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.

Discontinued Operations -The Company complies with the accounting and reporting requirements for reporting on discontinued operations. The results of operations of a component of an entity that either has been disposed of or is classified as held for sale is reported in discontinued operations if the operations and cash flows of the component have been (or will be) eliminated from the ongoing operations of the entity as a result of the disposal transaction, and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.

In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of the Company for current and prior periods will report the results of operations of the component, including any gain or loss recognized, in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur.

Reclassifications-Certain prior year amounts have been reclassified to reflect the impact of discontinued operations.

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 casino, the Rozvadov casino (which was sold in 2012) and the land in Hate, which is currently the Route 59 Casino. 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 casino, and the “Austrian reporting unit” which consists of the Route 55 and Route 59 casinos and the Hotel Savannah. Goodwill impairment tests require the Company to first assess qualitative factors to determine whether it is necessary to perform a two-step quantitative goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The Company assesses the potential impairment of goodwill annually (as of September 30th) and on an interim basis whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Upon completion of such review, if impairment is found to have occurred, a corresponding charge will be recorded.

Based on TWC’s own assessment of qualitative factors which included an analysis of macroeconomic conditions, financial performance, and industry and market considerations, the Company concluded that it was not necessary to perform a two-step quantitative goodwill impairment test and that the goodwill of the Company was not impaired as of December 31, 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 (loss).

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, 2012 (in thousands, except FX)

Rate (“FX”) (2)

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, 2012 FX of:

18.9600

USD

5,437

USD

959

USD

6,396

Net increase to Goodwill

USD

2,395

USD

422

USD

2,817

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(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, 2012, the Company’s Common Stock equivalents include 660,575 unexercised stock options, 75,000 outstanding warrants, 75,000 shares of restricted stock, and 151,640 shares issuable under the Company’s Deferred Compensation Plan. As of December 31, 2011, the Common Stock equivalents included 837,675 unexercised stock options, 75,000 outstanding warrants, 75,000 shares of restricted stock, and 53,514 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)	2012		2011
Basic earnings per share:
Income from continuing operations	$	1,641	$	3,188
Weighted average common shares	8,870,129		8,871,637
Basic earnings per share	$	0.18	$	0.36

Diluted earnings per share:
Income from continuing operations	$	1,641	$	3,188
Weighted average common shares	8,870,129		8,871,637
Addition due to the effect of dilutive securities using the treasury stock method:
Stock options and warrants (1)	3,405		10,038
Stock issuable under the Deferred Compensation Plan	151,642		53,514
Dilutive potential common shares	9,025,176		8,935,189
Diluted earnings per share	$	0.18	$	0.36

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(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, 4.9% and 4.5% of total revenues for the years ended December 31, 2012 and 2011, respectively. Food and beverage revenues, which are included in revenues from ancillary services, represent approximately 1.8% and 1.9% of total consolidated revenues for the years ended December 31, 2012 and 2011, 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, 2012 and 2011, revenues do not include the retail amount of food and beverages and hotel accommodations of $6,064 and $6,244, 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 $2,265 and $2,359, 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)	2012			2011

Cost of complimentary food and beverages (A)	$	2,265		$	2,359
Average cost of food and beverages sold (B)	37.6		%	37.9		%

Retail value of food and beverages (A/B)	$	6,019		$	6,225
Cost of hotel accommodations	45			19
Total promotional allowances	$	6,064		$	6,244

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 $584 and $681 for the years ended December 31, 2012 and 2011, 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, 2012 and 2011.

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, 2012 and 2011.

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 2012 and 2011, the Company expensed approximately $135 and $139, respectively, for granted options to certain KMEs, which was recognized in its selling, general and administrative expenses in the consolidated statements of operations. In 2011, the Company also incurred expenses approximating $17 for warrants issued for services.

Czech Gaming Taxes - The majority of TWC’s revenues are derived from gaming operations in the Czech Republic, which were subject to, prior to January 1, 2012, only gaming taxes and charity taxes, while its non-gaming revenues, which were less than 5.0%, were subject to corporate income tax liabilities under Czech law.

Prior to 2012, gaming taxes were computed on gross gaming revenues, which were comprised of live (table) games and slot games revenues. For live game revenue, the 2011 applicable taxes and fees were: (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.

