Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark
One)
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|
|
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 29,
2009
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|
OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File No. 0-50848
WPT ENTERPRISES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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77-0639000
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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5700 Wilshire Boulevard, Suite 350
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Los Angeles, California
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90036
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(Address of principal executive offices)
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(Zip Code)
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Registrants
telephone number, including area code:
(323) 330-9900
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
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated
filer
o
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Accelerated filer
o
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Non-accelerated
filer
o
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Smaller reporting
company
x
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(Do not check if a
smaller reporting company)
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Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
As of May 6, 2009
there were 20,603,333 shares of Common Stock, $0.001 par value per share,
outstanding.
Table of
Contents
PART 1 FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WPT ENTERPRISES, INC.
Condensed Consolidated Balance
Sheets
(Unaudited)
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March 29, 2009
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December 28, 2008
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(In thousands, except par value data)
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Assets
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Current assets:
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Cash and cash equivalents
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$
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14,244
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$
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11,497
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Investments in debt securities
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2,084
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2,088
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Accounts receivable, net of allowances of $397 and $158
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1,858
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2,099
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Deferred television costs
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1,727
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2,285
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Other
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456
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666
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Current assets of discontinued operations
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72
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401
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20,441
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19,036
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Investments in debt securities and put rights
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3,900
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3,900
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Property and equipment, net
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1,136
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1,293
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Investment in Cecure Gaming
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1,000
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Other
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537
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537
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Long-term assets of discontinued operations
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115
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$
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26,014
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$
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25,881
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Liabilities and Stockholders Equity
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Current liabilities:
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Accounts payable
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$
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441
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$
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487
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Accrued payroll and related
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299
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269
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Operating lease reserve
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411
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456
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Other accrued expenses
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553
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693
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Line of credit
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2,651
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Deferred revenue
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947
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1,913
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Current liabilities of discontinued operations
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100
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5,402
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3,818
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Commitments and Contingencies
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Stockholders equity:
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Preferred stock, $0.001 par value; authorized 20,000 shares; none
issued or outstanding
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Common stock, $0.001 par value; authorized 100,000 shares; 20,603 and
20,492 shares issued and outstanding, respectively
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21
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20
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Additional paid-in capital
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44,621
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44,561
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Deficit
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(24,026
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)
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(22,521
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)
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Accumulated other comprehensive gain (loss)
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(4
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)
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3
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20,612
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22,063
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$
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26,014
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$
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25,881
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|
See
notes to unaudited condensed consolidated financial statements.
1
Table of
Contents
WPT ENTERPRISES, INC.
Condensed
Consolidated Statements of Loss and Comprehensive Loss
(Unaudited)
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Three months ended
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March 29, 2009
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March 30, 2008
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(In thousands, except per share data)
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Revenues:
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Television
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$
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3,565
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$
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3,600
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Product licensing
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678
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687
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Online gaming
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136
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247
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Event hosting and sponsorship fees
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573
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327
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Other
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575
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101
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5,527
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4,962
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Cost of revenues
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2,065
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2,670
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Gross profit
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3,462
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2,292
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Selling, general and administrative expense
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3,183
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4,956
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Asset impairment
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1,000
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Loss from operations
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(721
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)
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(2,664
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)
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Other income:
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Gain on sale of investment
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11
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Interest, net
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71
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353
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Loss from continuing operations before income taxes
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(650
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)
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(2,300
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)
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Income taxes
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129
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Loss from continuing operations
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(521
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)
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(2,300
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)
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Loss from discontinued operations, net of income
taxes (including $211 for shutdown in 2009)
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(984
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)
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(528
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)
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Net loss
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(1,505
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)
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(2,828
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)
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Unrealized loss on securities
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(7
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)
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(1,085
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)
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Comprehensive loss
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$
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(1,512
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)
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$
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(3,913
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)
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Loss per common share from continuing operations - basic and diluted
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$
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(0.02
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)
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$
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(0.11
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)
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Loss per common share from discontinued operations - basic and
diluted
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(0.05
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)
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(0.03
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)
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Net loss per common share - basic and diluted
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$
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(0.07
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)
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$
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(0.14
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)
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Weighted-average common shares outstanding -
basic and diluted
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20,603
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20,603
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See
notes to unaudited condensed consolidated financial statements.
2
Table of
Contents
WPT ENTERPRISES, INC.
Condensed Consolidated Statements
of Cash Flows
(Unaudited)
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Three months ended
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March 29, 2009
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March 30, 2008
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(In thousands)
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Operating Activities:
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|
|
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Net loss
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$
|
(1,505
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)
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$
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(2,828
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)
|
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities of continuing operations:
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Loss from discontinued operations
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984
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528
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Depreciation and amortization
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194
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157
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Share-based compensation
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60
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314
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Asset impairment
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1,000
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Loss on sale of assets
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22
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Change in value of put rights
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211
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Bad debt provision
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239
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Increase in operating (assets) and liabilities:
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Accounts receivable
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2
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953
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Deferred television costs
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558
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171
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Other
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207
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76
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Accounts payable
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(46
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)
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111
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|
Accrued expenses
|
|
(155
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)
|
(727
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)
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Deferred revenue
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(966
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)
|
(886
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)
|
Net cash provided by (used in) operating activities of continuing
operations
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805
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|
(2,131
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)
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Net cash used in operating activities of discontinued operations
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(440
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)
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(558
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)
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Net cash provided by (used in) operating activities
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365
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(2,689
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)
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Investing Activities:
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Purchase of property and equipment
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(59
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)
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(225
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)
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Change in value of ARS portfolio
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(211
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)
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Purchases of available for sale debt securities
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(11,187
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)
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Sales/redemptions of available for sale debt securities
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15,376
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|
Net cash provided by (used in) investing activities of continuing
operations
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(270
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)
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3,964
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Net cash used in investing activities of discontinued operations
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(100
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)
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Net cash provided by (used in) investing activities
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(270
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)
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3,864
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|
|
|
|
|
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Financing Activities:
|
|
|
|
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Borrowing under line of credit
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2,661
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|
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|
Repayments under line of credit
|
|
(10
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)
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Proceeds from exercise of stock options
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|
1
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|
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Net cash provided by financing activities
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2,652
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|
|
|
|
|
|
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Net increase in cash and cash equivalents
|
|
2,747
|
|
1,175
|
|
Cash and cash equivalents at beginning of period
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|
11,497
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|
3,852
|
|
Cash and cash equivalents at end of period
|
|
$
|
14,244
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|
$
|
5,027
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information:
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
2
|
|
$
|
|
|
See
notes to unaudited condensed consolidated financial statements.
3
Table of
Contents
WPT ENTERPRISES, INC.
Notes to Unaudited Condensed
Consolidated Financial Statements
1.
BUSINESS AND BASIS OF PRESENTATION
These condensed consolidated
financial statements have been prepared by management of WPT Enterprises, Inc.
(the Company) pursuant to the rules and regulations of the Securities
and Exchange Commission applicable to interim financial information.
Accordingly, certain information normally included in annual financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America has been condensed or omitted. For further
information, please refer to the annual audited financial statements of the
Company, and the related notes, included in the Companys Annual Report on Form 10-K
for the fiscal year ended December 28, 2008, from which the information as
of that date is derived.
In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. The results for the current interim periods are not necessarily
indicative of the results to be expected for the full year.
The accounting estimates that require
the most significant, difficult and subjective judgments include:
·
the valuation of investments in debt
instruments and put rights;
·
the valuation of non-marketable equity
investments;
·
the determination of current and deferred
income taxes;
·
the ultimate amount of estimated
television revenues and costs;
·
the recognition of revenues; and
·
the valuation of share-based
compensation.
