company engaged in the creation of
branded entertainment and consumer products driven by the development, production and marketing of
televised programming based on gaming themes. WPTE created the World Poker Tour®, a
television show based on a series of high-stakes poker tournaments that airs on the Travel Channel
in the U.S. and more than 60 markets globally. WPTEs immediate business plan involves continuing
to build the World Poker Tour concept into a highly recognizable brand from which it generates
revenues through television and product licensing fees, casino host fees, sponsorship fees,
merchandise and home entertainment sales. Organization-World Poker Tour, LLC was formed in March 2002 as a majority-owned subsidiary
of Lakes Entertainment, Inc. (Lakes or Parent) through Lakes Poker Tour, LLC (Lakes Poker Tour),
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 or Travel
Channel), granting TRV the right to broadcast the first season of the World Poker Tour®
(WPT) series. During July 2003, WPTE reached an agreement with TRV for a second season with TRV
being granted options for five additional seasons. TRV exercised its option for Season Three in
May 2004. Under the agreements, TRV has the exclusive right, license, and privilege to exhibit,
market, distribute, transmit, perform and otherwise exploit each of the seasons two-hour programs
produced by WPTE for an unlimited number of times over three and four year periods within the
United States. The Travel Channel exercised its option for Season Four in March 2005, and the agreement
grants the Travel Channel options for the following three seasons (Seasons Five through Seven)
under which WPTE would receive fixed license fees for each episode the Company produces. For each
season covered by an option exercised by the Travel Channel, the Travel Channel will have exclusive
rights to exhibit the programs in that season an unlimited number of times on its television
network (or any other television network owned by the Discovery Channel) in the U.S. for four
years. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation These financial statements have been prepared by the Company in
accordance with accounting principles generally accepted in the United States of America. Year End The Company has a 52- or 53-week accounting period ending on the Sunday closest to
December 31 of each year. Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Investments The Company has an equity investment in PokerTek, Inc., a company that developed
PokerPro, an automated poker system. As WPT has less than 20% ownership interest in PokerTek and
does not have the ability to exercise significant influence over PokerTek, this investment is
accounted for under the cost method and would be adjusted only for other-than-temporary declines in
fair value. 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. At April 3, 2005, the carrying value of this investment is approximately $207,000. 8




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##### Table of Contents



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 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; and
    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 Fees: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. Casino Host Fees:Casino host fee revenues paid by host casinos are recognized as episodes
are aired. Sponsorship Fees:Sponsorship revenues are recognized as episodes are aired. Cash and Cash Equivalents 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 cash on hand and in banks and money market funds. All of the Companys
cash and cash equivalents are considered available-for-sale. Cash
and Cash Equivalents  Restricted cash of approximately $246,000 at April 3, 2005
represents collateral for a letter of credit to guarantee new office space. Short-Term Investments The Company follows the provisions of Statement on Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securitiesand has classified all of its investments as available for sale, whereby investments are
reported at fair value, with unrealized gains and losses reported as accumulated other
comprehensive earnings (loss), net of income taxes, in the accompanying statement of shareholders
equity. Market value is determined by the most recently traded price of the security at the balance
sheet date. Net realized gains or losses are determined on the specific identification cost method.
Short-term investments all have original maturities beyond three months and consist of the
following: As of April 3, 2005 (in thousands): Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury and Agency Securities
    
    $
    7,161
    
    
    $
    
    
    
    $
    (68
    )
    
    $
    7,093Certificates of Deposit
    
    
    155
    
    
    
    
    
    
    
    (1
    )
    
    
    154Short-term Municipal Bonds
    
    
    11,200
    
    
    
    
    
    
    
    
    
    
    
    11,200Corporate Preferred Securities
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    1,000TOTAL
    
    $
    19,516
    
    
    $
    
    
    
    $
    (69
    )
    
    $
    19,447
 9




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) As of January 2, 2005 (in thousands): Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueU.S. Treasury and Agency Securities
    
    $
    13,161
    
    
    $
    13
    
    
    $
    (23
    )
    
    $
    13,151Certificates of Deposit
    
    
    155
    
    
    
    
    
    
    
    (1
    )
    
    
    154Short-term Municipal Bonds
    
    
    13,450
    
    
    
