Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2011

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

NOTE 2 - Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation -The accompanying consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America (“GAAP”), and pursuant to the accounting and disclosure rules and regulations of the Securities and Exchange Commission (the “SEC”) and Regulation S-X.  All significant intercompany balances and transactions have been eliminated in consolidation.

Property and Equipment- Property and equipment is stated at cost less accumulated depreciation and amortization.  TWC capitalizes the cost of improvements that extend the life of the asset and expenses maintenance and repair costs as incurred.  The Company provides for depreciation and amortization using the straight-line method over the following estimated useful lives:

Asset	Estimated Useful Life
Building and improvements	5-50 years
Furniture, fixtures and other equipment	4-12 years

Goodwill - Goodwill represents the excess of the cost of the Company’s Czech subsidiaries over the fair value of their net assets at the date of acquisition, which consisted of the Ceska and Rozvadov casinos and the land in Hate (upon which the Route 59 Casino and the Hotel Savannah and the Spa are situated on).  Goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test.  The Company has allocated the goodwill over two reporting units that are components of the operating segment “Czech subsidiaries” and are classified as the “German reporting unit” which consists of the Ceska and Rozvadov casinos and the “Austrian reporting unit” which consists of the Route 55, Route 59 and Hotel Savannah.  The impairment assessment requires the Company to compare the fair value of its two reporting units to their respective carrying values to determine whether there is an indication that an impairment exists.  The fair value of the two reporting units were determined through a combination of recent appraisals of the Company’s real property and a multiple of EBITDA, which was based on the Company’s experience and data from independent third parties.  As required, the Company performed its required annual fair-value based testing of the carrying value of goodwill related to its two reporting units at September 30, 2011, and determined that goodwill was not impaired.  There were no indicators of impairment present during the fourth quarter of 2011, therefore TWC determined that there was no impairment of goodwill at December 31, 2011.  The Company expects to perform its next required annual assessment of goodwill during the third quarter of 2012.

Comprehensive Income — The Company complies with requirements for reporting comprehensive income.  Those requirements establish rules for reporting and display of comprehensive income and its components.  Furthermore, they require the Company’s change in the foreign currency translation adjustments to be included in other comprehensive income.

Foreign Currency Translation- The Company complies with requirements for reporting foreign currency translation, which require that for foreign subsidiaries whose functional currency is the local foreign currency, balance sheet accounts are translated at exchange rates in effect at the end of the year and resulting translation adjustments are included in “accumulated other comprehensive income.”  Statement of income accounts are translated by applying monthly averages of daily exchange rates on the respective monthly local statement of operations accounts for the year.

The impact of foreign currency translation on goodwill is presented below:

	Applicable	Goodwill
	Foreign Exchange	German		Austrian
As of December 31, 2011 (in thousands, except FX)	Rate (“FX”) (2)	reporting unit		reporting unit		Total
Residual balance, as of January 1, 2003 (in USD) (1)		USD	3,042	USD	537	USD	3,579
USD residual balance, translated at June 30, 1998 (date of acquisition) FX rate of:	33.8830	CZK	103,077	CZK	18,190	CZK	121,267
2003 CZK balance, translated to USD, at December 31, 2011 FX of:	19.8191	USD	5,201	USD	918	USD	6,119
Net increase to Goodwill (adjustment made to Translation Adjustment in consolidation):		USD	2,159	USD	381	USD	2,540

(1)Goodwill was amortized over 15 years until the Company started to comply with revised GAAP requirements, as of January 1, 2002. This balance represents the remaining, unamortized goodwill, after an impairment charge taken prior to January 1, 2003.

(2)FX (interbank) rates taken from www.Oanda.com.