The
Game Show Network (GSN) licensed Season Six of the World Poker Tour (WPT)
and represented 0% and 42% of the Companys total revenue for the three months
ended March 29, 2009 and March 30, 2008, respectively. Fox Sports Net
(FSN) is broadcasting Season Seven of the WPT television series in 2009 and
FullTiltPoker.net is the sponsor of the television series in the U.S. and
Mexico. FullTiltPoker.net represented 27% and 0% of the Companys total revenue
for the three months ended March 29, 2009 and March 30, 2008,
respectively. Party Gaming Plc (Party Gaming) is one international sponsor of
the Season One of the Professional Poker Tour (PPT) and Seasons Four through
Six of the WPT. Party Gaming represented 27% and 15% of the Companys total
revenue for the three months ended March 29, 2009 and March 30, 2008.
Included
in accounts receivable at March 29, 2009 are amounts billed to Party
Gaming and Hands-On Mobile that are 57% and 18% of the total balance,
respectively. Included in accounts receivable at December 28, 2008 are
amounts billed to FullTiltPoker.net, Party Gaming and Hands-On Mobile that are
39%, 24% and 15% of the total balance, respectively.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2008, the FASB issued FSP 157-1,
Application of FASB Statement No. 157 to FASB Statement No. 13
and Other Accounting Pronouncements That Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13
and FSP 157-2,
Effective Date of FASB Statement No. 157
.
FSP 157-1 amends SFAS 157 to remove certain leasing transactions from its
scope, and was effective upon initial adoption of SFAS 157. FSP 157-2
delays the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities, except for items that are recognized or disclosed at
fair value in the financial statements on a recurring basis (at least annually)
until the first quarter of 2009. FSP 157-2 was adopted in the first quarter of
2009 and the new accounting standard did not have a significant impact on the
consolidated financial statements.
In April 2009, the FASB issued FSP 157-4
Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying Transactions
That are Not Orderly
. FSP 157-4 provides guidance in the application
of SFAS 157 when the volume and level of activity for an asset or
liability have significantly decreased and when circumstances indicate that a
transaction is not orderly. In April, the FASB also issued FSP 115-2 and FSP
124-2
Recognition and Presentation of
Other-Than-Temporary-Impairments
. FSP 115-2 and FSP 124-2 amend the
other-than-temporary impairment guidance for debt securities and the
presentation and disclosure requirements of other-than-temporary impairments of
debt and equity securities. These accounting changes are effective in the
Companys second quarter. The Company does not currently expect these
accounting changes will have a material impact on the consolidated financial
statements.
In December 2007, the FASB issued SFAS 141
(Revised 2007),
Business Combinations.
SFAS 141(R) significantly
changes the accounting for business combinations and is now required for all
business combinations. SFAS 141(R) results in the expensing of certain
costs that were previously capitalized under prior accounting standards. In April 2009,
the FASB issued FSP 141(R)-1,
Accounting for Assets and
Liabilities Assumed in a Business Combination That Arise from Contingencies
.
FSP 141(R)-1 amends and clarifies SFAS 141(R) in the recognition,
measurement and disclosure of assets and liabilities arising from contingencies
in a business combination. FSP 141(R)-1 is now required for all business
combinations.
4
Table
of Contents
WPT ENTERPRISES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
In December 2007, the FASB issued SFAS 160,
Noncontrolling Interests in
Consolidated Financial Statements an Amendment of
ARB No. 51
which establishes accounting and reporting standards
for the noncontrolling or minority interest in a subsidiary and for the
deconsolidation of a subsidiary. Among the effects of SFAS 160 is the exclusion
from net income (loss) of the noncontrolling or minority interest therein and
the relocation of such noncontrolling or minority interest to the stockholders
equity section of the balance sheet. SFAS 160 was adopted in the first quarter
of 2009 and the new accounting standard did not have a significant impact on
the consolidated financial statements.
In March 2008, the FASB issued SFAS 161,
Disclosures About Derivative Instruments and Hedging Activities an
amendment of FASB Statement No. 133
. SFAS 161 expands the
disclosure requirements in SFAS 133,
Accounting for Derivative
Instruments and Hedging Activities
, regarding derivative instruments
and hedging activities. SFAS 161 was adopted in the first quarter of 2009 and
the new accounting standard did not have a significant impact on the
consolidated financial statements.
3. INVESTMENTS IN DEBT SECURITIES
AND PUT RIGHTS
As of March 29,
2009, investments in debt securities and put rights consist of the following
(in thousands):
|
|
|
Cost
|
|
Unrealized
Gains/(Losses)
|
|
Fair Value
|
|
Maturity less than 1 year
(all available for sale)
|
|
|
|
|
|
|
|
Short-term municipal bonds
|
|
$
|
800
|
|
$
|
2
|
|
$
|
802
|
|
Corporate preferred securities
|
|
1,000
|
|
(6
|
)
|
994
|
|
Certificates of deposit
|
|
288
|
|
|
|
288
|
|
|
|
$
|
2,088
|
|
$
|
(4
|
)
|
$
|
2,084
|
|
|
|
Cost
|
|
Realized
Gains/(Losses)
|
|
Fair Value
|
|
Maturity 1 year
to 5 years (all trading securities)
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$
|
3,295
|
|
$
|
211
|
|
$
|
3,506
|
|
Put rights
|
|
605
|
|
(211
|
)
|
394
|
|
|
|
$
|
3,900
|
|
$
|
|
|
$
|
3,900
|
|
Investments in debt securities that are classified as
available for sale or trading securities are the only assets or liabilities
that the Company is required to measure at their estimated fair value on a
recurring basis. The estimated fair value is determined using inputs from among
the three levels of the fair value hierarchy set forth in SFAS 157 as follows:
Level 1 inputs
Unadjusted quoted prices in active markets for identical assets or liabilities,
which prices are available at the measurement date.
Level 2 inputs Include quoted prices for similar
assets and liabilities in active markets, quoted prices for identical or
similar assets and liabilities in markets that are not active, inputs other
than quoted prices that are observable for the asset or liability (
i.e.
, interest rates, yield curves,
etc.
)
and inputs that are derived principally from or corroborated by observable
market data by correlation or other means (market corroborated inputs).
Level 3 inputs Unobservable inputs that reflect
managements estimates about the assumptions that market participants would use
in pricing the asset or liability. Management develops these inputs based on
the best information available, including internally-developed data.
In estimating fair value, the Company utilizes
valuation techniques that maximize the use of observable inputs and minimize
the use of unobservable inputs to the extent possible. None of the Companys
financial instruments are measured based on Level 2 inputs.
5
Table
of Contents
WPT ENTERPRISES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
As of March 29, 2009, financial assets that are
carried at fair value consist of the following (in thousands):
Description
|
|
Level 1
|
|
Level 3
|
|
Total
|
|
Cash and cash equivalents
|
|
$
|
14,244
|
|
$
|
|
|
$
|
14,244
|
|
Short-term municipal bonds
|
|
802
|
|
|
|
802
|
|
Corporate preferred securities
|
|
994
|
|
|
|
994
|
|
Certificates of deposit
|
|
288
|
|
|
|
288
|
|
Auction rate securities
|
|
|
|
3,506
|
|
3,506
|
|
Put rights
|
|
|
|
394
|
|
394
|
|
Total assets at estimated fair value
|
|
$
|
16,328
|
|
$
|
3,900
|
|
$
|
20,228
|
|
For financial assets that
utilize Level 1 inputs, the Company utilizes direct observable price quotes in
active markets for identical assets. Due to the lack of observable market
quotes on the Companys auction rate securities (ARS) portfolio and related
put rights, the Company utilizes valuation models that rely exclusively on
Level 3 inputs including those that are based on managements estimates of
expected cash flow streams and collateral values, default risk underlying the
security, long term broker credit rating, discount rates and overall capital
market liquidity. The valuation of the Companys ARS portfolio and related put
rights is subject to uncertainties that are difficult to predict. Factors that
may affect the estimated fair value include changes to credit ratings of ARS as
well as to the assets collateralizing the securities, rates of default of the
underlying assets and collateral value, broker default risk, discount rates,
and evolving market conditions affecting the liquidity of ARS.