    
    
    
    
    
    
    
    
    13,450Corporate Preferred Securities
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    1,000TOTAL
    
    $
    27,766
    
    
    $
    13
    
    
    $
    (24
    )
    
    $
    27,755
 Inventory Inventory consists of merchandise to be sold on a direct sales basis online.
Substantially the entire inventory is comprised of finished goods. Inventory is stated at the lower
of cost or market and determined on a specific identification basis. Property and Equipment Property and equipment are stated at cost less accumulated
depreciation. Expenditures for additions, renewals, and improvements are capitalized. Costs of
repairs and maintenance are expensed when incurred. Depreciation of property and equipment is
computed using the straight-line method over the following estimated useful lives: Furniture and equipment
    
    2-3 yearsSoftware
    
    3 years
 Property and equipment consist of the following: April 3,
    
    
    January 2,2005
    
    
    2005Furniture and equipment
    
    
    776,000
    
    
    
    763,000Software
    
    
    200,000
    
    
    
    196,000Construction in progress
    
    
    522,000
    
    
    
    71,0001,498,000
    
    
    
    1,030,000Less: Accumulated depreciation
    
    
    (402,000
    )
    
    
    (327,000
    )Property and equipment, net
    
    $
    1,096,000
    
    
    $
    703,000
 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, depreciation,
consultant stock option expense 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 April 3, 2005 and January 2, 2005 consist of the following: April 3,
    
    
    January 2,2005
    
    
    2005Television CostsIn-production
    
    $
    1,425,000
    
    
    $
    911,000Development and pre-production
    
    
    3,000
    
    
    
    6,000Total television costs
    
    $
    1,428,000
    
    
    $
    917,000
 Overhead costs of $265,000 were included in total capitalized television costs of $1.4 million
at April, 2005 and $189,000 were included in total capitalized television costs of $917,000 at
January 2, 2005. Based upon managements estimates as of April 3, 2005, approximately 100% of
capitalized television costs are expected to be recognized during fiscal 2005. 10




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) Income Taxes Prior to the Companys conversion from World Poker Tour, LLC to a C-Corporation
in July 2004, 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 subsequent to the conversion. 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. A valuation allowance was recorded for deferred tax assets other
than those recoverable through the filing of a carryback claim as management is unable to determine
if it is more likely than not that the remaining deferred tax assets will be recovered due to the
Companys limited operating history. 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 Casino 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 approximately $3.6 million and $3.3 million at April 3, 2005 and January
2, 2005, respectively. 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. Warrants Issued In connection with its initial public offering on August 9, 2004, the
Company issued to its lead underwriter, Feltl & Company, a warrant to purchase up to a total of
400,000 shares of common stock at an exercise price of $12.80 for a period of four years. The
warrant is not exercisable during the first year after the date of the offering and as of April 3,
2005 the warrant remained outstanding. Earnings (Loss) Per Share Basic earnings (loss) per common share is calculated by dividing
net income (net loss) by the weighted average number of common shares outstanding during the year.
Shares for stock options granted to employees and consultants of the Company are included in the
computation after the options have vested because the shares are issuable for relatively minimal
cash consideration in relation to the fair value of the options. Diluted earnings (loss) per common
share is calculated by adjusting weighted average outstanding shares, assuming conversion of all
potentially dilutive stock options and awards. The effects of stock options, restricted stock and
warrants have not been included in diluted loss per share for the three months ended April 3, 2005
as the effect would have been anti-dilutive. 11




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) Stock-Based Compensation The Company accounts for equity-based employee compensation under
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. The Company must also disclose the effect on net income (net loss) and earnings per share if the
Company had applied the fair value recognition provisions under the Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock Based Compensation,to equity-based
employee compensation. The fair value of each award under the option
plans is estimated on the
date of grant using the Black-Scholes option-pricing model. The following table illustrates the effect on net income (net loss) if the Company had applied the
fair value recognition provisions of SFAS No. 123 to equity-based compensation. Three Months EndedApril 3, 2005
    
    
    April 4, 2004Net earnings (loss) as reported
    
    $
    (1,602,000
    )
    
    $
    792,000Add: Equity-based compensation expense
included in reported net earnings
    
    
    423,000
    
    
    