In 2011, charity taxes were also computed on the reported slot revenues of each of our three former 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, of up to CZK 50,000 (or $2,800 at the annualized daily exchange rate for 2011), a 6% charity tax applied; of up to CZK 100,000 (or $5,700 at the same exchange rate), an 8% rate applied; of up to CZK 500,000 (or $28,300 at the same exchange rate), a 10% rate applied; and of above the CZK 500,000 gaming revenue threshold, a 15% rate applied. For slot game revenue, the applicable assessment was the charity tax, net of local (municipality) administration and slot state-licensing fees.

Effective January 1, 2012, the charity taxes were eliminated in lieu of the New Gaming Tax on all live game and slot revenues, as well as an applicable corporate income tax on adjusted Czech net income, net of exemptions. Additionally, the administration tax and state supervision fee were eliminated in lieu of minor license renewal fees. A summary of the changes is summarized in the following table, in actual monetary amounts (not in thousands):

		New Gaming Tax Law *
	Pre-2012 Gaming Tax Law	(effective January 1, 2012)
Live Games:	10% Gaming Tax from Win (administration fee);
	1% Gaming Tax from Win (state supervision);	20% Gaming Tax from Win (70% of tax to state; 30% to municipal).
	6-15% Charity Tax from Win, net of Gaming Taxes (the Charity Tax rate was based on tiered revenue thresholds).
Slots:	16,000 CZK (or $800) License per machine, per every 6 months;
	1,000 CZK (or $50) Municipality Fee per machine, per quarter;	20% Gaming Tax from Win (20% of tax to state; 80% to municipal);
	6-15% Charity Tax from Win, net of License and Municipality fees (the Charity Tax rate is based on tiered revenue thresholds).	55 CZK (or $3) Gaming Tax per Slot Machine, per Day.
Net Income	No corporate income tax.	19% corporate income tax on adjusted net income, net of exemptions.

____________________________

* The new Gaming Tax is to be paid quarterly, while the corporate income tax obligation is to be paid in June of the subsequent year.

Gaming taxes payable for year 2011 were due and paid to the Czech Ministry of Finance in April 2012, while charity taxes payable, despite having no stated due dates, were fully paid by September 30, 2012. The New Gaming Tax is payable by the 25th day following the end of each quarter.

TWC’s gaming-related taxes and fees for the years ended December 31, 2012 and 2011 are summarized in the following table:

	For the Year Ended
(amounts in thousands)	2012			2011

Gaming revenues (live-game and slot only)	$	32,658		$	32,761

Gaming taxes, live games and slots	6,860			1,580
Charity taxes (eliminated in 2012)	—			2,885
Licensing fees (eliminated in 2012) (1)	263			646
Total gaming taxes and fees	$	7,123		$	5,111
as % of gaming revenue (2)	21.8		%	15.6		%

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(1) The non-refundable, six-month licensing fees effective for January 2012 through June 2012 were paid in advance in October 2011, prior to the passing of the New Gaming Tax laws in December 2011, which eliminated them. As a result, the Company incurred these additional fees for the first six months of 2012. Excluding these non-recurring licensing fees, the gaming taxes for the year 2012 would have been 21.0% of gaming revenues.

(2) The tax as a percentage of gaming revenue in 2012 varies slightly from the 20% flat rate, due to a gaming tax imposed per slot machine, per day.

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. Between January 1, 2010 and December 31, 2012, VAT rates increased to between 10% and 20%. All non-EU generated purchases were impacted by identical VAT increases, beginning in May 2004. The VAT top rate is expected to increase to 21% beginning in 2013. 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 years ended December 31, 2012 and 2011, respectively.

Effective January 1, 2012, TWC merged its three Czech slot subsidiary companies, ACC Slot, s.r.o., Hollywood Spin s.r.o. and LMJ Slot s.r.o. into its primary Czech operating entity company, American Chance Casinos a.s.. Furthermore, on February 28, 2012, TWC transferred the ownership of its fully-owned Czech subsidiary, Trans World Hotels, s.r.o., which owns the Hotel Savannah, to TWC’s primary Czech subsidiary, American Chance Casinos a.s..

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 2009. 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, 2012 and 2011. 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 of 19% on income derived from gaming revenues, which prior to the law changes were subject only to gaming taxes. (See also “Corporate Income Taxes” in “Part I, Item 1, Taxation” above).

Recently Issued and Adopted Accounting Standards -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. The adoption of this guidance on January 1, 2012 did not have a material effect on the Company’s consolidated financial statements.

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 of 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 of the previous accounting standard on the presentation of comprehensive income, issued in September 2011, are not affected. The previous presentation related to the comprehensive income standard required that entities 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. The Company adopted the update on January 1, 2012 resulting in no impact to the Company’s consolidated balance sheets, statements of income and cash flows.