The following table summarizes activity in the Companys
ARS portfolio and Put Rights (in thousands):
Description
|
|
ARS
|
|
Put Rights
|
|
Total
|
|
Balance December 28, 2008
|
|
$
|
3,295
|
|
$
|
605
|
|
$
|
3,900
|
|
Change in value of put rights, included in
earnings
|
|
|
|
(211
|
)
|
(211
|
)
|
Change in value of ARS portfolio, included in
earnings
|
|
211
|
|
|
|
211
|
|
Settlements, net of purchases
|
|
|
|
|
|
|
|
Balance March 29, 2009
|
|
$
|
3,506
|
|
$
|
394
|
|
$
|
3,900
|
|
In November 2008, the Company accepted an offer
from UBS AG (UBS), that created new rights and obligations related to the ARS
portfolio (the Put Rights). The Put Rights permit the Company to require UBS
to purchase the ARS at par value, at any time during the period of June 30,
2010 through July 2, 2012. UBS also has the right, in its discretion, to
purchase or sell the ARS at any time until July 2, 2012, so long as par
value is received. The Company expects to sell the ARS under the Put Rights.
However, if the Put Rights are not exercised before July 2, 2012 they will
expire and UBS will have no further obligation to buy the ARS.
UBSs obligations under the Put Rights are not secured
by its assets and do not require UBS to obtain any financing to support its
performance obligations under the Put Rights. UBS has disclaimed any assurance
that it will have sufficient financial resources to satisfy its obligations
under the Put Rights and UBSs obligations are not guaranteed by any other
party.
The Put Rights represent an asset that is separate
from the ARS. The Company initially recorded $605,000 as the fair value of the
Put Rights asset in interest income. The Company also elected to measure the
Put Rights at fair value under SFAS 159, which permits an entity to elect the
fair value option for recognized financial assets. As a result, unrealized
gains and losses are included in interest income and the Company reduced the
value of the Put Right by $211,000 for the three months ended March 29,
2009. The Company did not elect the fair value option for its other financial
assets and liabilities.
In connection with the acceptance of the UBS offer in November 2008,
the Company transferred the ARS from investments available-for-sale to trading
securities in accordance with SFAS 115. The transfer to trading securities
reflects managements intent to exercise the Put Rights during the period June 30,
2010 to July 3, 2012. Prior to the agreement with UBS, the Companys
intent was to hold the ARS until the market recovered. At the time of transfer,
the $605,000 unrealized loss on ARS was included in accumulated other comprehensive
gain (loss). Upon transfer to trading securities, the Company recognized a
$605,000 reduction in interest income. Unrealized gains and losses are included
in interest income and the Company increased the estimated value of the ARS
portfolio by $211,000 for the three months ended March 29, 2009. Prior to
accepting the UBS offer, the ARS were recorded as investments
available-for-sale.
6
Table of
Contents
WPT ENTERPRISES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
UBS provided the Company
with a line of credit, secured by ARS held by UBS, equal to 75% of the
estimated fair value of the ARS held by UBS. The Company borrowed $2,661,000
under the line of credit from UBS in February 2009. Interest is charged at
the lower of 30-day LIBOR plus 150 to 275 basis points or the actual interest
earned by the ARS. The line of credit is due upon demand. At March, 29, 2009,
$2,651,000 was outstanding under the line of credit.
4. ASSET IMPAIRMENT
In 2006, the Company paid $2,923,000 for an interest
(currently 8%) in Cecure Gaming, LLC, a developer and operator of mobile phone
casino games. The Company recorded a $1,923,000 impairment charge in the third
quarter of 2008 related to difficulties Cecure was having in obtaining working
capital to finance its business development that resulted in a significant
reduction in staffing. Cecures financing difficulties have continued into 2009
and the Company recorded an additional $1,000,000 impairment charge in the
first quarter of 2009.
This investment was
measured at implied fair value resulting in an
other-than-temporary impairment charge. The implied fair value measurement was calculated
using financial metrics and ratios of comparable public companies and was
measured using Level 3 inputs, as the Company used unobservable inputs and
significant management judgment to value this investment due to the absence of
quoted market prices, inherent lack of liquidity, and the long-term nature of
this investment.
5.
SHARE-BASED COMPENSATION
Share-based compensation expense was $60,000 and
$314,000 for the three months ended March 29, 2009 and March 30,
2008, respectively.
The Company uses the
Black-Scholes option-pricing model to estimate the fair value and compensation
cost associated with employee incentive stock options which requires the
consideration of historical employee exercise behavior data and the use of a
number of assumptions including volatility of the Companys stock price, the
weighted-average risk-free interest rate, and the weighted-average expected
life of the options.
The following values
represent the average per grant assumptions used to value options granted during
the three months ended March 29, 2009 and March 30, 2008. There have
been no significant changes to the assumptions thus far in 2009 and none are
expected during the remainder of 2009.
Key valuation assumptions
|
|
Three months ended
March 29, 2009
|
|
Three months ended
March 30, 2008 (*)
|
|
Risk-free interest rate
|
|
2.06
|
%
|
None
|
|
Expected term
|
|
6.25
years
|
|
None
|
|
Expected dividend yield
|
|
0
|
%
|
None
|
|
Expected volatility
|
|
87.27
|
%
|
None
|
|
Forfeiture rate
|
|
0
|
%
|
None
|
|
Weighted-average fair value
|
|
$
|
0.19
|
|
None
|
|
|
|
|
|
|
|
|
(*) There were no stock
option grants in the first quarter of 2008.
The following table
summarizes stock option activity during the three months ended March 29,
2009:
|
|
|
|
Number of Common Shares
|
|
|
|
Options
|
|
|
|
Available
|
|
Weighted-avg.
|
|
|
|
outstanding
|
|
Exercisable
|
|
for grant
|
|
exercise price
|
|
Balance at December 28, 2008
|
|
2,314,589
|
|
1,106,921
|
|
873,418
|
|
$
|
3.83
|
|
Granted
|
|
505,000
|
|
|
|
(505,000
|
)
|
0.49
|
|
Forfeited/canceled/exchanged
|
|
(1,182,666
|
)
|
|
|
1,182,666
|
|
5.69
|
|
Exercised
|
|
(111,340
|
)
|
|
|
|
|
0.0049
|
|
Balance at March 29, 2009
|
|
1,525,583
|
|
179,914
|
|
1,551,084
|
|
$
|
1.56
|
|
7
Table of
Contents
WPT ENTERPRISES, INC.