    94,000Deduct: Total equity-based
compensation expense determined under
the fair value method
    
    
    (992,000
    )
    
    
    (94,000
    )Net earnings (loss) as pro forma under
SFAS No. 123
    
    $
    (2,171,000
    )
    
    $
    792,000Net (loss) earnings per common share 
basic  as reported
    
    $
    (0.08
    )
    
    $
    (0.06
    )Net (loss) earnings per common share 
diluted  as reported
    
    $
    (0.08
    )
    
    $
    (0.05
    )Net earnings (loss) per common share 
basic  pro forma
    
    $
    (0.11
    )
    
    $
    (0.06
    )Net earnings (loss) per common share 
diluted  pro forma
    
    $
    (0.11
    )
    
    $
    (0.05
    )
 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. 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 $422,000 during the first three months of 2005. All of these expenses are
capitalized television costs and are included as costs of revenue upon delivery and acceptance of
completed episodes. Derivative Instruments All derivatives, including those embedded in other contracts, are
recognized as either assets or liabilities and measured at fair value. The accounting for changes
in the fair value of derivatives depends on their intended use and designation. Management has
reviewed the requirements of SFAS No. 133 and has determined the Company does not have any
freestanding or embedded derivatives. All contracts that contain provisions meeting the definition
of a derivative also meet the requirements of, and have been designated as, normal purchases or
sales. The Companys policy is to not use freestanding derivatives and to not enter into contracts
with terms that cannot be designated as normal purchases or sales. 12




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) Recent Accounting Pronouncements In December 2004, the FASB issued Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS No. 123(R)), which amends
FASB Statement Nos. 123 and 95. FAS No. 123(R) requires all companies to measure compensation
expense for all share-based payments (including employee stock options) at fair value and recognize
the expense over the related service period. Additionally, excess tax benefits, as defined in FAS
No. 123(R), will be recognized as an addition to paid-in capital and will be reclassified from
operating cash flows to financing cash flows in the Statements of Cash Flows. FAS No. 123(R) will
be effective for the first quarter of 2006. We are currently evaluating the effect that FAS No.
123(R) will have on our financial position, results of operations and operating cash flows. We have
included information regarding the effect on net earnings and net earnings per common share had we
applied the fair value expense recognition provisions of the original FAS No. 123 within the
Stock-Based Compensation heading in this note. FAS No. 123(R) will not alter the accounting for
equity-based consultant compensation under EITF 96-18, Accounting for Equity Instruments that are
Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. 3. RELATED PARTY TRANSACTIONS On May 17, 2004, the Company 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 had developed using certain intellectual property rights of
Sklansky Games, LLC. Under the terms of the agreement, the Company will 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. In addition to Lakes ownership, through Lakes
Poker Tour, LLC, of a majority of the Companys common stock, Lyle Berman, Executive Chairman, and
Brad Berman, Mr. Bermans son and a director of the Company, own 28% and 44%, respectively, of the
outstanding equity interests in Sklansky Games. The Company has a 15% ownership interest in PokerTek, a start-up manufacturer and distributor
of electronic poker tables. This interest was obtained by loaning PokerTek approximately $185,000
at an annual interest rate equal to the lowest applicable federal rate. Lyle Berman along with his
son Bradley Berman, who is an employee of Lakes and sits on the Companys Board of Directors, made
personal investments in PokerTek and as of April 3, 2005, hold a combined ownership of
approximately 3% of PokerTek. Lyle Berman agreed to serve as Chairman of the Board of PokerTek and
received 200,000 stock options in that company. Effective as of February 24, 2004, the Company entered into a non-exclusive license agreement
with G-III Apparel Group Ltd. Morris Goldfarb, a Lakes director, is Co-Chairman of the Board and
Chief Executive Officer of G-III. Under the agreement, G-III licenses the World Poker Tour name,
logo and trademark from the Company in connection with G-IIIs production of certain types of
apparel for distribution in authorized channels within the U.S., its territories and possessions
and in certain circumstances, Canada. As consideration for this non-exclusive license, G-III pays
royalties and certain other fees to the Company. 4. CONCENTRATIONS The Company has entered into agreements with the Travel Channel 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 March 17, 2005, TRV exercised its option with respect to
Season Four. 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 viewing public. Since the Companys revenue from the TRV has
represented approximately 72% 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 13