Earnings Per Common Share- The Company complies with accounting and disclosure requirements regarding earnings per share.  Basic earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period.  Diluted earnings per common share incorporate the dilutive effect of Common Stock equivalents on an average basis during the period.  As of December 31, 2011, the Company’s Common Stock equivalents include 837,675 unexercised stock options, 75,000 outstanding warrants, 75,000 shares of restricted stock, and 53,514 shares issuable under the Company’s Deferred Compensation Plan.  As of December 31, 2010, the Common Stock equivalents included 838,175 unexercised stock options, 75,000 outstanding warrants, 75,000 shares of restricted stock, and 49,262 deferred compensation shares.  These shares for the respective years were included in the computation of diluted earnings per common share, if such unexercised stock options, warrants, restricted stock, and deferred compensation stock were vested and “in-the-money.”

A table illustrating the impact of dilution on earnings per share, based on the treasury stock method, is presented below:

	For the Year Ended
(amounts in thousands, except for	December 31,
share data)	2011		2010
Basic earnings per share:
Net income	$	2,963	$	1,690
Weighted average common shares	8,871,637		8,871,640
Basic earnings per share	$	0.33	$	0.19
Diluted earnings per share:
Net income	$	2,963	$	1,690
Weighted average common shares	8,871,637		8,871,640
Addition due to the effect of dilutive securities using the treasury stock method:
Stock options and warrants (1)	10,038		90
Stock issuable under the Deferred Compensation Plan	53,514		49,262
Dilutive potential common shares	8,935,189		8,920,992
Diluted earnings per share	$	0.33	$	0.19

(1) Per the treasury stock method.

Revenue Recognition -Casino revenue is defined as the net win from gaming activities, which is the difference between gaming wagers and the amount paid out to patrons, and is recognized on the day it is earned.  Revenues generated from ancillary services, including room rentals, sales of food, beverage, cigarettes, and casino logo merchandise are recognized at the time the related services are performed or goods sold, and represent, in the aggregate, 4.5% and 4.9% of total revenues for the years ended December 31, 2011 and 2010, respectively.  Food and beverage revenues, which are included in revenues from ancillary services, represent approximately 1.9% and 2.5% of total consolidated revenues for the years ended December 31, 2011 and 2010, respectively.

Promotional Allowances-Promotional allowances primarily consist of the provision of complimentary food and beverages and, to certain of its valuable players, hotel accommodations.  For the years ended December 31, 2011 and 2010, revenues do not include the retail amount of food and beverages and hotel accommodations of $6,244 and $6,430, respectively, provided at no-charge to customers. The retail value of the food and beverages given away is determined by dividing the food and beverage costs charged to the gaming operation of $2,359 and $2,664, for the respective periods, by the average percentage of cost of food and beverages sold.  The cost of hotel accommodations is either the out-of-pocket expenses paid to other hotels to accommodate TWC’s customers or the retail charge of room accommodations at the Company’s Hotel Savannah and at its three guest rooms at Route 55.

The promotional allowances are summarized below:

	For the Year Ended
	December 31,
(amounts in thousands)	2011			2010
Cost of complimentary food and beverages (A)	$	2,359		$	2,664
Average cost of food and beverages sold(B)	37.9		%	41.7		%
Retail value of food and beverages (A/B)	$	6,225		$	6,396
Cost of hotel accommodations	19			34
Total promotional allowances	$	6,244		$	6,430

External Advertising- The Company complies with the accounting and reporting requirements for reporting on advertising costs.  External advertising expenses are charged to operations as incurred and were $811 and $780 for the years ended December 31, 2011 and 2010, respectively.

Fair Value of Financial Instruments-The fair values of the Company’s assets and liabilities that qualify as financial instruments approximate their carrying amounts presented in the accompanying consolidated balance sheets at December 31, 2011 and 2010.

Use of Estimates-The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s 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 consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Impairment of Long-Lived Assets-The Company periodically evaluates whether current facts or circumstances indicate that the carrying value of its depreciable assets to be held and used may be recoverable.  If such circumstances are determined to exist, an estimate of undiscounted future cash flows produced by the long-lived assets, or the appropriate grouping of assets, is compared to the carrying value to determine whether an impairment exists.  If an asset is determined to be impaired, the loss is measured based on the difference between the asset’s fair value and its carrying value. An estimate of the asset’s fair value is based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable market value. There were no impairment losses for long-lived assets recorded for the years ended December 31, 2011 and 2010.