Notes to Unaudited Condensed Consolidated Financial Statements
The following table
summarizes significant ranges of outstanding and exercisable options as of March 29,
2009
:
|
|
Options outstanding
|
|
Options exercisable
|
|
|
|
|
|
Weighted-avg.
|
|
|
|
|
|
|
|
Range of
exercise prices
|
|
Number
outstanding
|
|
remaining
contractual
life (in years)
|
|
Weighted-avg.
exercise
price
|
|
Aggregate
intrinsic
value
|
|
Number
exercisable
|
|
Weighted-avg.
exercise
price
|
|
Aggregate
intrinsic
value
|
|
$
|
0.37 1.87
|
|
1,271,583
|
|
9.76
|
|
$
|
0.53
|
|
$
|
68,820
|
|
10,081
|
|
$
|
1.87
|
|
$
|
|
|
$
|
4.26 8.00
|
|
241,000
|
|
6.60
|
|
6.28
|
|
|
|
156,833
|
|
6.86
|
|
|
|
$
|
14.51 19.50
|
|
13,000
|
|
5.70
|
|
14.89
|
|
|
|
13,000
|
|
14.89
|
|
|
|
|
|
1,525,583
|
|
9.22
|
|
$
|
1.56
|
|
$
|
68,820
|
|
179,914
|
|
$
|
7.16
|
|
$
|
|
|
The aggregate intrinsic value
in the preceding table
represents
the total pre-tax intrinsic value, based on the Companys closing stock price
of $0.55 on March 29, 2009, which would have been received by the option
holders had they exercised their options as of that date. As of March 29,
2009, there were no exercisable in-the-money stock options. The total
intrinsic value of options exercised during the three months ended March 29,
2009 was $44,000.
As
of March 29, 2009, total unrecognized compensation cost related to
nonvested options was $741,000, which is expected to be recognized over the
next 34 months on a weighted-average basis.
In a negotiated transaction, the Company exchanged
outstanding stock options held by the Companys President and Chief Executive
Officer for new stock options in February 2009. The new stock options have
a four year vesting period and one quarter of the stock options vest annually
on January 1 of each year. In this exchange, the Company cancelled 600,000
stock options and issued 500,000 stock options. Total incremental estimated
compensation cost related to the exchanged stock options was $94,000.
6.
DISCONTINUED WPT CHINA OPERATIONS
In January 2009, the
Company began searching for a strategic partner to invest in the WPT China
business. The cash needs to support the growth in this business are greater
than the Company is willing to expend. In March 2009, the Company shut
down the operations of WPT China while continuing to look for a strategic
partner to acquire the WPT China assets. The financial results of WPT China
have been reclassified as discontinued operations.
The Company expects to
incur approximately $350,000 of costs to shutdown the WPT China business,
consisting of $20,000 of employee severance, $224,000 of contract termination
costs and $106,000 of software write down costs. During the three months ended March 29,
2009, the Company incurred $211,000 of these costs consisting of $19,000 of
employee severance, $86,000 of contract termination costs and $106,000 of
software write down costs. The Company expects to incur the remaining $139,000
of these costs in the three months ended June 28, 2009.
Summarized operating results information for the WPT
China business is as follows (in thousands):
|
|
Three months ended
|
|
|
|
March 29,
2009
|
|
March 30,
2008
|
|
Revenues
|
|
$
|
|
|
$
|
|
|
Loss before income taxes
|
|
(1,018
|
)
|
(528
|
)
|
Income taxes
|
|
34
|
|
|
|
Loss from discontinued operations
|
|
(984
|
)
|
(528
|
)
|
|
|
|
|
|
|
|
|
Summarized balance sheet
information for the WPT China business is as follows (in thousands):
|
|
March 29,
2009
|
|
December 28,
2008
|
|
Cash and cash equivalents
|
|
$
|
62
|
|
$
|
168
|
|
Other current assets
|
|
10
|
|
233
|
|
Property and equipment, net
|
|
|
|
115
|
|
Current liabilities
|
|
100
|
|
|
|
|
|
|
|
|
|
|
|
7. INCOME TAXES
The Company expects to pay federal alternative minimum tax
on the utilization of net operating losses in 2009 and California income taxes
due to the suspension of the availability of net operating losses in 2009. The
Company utilizes net operating losses from operations before utilizing net
operating losses generated from the exercise of stock options. The
8
Table of Contents
WPT ENTERPRISES, INC.
Notes to Unaudited Condensed Consolidated Financial
Statements
income tax benefit for the three
months ended March 29, 2009 is based on the estimated effective income tax
rate for 2009. There was no income tax benefit for the three months ended March 30,
2008 due to the net loss for the period.
Based on the Companys relatively limited and volatile
earnings history, the Company recorded
a full valuation allowance for the net deferred tax assets as management
currently believes it is more likely than not that deferred tax assets will not
be realized in the foreseeable future.
8. NET
LOSS PER COMMON SHARE
Basic net loss per common
share is calculated by dividing net loss by the weighted-average number of
common shares outstanding during the period. Shares for certain stock options
granted to Company employees are included in the computation after the options
have vested when the shares are issuable for minimal cash consideration in
relation to the fair value of the options. Diluted earnings per common share is
calculated by adjusting weighted-average outstanding shares, assuming the
conversion of all potentially dilutive stock options and awards (common stock
equivalents). However, common stock equivalents are not included in the
calculation of diluted earnings per share for loss periods because the effect
is anti-dilutive. There were 21,000 and 0 common stock equivalents for the
three months ended March 29, 2009 and March 30, 2008.
The Company also excluded 1,784,000 and
2,837,000 of weighted average outstanding stock options for the three months
ended March 29, 2009 and March 30, 2008, respectively, from the
calculation of diluted net loss per common share because the exercise prices of
these stock options were greater than the average market value of the Companys
common stock. These stock options could be included in the calculation in the
future if the average market value of the Companys common stock exceeds the
exercise price of these stock options.
9.
CONTINGENCIES
The Company is involved in
various inquiries, administrative proceedings and litigation relating to
matters arising in the normal course of business. The Company is not currently
a defendant in any material litigation and is not aware of any threatened
litigation that could have a material effect on the Company. Management is not
able to estimate the minimum loss to be incurred, if any, as a result of the
final outcome of these matters but believes they are not likely to have a
material adverse effect upon the Companys financial position or results of
operations and, accordingly, no provision for loss has been recorded.
10. 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 March 29,
2009 (in thousands):
|
|
WPT
|
|
WPT Online
|
|
WPT Global
|
|
|
|
|
|
|
|
Studios
|
|
Gaming
|
|
Non-gaming
|
|
Marketing
|
|
Corporate
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
|
$
|
3,565
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
3,565
|
|
Product licensing
|
|
|
|
|
|
|
|
678
|
|
|
|
678
|
|
Online gaming
|
|
|
|
136
|
|
|
|
|
|
|
|
136
|
|
Event hosting and sponsorship
|
|
350
|
|
|
|
|
|
223
|
|
|
|
573
|
|
Other
|
|
|
|
|
|
544
|
|
31
|
|
|
|
575
|
|
|
|
3,915
|
|
136
|
|
544
|
|
932
|
|
|
|
5,527
|
|
Cost of revenues
|
|
1,689
|
|
|
|
297
|
|
79
|
|
|
|
2,065
|
|
Gross profit
|
|
2,226
|
|
136
|
|
247
|
|
853
|
|
|
|
3,462
|
|
Total assets (1)
|
|
3,089
|
|
60
|
|
782
|
|
560
|
|
21,451
|
|
25,942
|
|
Depreciation and amortization (1)
|
|
75
|
|
|
|
73
|
|
|
|
46
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The total excludes $72 of total assets
and $8 of depreciation and amortization for discontinued WPT China operations.
Revenues attributed to domestic and international
operations were $3.3 million and $2.2 million, respectively.
9
Table
of Contents
WPT ENTERPRISES, INC.