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##### Table of Contents



WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) streams, the failure to maintain a broadcast license agreement would be detrimental to the
visibility and viability of the World Poker Tour brand. 5. COMMITMENTS AND CONTINGENCIES 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 three months ended April
3, 2005, the Company made total payments to HSOR, LLC of $9,000. 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. 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. 6. SEGMENT INFORMATION The operating segments reported below are the segments of the Company for which separate
financial information is available and for which operating results are evaluated by the Chief
Operating Decision Maker in deciding how to allocate resources and in assessing performance. Three months ended April 3, 2005 (in thousands): Consumer
    
    
    CorporateStudios
    
    
    Products
    
    
    Alliances
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    2,663
    
    
    $
    1,147
    
    
    $
    293
    
    
    $
    
    
    
    $
    4,103Cost of Revenues
    
    
    3,154
    
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    3,188Gross Profit
    
    
    (491
    )
    
    
    1,113
    
    
    
    293
    
    
    
    
    
    
    
    915Total Assets
    
    
    2,242
    
    
    
    904
    
    
    
    12
    
    
    
    33,709
    
    
    
    36,867Depreciation
    
    
    55
    
    
    
    
    
    
    
    
    
    
    
    20
    
    
    
    75
 14




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WPT ENTERPRISES, INC.
Notes to Condensed Financial Statements (Continued)
(Unaudited) Three months ended April 4, 2004 (in thousands): Consumer
    
    
    CorporateStudios
    
    
    Products
    
    
    Alliances
    
    
    Corporate
    
    
    TotalRevenues
    
    $
    3,893
    
    
    $
    119
    
    
    $
    128
    
    
    $
    
    
    
    $
    4,140Cost of Revenues
    
    
    2,448
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    2,472Gross Profit
    
    
    1,445
    
    
    
    95
    
    
    
    128
    
    
    
    
    
    
    
    1,668Total Assets
    
    
    1,965
    
    
    
    24
    
    
    
    128
    
    
    
    554
    
    
    
    2,671Depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34
    
    
    
    34
 15




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##### Table of Contents



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 We are a company engaged in the creation of branded entertainment and consumer products driven
by the development, production and marketing of televised programming based on gaming themes. We
created the World Poker Tour®, a television show based on a series of high-stakes poker
tournaments that airs on the Travel Channel in the U.S. and more than 60 markets globally. Our
immediate business plan involves continuing to build our World Poker Tour concept into a highly
recognizable brand from which we currently generate revenues through television and product
licensing fees, casino host fees, sponsorship fees, merchandise and home entertainment sales. 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. Our principal source of revenues has been and continues to be the license fees we receive
under our agreement with the Travel Channel covering the episodes of the World Poker Tour
television series. We have also recognized revenues from our WPT Consumer Products and WPT
Corporate Alliances business units. WPT Studiosgenerates revenue through the domestic and international licensing of broadcast
and telecast rights and casino host fees 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 (13 regular tour stops and 12 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 episodes from the fourth quarter of 2003 through the third quarter of
fiscal 2004. Our production of Season Three began in the third quarter, and we began to deliver
episodes in the fourth quarter of fiscal 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 83% 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 U.S. have been responsible for approximately 72% of our companys
total revenue. Under our agreement 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 cost of revenues 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. The Travel Channel exercised its option for Season Four in March
2005, and the agreement grants the Travel Channel options for the following three seasons (Seasons
Five through Seven) under which we would receive fixed license fees for each episode we produce.
For each season covered by an option exercised by the Travel Channel, the Travel Channel will have
exclusive rights to exhibit the programs in that season an unlimited number of times on its
television network (or any other television network owned by the Discovery Channel) in the U.S. 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 with reach into over 60
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 host fees payable by the member casinos that host World
Poker Tour events (our 16