Stock-based Compensation- The Company complies with the accounting and reporting requirements for share-based payments which permit companies to adopt the requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the consolidated financial statements beginning with the effective date, based on the requirements of share-based payments for all share-based payments vested after that date, and based on these requirements for all unvested awards granted prior to the effective date of this accounting requirement. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but also permit entities to restate the consolidated financial statements of previous periods, either for all prior periods presented or to the beginning of the fiscal year in which the statement is adopted, based on previous pro forma disclosures made in accordance with this reporting requirement. Accordingly, the Company has adopted the modified prospective method of recognition, and began applying the valuation and other criteria to stock options and warrants granted beginning January 1, 2006.  The Company is recognizing expense for the unvested portion of previously issued grants based on the valuation and attribution methods used previously to calculate the pro forma disclosures.  The Company did not recognize expense for employee stock options prior to January 1, 2006.

The Company currently utilizes the Black-Scholes option pricing model to measure the fair value of stock options granted to certain key management employees (“KMEs”), as well as for warrants issued for services. While this accounting requirement permits entities to continue to use such a model, it also permits the use of a “lattice” model. The Company expects to continue using the Black-Scholes option pricing model in connection with its adoption of accounting and reporting requirements to measure the fair value of stock options and warrants granted.

In 2011 and 2010, the Company expensed approximately $139 and $238, respectively, for granted options to certain KMEs, which was recognized in its selling, general and administrative expenses in the consolidated statements of income.  The Company also incurred expenses approximating $17, respectively, for shares and warrants issued for services in 2011 and 2010.

Czech Gaming Taxes- The majority of TWC’s revenues are derived from gaming operations in the Czech Republic, which are subject to, prior to January 1, 2012, only gaming taxes (including charity taxes), while its non-gaming revenues, which were not material, have correspondingly non-material corporate income tax liabilities under Czech law. TWC’s gaming-related taxes for the years ended December 31, 2011 and 2010 are summarized in the following table:

	For the Year Ended December 31,
(amounts in thousands)	2011		2010
Gaming taxes	$	1,659	$	1,578
Charity taxes	3,008		2,677
Total Czech gaming taxes	$	4,667	$	4,255

Gaming taxes were computed on gross gaming revenues, which are comprised of live (table) games and slot games revenues. For live game revenue, the applicable taxes and fees are: (i) a 10% administration tax; (ii) a 1% state supervision fee; and (iii) a charity “contribution” (i.e., a tax), herein referred to as the charity tax, for publicly beneficial, cultural, sporting and welfare purposes, according to a gross revenue formula specified by the Czech Ministry of Finance.

Charity taxes were also computed on the reported slot revenues of each of our three slot subsidiary companies, ACC Slot, s.r.o., Hollywood Spin s.r.o. and LMJ Slot s.r.o., net of gaming taxes and fees.  Therefore, for all gaming revenue, net of applicable taxes and fees, up to CZK 50,000 (or $2,800 at the annualized daily exchange rate for 2011), a 6% charity tax applies; up to CZK 100,000 (or $5,700 at the same exchange rate), an 8% rate applies; up to CZK 500,000 (or $28,300 at the same exchange rate), a 10% rate applies; and above the CZK 500,000 gaming revenue threshold, a 15% rate applies.  For slot game revenue, the applicable assessment is the charity tax, net of local (municipality) administration and slot state-licensing fees.  Effective January 1, 2012, the charity taxes have been eliminated in lieu of a new overall flat gaming tax (the “New Gaming Tax”) of 20.0% on all live-game and slot revenues, as well as an applicable corporate income tax on adjusted net income.  Additionally, the administration tax and state supervision fee have been eliminated in lieu of minor license renewal fees. (See also Part I, Item 1 “Taxation” above.)