Notes to Unaudited
Condensed Consolidated Financial Statements
Three months ended March 30,
2008 (in thousands):
|
|
WPT
|
|
WPT Online
|
|
WPT Global
|
|
|
|
|
|
|
|
Studios
|
|
Gaming
|
|
Non-gaming
|
|
Marketing
|
|
Corporate
|
|
Total
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Television
|
|
$
|
3,600
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
3,600
|
|
Product licensing
|
|
|
|
|
|
|
|
687
|
|
|
|
687
|
|
Online gaming
|
|
|
|
247
|
|
|
|
|
|
|
|
247
|
|
Event hosting and sponsorship
|
|
100
|
|
|
|
|
|
227
|
|
|
|
327
|
|
Other
|
|
|
|
|
|
35
|
|
66
|
|
|
|
101
|
|
|
|
3,700
|
|
247
|
|
35
|
|
980
|
|
|
|
4,962
|
|
Cost of revenues
|
|
2,371
|
|
181
|
|
30
|
|
88
|
|
|
|
2,670
|
|
Gross profit
|
|
1,329
|
|
66
|
|
5
|
|
892
|
|
|
|
2,292
|
|
Total assets (1)
|
|
3,151
|
|
373
|
|
560
|
|
829
|
|
31,435
|
|
36,348
|
|
Depreciation and amortization (1)
|
|
65
|
|
1
|
|
11
|
|
|
|
80
|
|
157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The total excludes $248 of total assets
and $8 of depreciation and amortization for discontinued WPT China operations.
Revenues
attributed to domestic and international operations were $3.2 million and $1.8
million, respectively.
10
Table of
Contents
ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Business Overview
We create internationally
branded entertainment and consumer products driven by the development,
production and marketing of televised programming based on gaming themes. Our
current season of the World Poker Tour
®
,
or WPT
®
television series - Season Seven, based on a
series of high-stakes poker tournaments, currently airs on Fox Sports Net in
the United States, and has been licensed for broadcast globally. In January 2008,
we launched ClubWPT.com, an innovative subscription-based online poker club
targeted to the estimated 60 million poker players in the United States, which
is currently offered in 38 states. Through November 2008, we offered a
real-money online gaming website which prohibited wagers from players in the
U.S. and other restricted jurisdictions. We also license our brand to companies
in the business of poker equipment and instruction, apparel, publishing,
electronic and wireless entertainment, DVD/home entertainment, casino games and
giftware and are engaged in the sale of corporate sponsorships. Through March 2009,
we developed and marketed online and mobile games supporting the WPT China
National Traktor Poker Tour
TM
.
We operate through four business segments, WPT
Studios, WPT Online, WPT Global Marketing and WPT China, described in greater
detail below:
WPT Studios
, our
multi-media entertainment division, generates revenue through domestic and
international television licensing, domestic and international television
sponsorship, as well as host fees from casinos and card rooms that host our
televised events.
WPT Online
includes the online poker club ClubWPT.com that generates revenue from
subscriptions, our international poker and casino real money gaming websites
which were terminated in November 2008 and an online merchandise store.
WPT Global Marketing
includes branded consumer
products, sponsorships and event management. Branded consumer products generate
revenue 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.
Sponsorship and event management generates revenue through corporate
sponsorship and management of televised and live events.
WPT China
produced
third-party branding at WPT China
National Traktor Poker Tour events, licensed the television broadcast of the
WPT China National Traktor Poker Tour and marketed the popular Chinese national
card game Tuo La Ji or Traktor Poker in online and mobile games. In January 2009,
the Company began searching for a strategic partner to invest in the WPT China
business. The cash needs to support the growth in this business are greater
than the Company is willing to expend. In March 2009, the Company decided
to shut down the operations of WPT China while continuing to look for a
strategic partner to acquire the WPT China assets. The historical results of
WPT China have been reclassified as a discontinued operation.
Results of Operations
Three Months Ended March 29,
2009 Compared to the Three Months Ended March 30, 2008
The
following table sets forth revenue and cost of revenue information for our three
continuing business segments (amounts in thousands):
|
|
Three months ended
|
|
|
|
March 29, 2009
|
|
% of
Revenues
|
|
March 30, 2008
|
|
% of
Revenues
|
|
WPT Studios:
|
|
|
|
|
|
|
|
|
|
Domestic sponsorship
|
|
$
|
1,500
|
|
38
|
%
|
$
|
|
|
|
%
|
Domestic license
|
|
|
|
|
%
|
2,100
|
|
57
|
%
|
International sponsorship
|
|
1,484
|
|
38
|
%
|
730
|
|
20
|
%
|
International license
|
|
581
|
|
15
|
%
|
770
|
|
21
|
%
|
Event hosting and sponsorship
|
|
350
|
|
9
|
%
|
100
|
|
2
|
%
|
|
|
3,915
|
|
100
|
%
|
3,700
|
|
100
|
%
|
Cost of revenues
|
|
1,689
|
|
43
|
%
|
2,371
|
|
64
|
%
|
Gross profit
|
|
$
|
2,226
|
|
57
|
%
|
$
|
1,329
|
|
36
|
%
|
11
Table of
Contents
|
|
Three months ended
|
|
|
|
March 29, 2009
|
|
% of
Revenues
|
|
March 30, 2008
|
|
% of
Revenues
|
|
WPT Online:
|
|
|
|
|
|
|
|
|
|
Online gaming
|
|
$
|
136
|
|
20
|
%
|
$
|
247
|
|
88
|
%
|
Non-gaming
|
|
544
|
|
80
|
%
|
35
|
|
12
|
%
|
|
|
680
|
|
100
|
%
|
282
|
|
100
|
%
|
Cost of revenues
|
|
297
|
|
44
|
%
|
211
|
|
75
|
%
|
Gross profit
|
|
$
|
383
|
|
56
|
%
|
$
|
71
|
|
25
|
%
|
|
|
|
|
|
|
|
|
|
|
WPT Global Marketing:
|
|
|
|
|
|
|
|
|
|
Product licensing
|
|
$
|
678
|
|
73
|
%
|
$
|
687
|
|
70
|
%
|
Event hosting and sponsorship
|
|
223
|
|
24
|
%
|
227
|
|
23
|
%
|
Other
|
|
31
|
|
3
|
%
|
66
|
|
7
|
%
|
|
|
932
|
|
100
|
%
|
980
|
|
100
|
%
|
Cost of revenues
|
|
79
|
|
8
|
%
|
88
|
|
9
|
%
|
Gross profit
|
|
$
|
853
|
|
92
|
%
|
$
|
892
|
|
91
|
%
|
WPT Studios.
Combined domestic and foreign television
revenues decreased $35,000 to $3,565,000 in 2009, from $3,600,000 in 2008.
Domestic television revenues decreased $600,000 and international television
revenues increased $565,000 in 2009 compared to 2008. The sponsorship fees
received per episode in 2009 for Season Seven of the WPT television series were
lower than the license fees received for Season Six in 2008. The sponsorship
fee per one-hour episode for Season Seven was $125,000 compared to a license
fee of $300,000 per two-hour episode for Season Six. In 2009, we aired 13
one-hour episodes of Season Seven compared to the delivery of seven two-hour
episodes of Season Six in 2008. International television licensing revenues
decreased $189,000 in 2009 compared to 2008 as a result of fewer international
territories accepting license arrangements and the substitution of sponsorship
arrangements for license arrangements in many territories. International
television sponsorship revenues increased $754,000 in 2009 compared to 2008 as
we had greater distribution of Seasons Four, Five and Six of the WPT television
series and PPT Season One in territories covered by the Party Gaming
sponsorship contract. WPT television series hosting fees increased by $250,000
in 2009 because 13 episodes of Season Seven aired in 2009 compared to one
episode of Season Six that aired in 2008.
In the
first quarter of 2009, our sources of revenue changed from primarily
licensed-based revenues from the sale of our programming to television networks
to primarily sponsorship-based revenues. Sponsors pay to appear in the show and
television networks air the program for free or we pay a fee to television
networks to air the program. In addition, in recent television seasons, foreign
television revenues increased and domestic television revenues decreased. We
expect these two trends to continue in 2009.