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##### Table of Contents



WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) member casinos). We currently have written agreements with 12 member casinos and an unwritten
arrangement with one member casino. Additionally, we generate home entertainment revenues from the
distribution of DVD collections of the World Poker Tours Season One and Season Two. In October 2004, we announced the formation of the Professional Poker TourTM (PPT).
The PPT is an invitation only tournament restricted to pokers professional elite, including
champions from the WPT and other major poker competitions. The PPT currently includes five major
stops: Foxwoods, Bellagio, Goldstrike Casino, Commerce Casino and Mirage. We will produce these
five events, which may result in multiple episodes, and contribute to the event fees in 2005. We
intend to license the series for network broadcast or cable telecast and currently are in-process
of negotiating a licensing agreement. WPT Consumer Productsderives 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 signed or are in the process of negotiating licensing agreements with various
licensees for a variety of consumer products in the U.S. and abroad. In addition, we have entered
into a license agreement with 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, an affiliate of Lakes. 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 have
entered into an agreement with video game publisher Take-Two Interactive Software to produce poker
games for console, handheld and PC formats. WPT Corporate Alliancesgenerates 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.
Anheuser-Buschs Michelob AmberBock is currently the official beer of Season Three of the World
Poker Tour on the Travel Channel. Three Months Ended April 3, 2005 Compared to the Three Months Ended April 4, 2004 Revenues Total revenues were $4.1 million for the three months ended April 3, 2005 and April 4, 2004.
Domestic television license revenues were $2.0 million in the first quarter of 2005 compared to
$3.5 million in the first quarter of 2004. The higher domestic television license revenue reported
in the first quarter of 2004 reflected the delivery of nine Season 2 episodes during the period
compared to five episodes of Season 3 delivered during the first quarter of 2005. The remaining
eight episodes in Season 3 are expected to be delivered in the second quarter of 2005.
International television licensing revenues increased to $0.4 million for the three months ended
April 3, 2005 from $0.1 million for the three months ended April 4, 2004. Revenues for the three
months ended April 3, 2005 also included $1.1 million in product licensing revenues compared to no
product licensing revenues for the three months ended April 4, 2004.. In March 2005, TRV exercised its option to broadcast Season Four, the second of a possible four
additional seasons of WPT covered by the option. WPT Season Four episodes are currently in
pre-production, and are scheduled to begin airing in March 2006. 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 expect to
begin to deliver completed Season Four episodes starting in the fourth quarter of 2005 and expect to
begin to recognize revenues at that time. Costs and Expenses
Our cost of revenues increased to $3.2 million in the first quarter of 2005 from $2.5 million in
the first quarter of 2004. Cost of revenues in the first quarter of 2005 related primarily to the
production of Season 3 episodes of the WPT and the production of the premiere season of the PPT.
Approximately $1.4 million of cost of revenues in the first quarter of 2005 were related to PPT
production costs. First quarter 2004 cost of revenues of $2.5 million was related primarily to the
production of Season 2 episodes of the WPT. Additionally, cost of revenues in the first quarter of
2005 included approximately $0.4 million of non-cash compensation expenses related to consultant
stock options compared to $0.1 million in the first quarter of 2004. Overall gross margins were
22.3% in the first quarter of 2005 compared to 40.3% in the first quarter of 2004. The lower gross
margins in the first quarter of 2005 primarily reflect the impact of PPT production costs and
non-cash compensation expenses related to 17




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) consultant stock options included in cost of revenues. Excluding the non-cash compensation
expenses and PPT production costs expensed during the quarter, gross margin for the first quarter
of 2005 would have been 67.3% compared to 42.6% for the corresponding period in 2004, with the
higher margin due to increased revenues from product licensing, international licensing, and
sponsorship. There were no PPT production costs recognized in the first quarter of 2004. Selling and administrative expenses increased to $2.8 million for the three months ended April 3,
2005 from $0.8 million for the three months ended April 4, 2004. This increase is primarily due to
additional headcount costs, product licensing commissions, and legal, audit and consulting fees
incurred during the 2005 period associated with business development, increased product licensing
revenues, and growth related to becoming an independent public company. Other Interest income was $0.3 million for the three months ended April 3, 2005 compared to $0 of
interest income for the same period in the prior year. This difference is primarily due to the
higher investment balances in the current year from the proceeds of the initial public offering. Interest expense was $0 for the three months ended April 3, 2005 compared to $41,000 of interest
expense for the same period in the prior year. This difference is primarily due to the payoff of
the credit line with Lakes prior to the current year period. Earnings (Loss) Per Common Share and Net Earnings (Loss) For the three months ended January 3, 2005, basic and diluted loss per common share were $0.08
compared to basic earnings of $0.06 and diluted earnings of $0.05 per common share for the same
period in the prior year. Net loss for the period ended April 3, 2005 was $1.6 million compared to
net income of $0.8 million for the three months ended April 4, 2004. Liquidity and Capital Resources At April 3, 2005, we had cash and short term investments aggregating $31.6 million. For the
three months ended April 3, 2005, we incurred net losses of approximately $1.6 million and utilized
$0.1 million of cash in operating activities. We intend to use existing funds for working capital and capital expenditures associated with
the expansion of our media and other businesses and for general corporate purposes. We believe
that our cash, cash equivalents and short-term investments, along with expected cash receipts, will
be adequate to fund operating expenses for at least the next 12 months. The table below sets forth our known contractual obligations (in thousands) as of April 3,
2005: Payments Due by PeriodLess Than
    