Gaming taxes payable for year 2011 are due to the Czech Ministry of Finance annually, typically in April of the subsequent year, while charity taxes payable, despite having no stated due dates, are paid as mutually agreed with the charities, customarily by May of the subsequent year.  The Company may allocate this charity contribution to local schools, sports clubs, subsidized or volunteer organizations, or municipalities in which each of the Company’s casinos operate. The distribution is subject to the prior approval of the Czech Ministry of Finance.

Effective January 1, 2012, the New Gaming Tax is payable at the end of each quarter, while the corporate income tax is payable by June of the subsequent year. (See also Part I, Item 1 “Taxation” above.)

In conformity with the European Union (“EU”) taxation legislation, when the Czech Republic joined the EU in 2004, its VAT increased from 5% to 22%, from January 2004 through December 2009, and ranged between 9% and 19% for all intra-EU generated purchases.  Beginning January 1, 2010, VAT rates increased to between 10% and 20%.  All non-EU generated purchases were impacted by identical VAT increases, beginning in May 2004. The Company pays its VAT directly to its vendors in connection with any purchases that are subject to this tax.  Unlike in other industries, VATs are not recoverable for gaming operations.  The recoverable VAT under the Hotel Savannah operation was non-material for the years ended December 31, 2011 and 2010.

Income Taxes-The Company complies with accounting and reporting requirements with respect to accounting for U.S. federal and foreign income taxes, which require an asset and liability approach to financial accounting and reporting for income taxes.  Deferred income tax assets and liabilities are computed for differences between the financial statement and the tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amount expected to be realized.  In accordance with GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement.  De-recognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets.  This policy also provides guidance on thresholds, measurement, de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition that is intended to provide better financial statement comparability among different entities.  The Company is subject to income tax examinations by major taxing authorities for all tax years since 2008. Based on its analysis, the Company has determined that the adoption of this policy did not have a material impact on the Company’s financial statements for the years ended December 31, 2011 and 2010. However, management’s conclusions regarding this policy may be subject to review and adjustment at a later date based on factors including, but not limited to, on-going analyses of and changes to tax laws, regulations and interpretations thereof.

Effective January 1, 2012, the Czech government instituted an effective corporate income tax on gaming revenues, which prior to the law changes were subject only to gaming taxes. (See “Corporate Income Taxes” under section “Taxation” above.)

Recently Issued and Adopted Accounting Standards

In April 2010, the Financial Accounting Standards Board (the “FASB”) issued a standards update, which requires that a gaming entity should not accrue a jackpot liability (or portions thereof) before the jackpot is won if the entity is not obligated to pay out that jackpot. Jackpots should be accrued and charged to revenue when an entity has the obligation to pay the jackpot. The Company adopted the pronouncement on January 1, 2011 resulting in no impact to the Company’s consolidated balance sheets, statements of income and cash flows.

New Accounting Pronouncements

In September 2011, the FASB amended the authoritative guidance regarding the testing for Goodwill Impairment. Under the amendments, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value reporting of a reporting unit is less than the carrying amount, then performing the two-step impairment test is unnecessary. The changes are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, however, early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011. The Company did not elect to make an early adoption of this standard.

In December 2011, the FASB issued an update on comprehensive income, which pertains to the deferral of the effective date for amendments to the presentation of reclassification of items out of accumulated other comprehensive income in a previous accounting standard update that pertained to the presentation of comprehensive income.  The update defers the presentation on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods.  All other requirements the previous accounting standard on the presentation of comprehensive income, issued in June 2011, are not affected.  The previous presentation related comprehensive income standard requires entities to report components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements.  Under the continuous statement approach, the statement would include the components and total of net income, the components and total of other comprehensive income and the total of comprehensive income.  Under the two statement approach, the first statement would include the components and total of net income and the second statement would include the components and total of other comprehensive income and the total of comprehensive income.  It does not change the items that must be reported in other comprehensive income and it is effective retrospectively for interim and annual periods beginning after December 15, 2011, with early adoption permitted.  We have evaluated the guidance and expect it to impact only the presentation and note disclosures in our financial statements.