Television
cost of revenues
decreased $682,000 in 2009
compared to 2008 due to higher gross margins for Season Seven of the WPT
television series compared to Season Six and lower revenues in 2009 compared to
2008. Television gross profit margins were 57% in 2009 compared to 36% in 2008.
WPT Online.
Online revenues increased $398,000 to
$680,000 in 2009, from $282,000 in 2008. Online gaming revenues decreased
$111,000 between years. In 2009, our online gaming revenues were derived from
affiliate revenues whereas in 2008 our online gaming revenues were derived from
the WPT-branded online gaming website. In November, 2008, we terminated the
WPT-branded online gaming website. Affiliate revenues in 2009 had no
cost
of revenues whereas the WPT-branded online gaming website had $181,000 of cost
of revenues in 2008.
Non-gaming revenues increased $509,000 between years due to increased
membership in ClubWPT.com which was launched in the first quarter of 2008.
ClubWPT.com cost of revenues increased $280,000 to $292,000 in 2009 from
$12,000 in 2008 due to increased revenues. ClubWPT.com gross profit margins
increased to 45% in 2009 from 37% in 2008. As total membership increased, we
realized improved gross profit margins from economies of scale.
WPT Global Marketing.
Global marketing revenues decreased
$48,000 to $932,000 in 2009, from $980,000 in 2008. Product licensing, event
hosting and sponsorship revenues were similar between years. A decrease in
licensing revenues from one significant licensee was offset by an increase in
licensing revenues from another significant licensee. Other global marketing
revenues decreased $35,000 in 2009 compared to 2008 due to the expiration of a
DVD distributor agreement in 2008. Global marketing gross profit margins
increased to 92% in 2009 from 91% in 2008.
12
Table
of Contents
The
following table sets forth selling, general and administrative expense
information for our three continuing business segments (amounts in thousands):
|
|
Three months ended
|
|
|
|
|
|
March 29, 2009
|
|
March 30, 2008
|
|
% Change
|
|
Operational expenses
|
|
$
|
151
|
|
$
|
456
|
|
(67
|
)%
|
Selling and marketing expenses
|
|
795
|
|
1,172
|
|
(32
|
)%
|
General and administrative expenses
|
|
2,237
|
|
3,328
|
|
(33
|
)%
|
|
|
$
|
3,183
|
|
$
|
4,956
|
|
(36
|
)%
|
Selling,
General and Administrative Expense.
Selling,
general and administrative expense decreased $1,773,000 to $3,183,000 in 2009, from
$4,956,000 in 2008. Selling, general and administrative expense consists of
operational costs to manage websites and software, sales and marketing expenses
and general administrative expenses.
Operational
expenses decreased $305,000 in 2009. Costs associated with our domestic website
decreased $105,000 in 2009 due to lower maintenance costs. Costs associated
with our WPT-branded online gaming website decreased $194,000 in 2009 because
we terminated our WPT-branded online gaming website in the fourth quarter of
2008.
Sales
and marketing expenses decreased $377,000 in 2009. Costs decreased primarily
due to the shutdown of our WPT-branded online gaming website. In the first half
of 2008, we heavily marketed our WPT-branded online gaming website and costs
associated with advertising, promotions and affiliates for online gaming
decreased $531,000 in 2009. In 2009, costs associated with our sponsorship of
the Amateur Poker League decreased $88,000. Other sponsorship costs increased
$235,000 in 2009 due to the termination of our spokesperson contract with
Antonio Esfandiari.
General
administrative expenses decreased $1,091,000 in 2009. The decrease was
primarily due to personnel reductions in 2008 that resulted in $905,000 in
lower payroll and related costs in 2009. Legal expense decreased $218,000 in
2009 as litigation was settled in the second quarter of 2008. Offsetting these
lower 2009 costs was $260,000 of higher bad debt expense from the third party
system provider for ClubWPT.
Asset Impairment.
We recorded an impairment charge against our
investment in Cecure Gaming in the third quarter of 2008 due to difficulties
Cecure Gaming was having in obtaining working capital to finance their business
development over the next several years that resulted in a significant
reduction in staffing. Financing difficulties continued into 2009 and we
recorded an additional $1,000,000
impairment charge in the three months ended March 29, 2009. This
investment was measured at implied fair value resulting in an other-than-temporary
impairment charge.
Other Income.
Net i
nterest
income decreased $282,000 in 2009 compared to 2008, primarily due to lower
interest rates and lower balances of investments in cash equivalents and debt
securities. We recorded a $211,000 increase in interest income in 2009 in
marking our ARS portfolio to fair value and a corresponding decrease in
interest income in marking to fair value the rights that our broker gave us to
compel them to repurchase our auction rate securities.
Income Taxes.
The Company
expects to pay federal alternative minimum tax on the utilization of net
operating losses in 2009 and California income taxes due to the suspension of
the availability of net operating losses in 2009. The income tax benefit for
the three months ended March 29, 2009 is based on the estimated effective
income tax rate for 2009. There was no income tax benefit for the three months
ended March 30, 2008 due to the net loss for the period.
13
Table of
Contents
The
following table sets forth selling, general and administrative expense
information for our discontinued business segment (amounts in thousands):
|
|
Three months ended
|
|
|
|
|
|
March 29, 2009
|
|
March 30, 2008
|
|
% Change
|
|
Operational expenses
|
|
$
|
57
|
|
$
|
25
|
|
128
|
%
|
Selling and marketing expenses
|
|
247
|
|
132
|
|
87
|
%
|
General and administrative expenses
|
|
503
|
|
371
|
|
36
|
%
|
Shut down provision
|
|
211
|
|
|
|
|
%
|
|
|
$
|
1,018
|
|
$
|
528
|
|
93
|
%
|
Discontinued
WPT China Operations.
In January 2009,
the Company began searching for a strategic partner to invest in the WPT China
business. The cash needs to support the growth in this business are greater
than the Company is willing to expend. In March 2009, the Company shut
down the operations of WPT China while continuing to look for a strategic
partner to acquire the WPT China assets.
We
incurred $807,000 in 2009 and $528,000 in 2008 of selling, general and
administrative expenses. Higher 2009 expenses resulted from $135,000 of higher
payroll costs and $96,000 of higher Traktor Poker Tour fees. We also incurred
$211,000 in costs in 2009 to shut down the WPT China operations. We expect to
incur approximately $139,000 in the second quarter of 2009 to complete the shut
down of operations.
Business Outlook
For the second quarter
and full year 2009, we expect:
·
FSN to air 26 all-new
episodes of Season Seven of the WPT television series: 13 episodes aired in the
first quarter, and eleven episodes will air in the second quarter and two
episodes will air in the third quarter.
·
To recognize foreign
sponsorship revenues for Season Seven of the WPT television series beginning in
the fourth quarter. Foreign sponsorship revenues for Season One of the PPT
television series and Seasons Four through Six of the WPT television series
will also be recognized in 2009.
·
To complete production of
Season Seven of the WPT television series and begin production of Season Eight.
Season Eight production costs should be lower than Season Seven production
costs.
·
Lower general and
administrative expenses compared to the same period in 2008.
·
Lower selling and marketing
costs compared to the same period in 2008.
·
To incur approximately
$139,000 of additional costs to shut down the operations of WPT China in the
second quarter of 2009.