    
    1-3
    
    
    3-5
    
    
    More ThanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating lease(1)
    
    $
    2,959
    
    
    $
    378
    
    
    $
    949
    
    
    $
    1,012
    
    
    $
    620Purchase obligations(2)
    
    
    905
    
    
    
    230
    
    
    
    270
    
    
    
    270
    
    
    
    135Employee obligations(3)
    
    
    1,417
    
    
    
    1,000
    
    
    
    417
    
    
    
    
    
    
    
    Total
    
    $
    5,281
    
    
    $
    1,608
    
    
    $
    1,636
    
    
    $
    1,282
    
    
    $
    755
 18




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##### Table of Contents



WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued)   (1)
    
    Operating lease includes rent payments on our corporate office space. Monthly lease payments
began at approximately $38,000 and escalate to approximately $45,000 over the six year lease
term. The amount set forth in the table above assumes monthly lease payments through May 2011.(2)
    
    Purchase obligations include the following: Contractual obligations related to the
establishment of our Internet gaming site of $875,000 and a monthly retainer of $7,500 for
investor relations services through July 2005.(3)
    
    Employee obligations include the base salaries payable to Steven Lipscomb, Audrey Kania and
Robyn Moder under their respective employment agreements. Significant Accounting Policies The significant accounting policies that we believe are the most critical to aid in fully
understanding and evaluating our reported financial results include the following: revenue
recognition, television costs, deferred revenue, income taxes and stock-based compensation. Revenue recognition:Domestic and international television license fee revenues are
recognized as earned in accordance with 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, we do not consider collectibility
to be reasonably assured until the distributor has received payment. We present 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. We recognize minimum revenue guarantees ratably over the term of the
license or as earned royalties based on actual sales of the related products, if greater. Casino host fee revenues paid by member casinos are recognized as episodes are aired. Sponsorship revenues are recognized as episodes are aired. Home entertainment sales revenues are recognized as the products are sold. Deferred revenue:Licensing advances and guaranteed payments collected, but not yet earned,
by us, as well as casino 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 the Travel Channel of the completed
episode. Management currently estimates that 100% of capitalized television costs at January 2,
2005 are expected to be expensed by the end of fiscal 2005. Television costs related to the new
PPT series will continue to be expensed as incurred until a licensing agreement has been executed
or the Company has a firm commitment of revenue for the series. Income taxes:Prior to our conversion from World Poker Tour, LLC to a C-Corporation on July
28, 2004, we were not a tax-paying entity for federal and state income tax purposes. The members
allocable share of our 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, we became liable for federal and state taxes on taxable
income earned subsequent to the conversion. We account for income taxes under the provisions of Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes. Under this method, we determine 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 19