Liquidity and Capital Resources
During the three month
ended March 29, 2009, cash and cash equivalents and investments in debt
securities and put rights increased $2.7 million to a combined balance of $20.2
million. We borrowed $2.7 million from the broker that holds our ARS portfolio
and this source of cash was the reason for the increase in cash and investment
balances. Cash flows from operating activities of continuing operations were
$805,000 in 2009 compared to ($2,131,000) in 2008. Increases in revenues and
reductions in production costs and selling, general and administrative expenses
in 2009 were the primary reasons for the improvement between years. Our
principal operating cash requirements consist of payroll and benefits, office
leases, television production, professional and consulting fees, business
insurance and sales and marketing costs. Cash flows from investing activities
decreased to ($270,000) in 2009 from $3,864,000 in 2008. The decrease was
caused by fewer net redemptions of investments in 2009. Cash flows from
financing activities increased to $2,652,000 from none in 2008. The 2009 cash
flows were from the draw down of the line of credit in February 2009.
We intend to use funds
currently on hand for working capital and capital expenditures associated with
the expansion of the WPT television series, ClubWPT and WPT Global Marketing,
and for general corporate purposes. We anticipate our overall selling, general
and administrative expenses will decrease in future periods. We eliminated
sales and marketing expenditures related to our online gaming website and WPT
China and we significantly reduced payroll and related costs in 2008. We expect
to continue to benefit from these cost reductions throughout the remainder of
2009.
As of March 29,
2009, we had $3.9 million invested in ARS and rights to put the ARS back to the
broker that sold them to us. Historically, ARS have been liquid with interest
rates resetting every 7 to 35 days by an auction process. However, beginning in
February 2008, auctions for ARS held by us failed as a result of liquidity
issues experienced in the global credit and capital markets. An auction failure
means that the amount of securities submitted for sale exceeds the amount of
purchase
14
Table of Contents
orders and the parties
wishing to sell the securities are instead required to hold the investment
until a successful auction is completed. The ARS continue to pay interest in
accordance with the terms of the underlying security; however, liquidity will
continue to be limited until there is a successful auction or until such time
as other markets for ARS develop.
We entered into an
agreement with the broker that holds our ARS that requires the broker to buy
the ARS from us at par during the period June 30, 2010 to July 2,
2012. We are required to sell the ARS to the broker prior to that period if
they decide to buy the ARS at par value for any reason. The broker provided us
with a line of credit, secured by ARS held by that broker, equal to 75% of the
fair value of the ARS held by that broker. We borrowed $2,661,000 under the
line of credit agreement in February 2009.
At March, 29, 2009, $2,651,000 was outstanding under the line of credit.
We expect that cash, cash
equivalents, investments in debt securities and put rights and borrowings on
the credit line secured by our ARS portfolio will be sufficient to fund our
working capital and capital expenditure requirements for the next twelve months
even considering the current liquidity issues with the ARS.
General economic and capital market conditions are rapidly changing, are
unpredictable and the impact on our business is not within our control. If we
need to raise working capital, we may need to seek to sell additional equity
securities, issue debt or convertible securities or seek to obtain credit
facilities through financial institutions, the availability of which is highly
uncertain.
Contractual
Obligations, Commitments and Off-balance Sheet Arrangements
The table below sets forth our contractual obligations as
of March 29, 2009 (in thousands):
|
|
Payments due by period (in thousands)
|
|
Contractual obligations
|
|
Total
|
|
Year 1
|
|
Years 2-3
|
|
Years 4-5
|
|
Years 6
and Beyond
|
|
Operating leases (1)
|
|
$
|
2,019
|
|
$
|
908
|
|
$
|
1,111
|
|
$
|
|
|
$
|
|
|
Purchase obligations
|
|
385
|
|
297
|
|
88
|
|
|
|
|
|
|
|
$
|
2,404
|
|
$
|
1,205
|
|
$
|
1,199
|
|
$
|
|
|
$
|
|
|
(1)
Operating
lease obligations include rent payments for our corporate offices pursuant to
two lease agreements. For the first lease, monthly lease payments are
approximately $42,000 and escalate to approximately $45,000 over the remaining
lease term. For the second lease, monthly lease payments are approximately
$31,000 and escalate up to approximately $33,000 over the remaining lease term.
The amounts set forth in the table above include monthly lease payments through
June 2011.
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.
Nasdaq
Stock Market Listing Compliance
On August 14, 2008,
the Nasdaq Stock Market notified us that we were not in compliance with the
minimum stock listing price requirements of Nasdaq Marketplace Rule 4450(a)(5) as
a result of the closing bid price for the Companys common stock being below
$1.00 for 30 consecutive business days. This notification has no effect on the
listing of the Companys common stock at this time. The Nasdaq Marketplace Rules provide
the Company with 180 calendar days to regain compliance, which will require the
bid price of the Companys common stock to remain above $1.00 for a minimum of
10 consecutive business days.
On October 16, 2008,
Nasdaq announced the suspension of the enforcement of the rules requiring
a minimum $1.00 closing bid price. The term of the suspension was extended by
Nasdaq on December 19, 2008 and again on March 23, 2009. As a result
of the decision to suspend enforcement of the rules requiring a minimum
$1.00 closing bid price through July 19, 2009, Nasdaq has granted the
Company an extension until November 16, 2009 to become in compliance with
Nasdaq Marketplace Rule 4450(a)(5). The Company will continue to execute
its business plan to provide an opportunity to demonstrate value to the
investment community and regain Nasdaq compliance. In addition, the Board of
Directors have asked the stockholders for authority to effect a reverse stock split
to regain compliance with the minimum $1.00 closing bid price rule should
the Board determine that the reverse stock split is in the best interests of
stockholders.
Critical
Accounting Estimates
The methods,
estimates and judgments that we use in applying our accounting policies have a
significant impact on the results that we report in our financial statements.
Some of our accounting policies require us to make difficult and subjective
judgments, often as a result of the need to make estimates regarding matters
that are inherently uncertain. Management believes that there have been no
significant changes during the three months ended March 29, 2009 to the
items that we
15
Table of
Contents
disclosed as our critical
accounting policies and estimates in Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K
for the fiscal year ended December 28, 2008.
Recently Issued Accounting
Pronouncements
See Note 2. Recent
Accounting Pronouncements for information about recently issued accounting
pronouncements.
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 our 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 our anticipated future results and, accordingly, actual results may
differ materially from those expressed in any forward-looking statement. Our 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 our 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 our forward-looking statements, see Part II
Other Information, Item 1A. Risk Factors and the risk factors described in
our Form 10-K for the year ended December 28, 2008 for risk factors
that may impact our forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Our financial instruments
include cash and cash equivalents, short-term municipal bonds, corporate
preferred securities, certificates of deposit and ARS, including related put
rights. 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, or for our ARS portfolio because interest
rates reset to market rates frequently. As of March 29, 2009, the carrying
value of our cash and cash equivalents approximated fair value. We have in the
past and our strategy for the future is to obtain marketable debt securities
(principally consisting of government securities, commercial paper and corporate
bonds) 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 President, and Interim
Chief Financial Officer, we conducted an evaluation of our disclosure controls
and procedures, as such term is defined under Rules 13a-15(e) or
15d-15(e) promulgated under the Exchange Act, as of the end of the period
covered by this report. Based on this evaluation, our management has concluded
that our disclosure controls and procedures are effective.
There have been no
significant changes (including corrective actions with regard to significant
deficiencies of 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.
16
Table
of Contents
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 9.
Contingencies for information about legal proceedings.
ITEM 1A. RISK FACTORS
In
addition to the other information set forth in this report, the risk factors
set forth below include any material changes to the risk factors that you
should carefully consider as discussed in Part I, Item 1A. Risk Factors
in our Annual Report on Form 10-K for the year ended December 28,
2008. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial may also materially adversely affect our
business, financial condition and/or operating results.
GSN did not exercise its right to broadcast future seasons
of the WPT and our broadcast agreement with FSN does not provide for any
broadcast fees to be paid to us, which could materially and adversely affect
our results of operations.
License fees received
from U.S. broadcasters have been our most significant source of revenue.
Although we entered into a distribution agreement with FSN in September 2008
to broadcast Season Seven of the WPT television series, the FSN agreement does
not provide for any license fees to be paid to us for the broadcast rights. We
generate fees from sponsors by integrating sponsor logos and other advertising
materials into our programs and around the broadcast of the shows. In November 2008,
we entered into a sponsorship agreement with FullTiltPoker.net to sponsor
Season Seven of the WPT television series in the U.S. and Mexico. In the first
quarter of 2009, we entered into sponsorship agreements with Poker Stars to
sponsor Season Seven in Canada, certain European countries, Mexico and South
America. There is no assurance that we will be able to find sufficient sponsors
for Season Seven of the WPT television series that will pay us amounts
aggregating the fees paid by GSN and international television sponsors and
licensees for Season Six of the WPT television series. In January 2009, we
entered into a distribution agreement with FSN to broadcast Season Eight of the
WPT television series. We do not yet have any sponsors for Season Eight. We may
be required to pay the cost to produce Season Eight shows for FSN and depending
on the amount of sponsor revenues we are able to generate, the lack of license
fees in our FSN agreements could have a material adverse effect on our
financial condition, results of operations and cash flows.
Our ClubWPT.com business is
currently heavily dependent upon television as a primary source for the
generation of new subscribers and we need to find a more cost effective
marketing tool to generate new subscribers, which if not achieved could
materially and adversely affect our results of operations.
We spent $927,000 in the
fourth quarter of 2008 and $220,000 in the first quarter of 2009 to produce 13
one hour ClubWPT.com television shows to build awareness and drive traffic to
our online subscription website ClubWPT.com. We were disappointed with the rate
at which we converted ClubWPT.com television viewers to paying subscription
customers at ClubWPT. In order for the ClubWPT business to become a viable
business, we need to identify a more cost efficient marketing tool to generate
new subscribers for ClubWPT. The number of paid subscribers at ClubWPT
increased in the first quarter, but we expect the number of paid subscribers to
decrease in future quarters due to the lack of spending on marketing for new
players.
Our reliance on
Centaurus Games, LLC as a third party systems provider is subject to system
security risks and business viability risks that could disrupt services
provided to ClubWPT.com customers, and any such disruption could reduce our
revenue, increase our expenses and harm our reputation.
Experienced computer
programmers and hackers may be able to penetrate Centaurus network security
and misappropriate confidential information, create system disruptions or cause
shutdowns. In addition, computer programmers and hackers may be able to develop
and deploy viruses, worms and other malicious software programs that attack
their products or otherwise exploit security vulnerabilities in their products.
As a result, we could lose existing or potential customers. Furthermore, we are
Centaurus primary source of revenue. If we or other Centaurus customers do not
provide sufficient business to them, they will face significant financial
pressures. In the fourth quarter of 2008 and the first quarter of 2009,
Centaurus experienced a cash flow shortfall and we agreed to defer the payment
of certain amounts owed by Centaurus to us. It is possible that the deferral of
the payment of amounts owed by Centaurus to us will continue throughout 2009.
If Centaurus is not able to raise additional funding to finance their business,
or if we or other Centaurus customers are not able to generate sufficient
business for Centaurus, then Centaurus may not be able to continue to be a
viable vendor for us. Our efforts to address these risks could result in
interruptions, delays, cessation of service and loss of existing or potential
customers that may reduce our revenues, increase our expenses and harm our
reputation.
We may incur additional
impairment
charges to our auction rate securities portfolio and we are dependent on UBS AG
to repurchase these investments from us.
As of March 29,
2009, we had $3,900,000 of principal invested in auction rate securities. The
types of ARS investments that we own are backed by student loans, are
guaranteed under the Federal Family Education Loan Program and are AAA or
17
Table of Contents
Aaa rated. The estimated fair value of our ARS holdings
at March 29, 2009 was $3,506,000, which reflects a $394,000 impairment
loss.
We entered into an
agreement with UBS that requires UBS to buy our ARS at par value during the
period June 30, 2010 to July 2, 2012. We have valued that right at
$394,000 at March 29, 2009. We have given UBS the right to sell our ARS
before that period if they are able to find a buyer that is willing to pay par
value for our ARS. UBS has provided a $2,661,000 line of credit to us, secured
by the ARS held by them, which we drew down in February 2009. At March 29,
2009, $2,651,000 was outstanding under the line of credit.
UBSs obligation to
repurchase our ARS is not secured by their assets and does not require UBS to
obtain any financing to support their performance obligations. UBS has
disclaimed any assurance that they will have sufficient financial resources to
satisfy their obligations and the obligations are not guaranteed by any other
party.
If uncertainties in the
capital and credit markets continue, these markets deteriorate further or we
experience any ratings downgrades on any ARS investments in our portfolio, we
may need to further impair the value of our ARS portfolio, which could
negatively affect our financial condition and results of operations. We are
also dependant on UBS to repurchase our ARS portfolio at par value and that
obligation is subject to performance risk on the part of UBS.
We
received a Nasdaq staff determination letter on August 14, 2008, notifying
us that we were not in compliance with the minimum stock listing price
requirements of Nasdaq Marketplace Rule 4450(a)(5) and if we are
delisted from Nasdaq, the price of our common stock could drop.
Under Nasdaq Marketplace
rules, if the closing bid price of our common stock is below $1.00 for 30
consecutive business days, we could be delisted from the Nasdaq Global Market.
Nasdaq Marketplace rules provide the Company with 180 calendar days to
regain compliance, which will require the bid price of the Companys common
stock to remain above $1.00 for a minimum of 10 consecutive business days. If
we do not regain compliance with this rule, Nasdaq Staff will provide written
notification that our securities will be delisted. On October 16, 2008,
Nasdaq announced the suspension of the enforcement of rules requiring a
minimum $1.00 closing bid price. This term of the suspension was extended by
Nasdaq on December 19, 2008 and March 23, 2009 and the suspension
will remain in effect through November 16, 2009. We have until November 16,
2009 to become in compliance with Nasdaq Marketplace Rule 4450(a)(5). The
Board of Directors have asked the stockholders for authority to effect a
reverse stock split to regain compliance with the minimum $1.00 closing bid
price rule should the Board determine that the reverse stock split is in
the best interests of stockholders.
Due to the international nature
of our WPT China business, political or economic changes or other factors could
reduce our future revenue, increase costs and harm our investment in this
business.
We are also dependant on third parties to develop and market our
operations in China, and we have little control over their day-to-day
operations and have no way to ensure that we can monetize our China operations
effectively.
In
March 2009, we decided to shut down the operations of WPT China while
continuing to look for a strategic partner to acquire the WPT China assets.
These risk factors are now less significant to us due to our reduced business
presence in China.
18
Table of
Contents
ITEM 6. EXHIBITS
31.1
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|
Certification of Chief Executive Officer 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 2002
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|
|
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31.2
|
|
Certification of Interim Chief Financial Officer
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 2002
|
|
|
|
32.1
|
|
Certification of Chief Executive Officer and Interim
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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19
Table of
Contents
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 6, 2009
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WPT ENTERPRISES, INC.
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Registrant
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/s/
Steven Lipscomb
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Steven Lipscomb
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Chief Executive Officer
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/s/
Thomas Flahie
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Thomas Flahie
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Interim Chief Financial Officer
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20
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