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
and Results of Operations (Continued) 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. We 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. A valuation allowance was
recorded for deferred tax assets other than those recoverable through the filing of a carryback
claim as it is more likely than not that the remaining deferred tax assets will not be recovered. 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
Employeesand 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. Warrants
Issued:In connection with our initial public offering on August 9, 2004, we issued
to our lead underwriter, Feltl & Company, a warrant to purchase up to a total of 400,000 shares of
common stock at an exercise price of $12.80 for a period of four years. The warrant is not
exercisable during the first year after the date of the offering and as of April 3, 2005 the
warrant remained outstanding. Recently issued accounting pronouncements: In December 2004, the FASB issued Statement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (FAS No. 123(R)),
which amends FASB Statement Nos. 123 and 95. FAS No. 123(R) requires all companies to measure
compensation expense for all share-based payments (including employee stock options) at fair value
and recognize the expense over the related service period. Additionally, excess tax benefits, as
defined in FAS No. 123(R), will be recognized as an addition to paid-in capital and will be
reclassified from operating cash flows to financing cash flows in the Statements of Cash Flows. FAS
No. 123(R) will be effective for the first quarter of 2006. We are currently evaluating the effect
that FAS No. 123(R) will have on our financial position, results of operations and operating cash
flows. We have included information regarding the effect on net earnings and net earnings per
common share had we applied the fair value expense recognition provisions of the original FAS No.
123 in Note 2 to our financial statements included elsewhere in this
filing. FAS No. 123(R)
will not alter the accounting for equity-based consultant compensation under EITF 96-18, Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements that have or are reasonably likely to have a current
or future material effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital resources. 20




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WPT ENTERPRISES, INC.
Managements Discussion and Analysis of Financial Condition
And Results of Operations (Continued) 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 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 out 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 and Chief Executive Officer 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. 21




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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 Our financial instruments include cash and cash equivalents, U.S. Treasury and Agency
securities and short term municipal bonds. Our main investment objectives are the preservation of
investment capital and the maximization of after-tax returns on our investment portfolio.
Consequently, we invest with only high-credit-quality issuers and limit the amount of credit
exposure to any one issuer. We do not use derivative instruments for speculative or investment
purposes. Our cash and cash equivalents are not subject to significant interest rate risk due to the
short maturities of these instruments. As of April 3, 2005, the carrying value of our cash and cash
equivalents approximated fair value. We have 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. 22




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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 U.S. ($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 U.S., 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 agreement. 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; however, 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 U.S.
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 our 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 U.S. District Court, Central District of California,
asserting that defendants use of certain video footage infringed upon our copyrighted materials
and that defendants engaged in unfair competition through the unauthorized use of our copyrighted
materials and trademarks, and seeking damages and injunctive relief. Expedited discovery was
conducted. On September 7, 2004, the Court entered a stipulated preliminary injunction enjoining
defendants and all those acting in concert with them from infringing our copyrighted materials and
trademarks. On November 4, 2004, we amended the complaint to add additional defendants, including
Dante Pugliese, Michelle Pugliese, International Poker Championship Series, Inc. (IPCS), Sam
Riddle, and Sam Riddle & Associates, Inc. (SRA). Clerks defaults were entered against Dante
Pugliese and IPCS who failed to respond timely to the amended complaint. These two defendants later
moved to set aside the defaults. That motion is pending and has been taken under submission.
Michelle Pugliese was voluntarily dismissed without prejudice. Sam Riddles and SRAs time to
respond was extended. On February 14, 2005, the Court held a scheduling conference and set a trial
date of February 28, 2006. On March 24, 2005, the case was assigned to the Honorable Judge Rosalyn
M. Chapman for a settlement conference scheduled for April 28, 2005. At that conference, the
parties outlined the terms of a global settlement. Judge Chapman scheduled a second mandatory
settlement conference for June 1, 2005 which, by order, will be removed from the calendar in the
event all parties have executed the written settlement agreement by May 27, 2005. We are not currently a party to any other litigation, and are not aware of any threatened
litigation, that would have a material adverse effect on our business. 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (a)Unregistered Sales of Equity Securities.Not applicable. (b)Use of Proceeds.Not applicable. (c)Issuer Purchases of Equity Securities.Not applicable. 23




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WPT ENTERPRISES, INC.
Part II
Other Information (Continued) 
 ITEM 6. EXHIBITS 10.1
    
    Brand License and Online Casino
Operating Agreement dated January 19, 2005 by
and between WPT Enterprises, Inc. and WagerWorks Alderney 3 Limited
(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: May 13, 2005
    
    WPT ENTERPRISES, INC.Registrant/ s/ Steven LipscombSteven LipscombChief Executive Officer/s/ W. Todd SteeleW. Todd SteeleChief Financial Officer
 25