SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Foreign Currency Translations

The Company’s net assets, net earnings and cash flows from its Canadian and Mexican operations are based on the U.S. dollar equivalent of such amounts measured in the respective entity’s functional currency. Assets and liabilities are translated to U.S. dollars using the applicable exchange rates as of the end of a reporting period. Revenues, expenses and cash flows are translated using the average exchange rate during each period. Gains and losses on foreign currency translations are included in the determination of accumulated other comprehensive (loss) income for the year. Foreign currency translation gains amounted to $48,000, $521,000 and $2.5 million, in 2011, 2010 and 2009, respectively.

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. As of February 4, 2012, the Company’s cash equivalents were not material.

Accounts Receivable

For all PMPS studios, collections from customers are made directly to CPI. There are no customer receivables since revenue is not recorded until the delivery of a package which coincides with final collection. Accordingly, no allowance for doubtful accounts is required.

For all SPS and KKPS studios, collections (cash, check and credit sales) are deposited with Sears and Toys “R” Us, respectively, and subsequently remitted, net of commission, to CPI by Sears and Toys “R” Us. Sears’ and Toys “R” Us’ remittances are reconciled to CPI receivables and any differences are resolved and recorded as appropriate. There was no allowance for doubtful accounts at February 4, 2012, and February 5, 2011, as substantially all accounts receivable relate to amounts to be remitted by Sears and Toys “R” Us, and management has a high level of assurance of the collectability of these amounts.

For Bella Pictures®, customer collections are due in full prior to the event date. As such, no allowance for doubtful accounts is required.

Inventories

Inventories are stated at the lower of cost or market, with cost of all inventories being determined by the first-in, first-out (FIFO) method. Material and production costs incurred relating to portraits processed pending delivery to customers, or in-process, are inventoried and expensed when the related sales revenue is recognized.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization on property and equipment is computed principally using the straight-line method over estimated useful lives of the respective assets.

A summary of estimated useful lives is as follows:



Buildings and building improvements		15 to 19 years
Leasehold improvements		5 to 15 years
Photographic, sales and manufacturing equipment		2 to 7 years

Expenditures for improvements are capitalized, while normal repair and maintenance costs are charged to expense as incurred. When properties are disposed, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is credited or charged to income.

In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 350, “Intangibles-Goodwill and Other” (“ASC Topic 350”), photographic, sales and manufacturing equipment includes amounts related to the capitalization of certain costs incurred in connection with developing or obtaining software for internal use.

Property and Equipment and Intangible Asset Impairment

In accordance with FASB ASC Topic 360, “Property, Plant and Equipment” (“ASC Topic 360”) long-lived assets, including property and equipment and definite-lived intangible assets, are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. The impairment test is a two-step process. If the carrying value of the asset group exceeds the expected future cash flows (undiscounted and without interest) from the asset group, impairment is indicated. The impairment loss recognized is the excess of the carrying value of the asset over its fair value.

Business Combinations

In accordance with FASB ASC Topic 805, "Business Combinations" ("ASC Topic 805"), the Company allocates the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. Valuations are performed to assist in determining the fair values of assets acquired and liabilities assumed, which requires management to make significant estimates and assumptions, especially with respect to intangible assets. Management makes estimates of fair value based upon assumptions believed to be reasonable. These estimates are based in part on historical experience and information obtained from management of the acquired companies and expectations of future cash flows.

Goodwill Impairment

The Company accounts for goodwill under FASB ASC Topic 350, “Intangibles-Goodwill and Other” (“ASC Topic 350”) which requires the Company to test goodwill for impairment on an annual basis, and between annual tests whenever events or changes in circumstances indicate the carrying amount may not be recoverable. ASC Topic 350 prescribes a two-step process for impairment testing of goodwill. The first step is a screen for impairment, which compares the reporting unit’s estimated fair value to its carrying value. If the carrying value exceeds the estimated fair value in the first step, the second step is performed in which the Company’s goodwill is written down to its implied fair value.

Self-Insurance Reserves

The Company is self-insured with stop-loss coverage for medical insurance and has a large deductible program for worker’s compensation and general liability insurance. The Company has established reserves for claims under these plans that have been reported but not paid and incurred but not reported. These reserves are based upon the Company’s estimates of the aggregate liability for uninsured claims incurred using actuarial assumptions followed in the insurance industry and the Company’s historical experience. Loss estimates are adjusted based upon actual claims settlements and reported claims.

Revenue Recognition and Deferred Costs

Studio sales revenue is recorded when portraits and/or other merchandise is delivered to customers. Costs incurred relating to portraits processed pending delivery to customers, or in-process, is inventoried and expensed when the related photographic sales revenue is recognized.

Each studio brand offers customers the opportunity to join a portrait savings club. Each club requires a one-time membership fee for a certain enrollment period, which is currently one year. PMPS Portrait Smiles Club, Sears’ Super Saver Program and Kiddie Kandids Portrait Club members receive savings on products and services and a free portrait sheet on each returning visit. Additionally, Sears’ Super Saver Program and Kiddie Kandids Portrait Club members pay no session fees for the enrollment period. These plans were designed to promote customer loyalty while encouraging frequent return visits to the studio. The entire fee received is deferred and amortized into revenues on a straight-line basis over the period of the customer’s program.

Bella Pictures® revenue is recorded when each element of the wedding contract is delivered to the customer. Costs of the individual elements are capitalized and expensed when the related sales revenue is recognized.

Sales and other taxes collected from customers for remittance to governmental entities is presented on a net basis in the statement of operations.

Advertising Costs

The Company expenses costs associated with newspaper, magazines and other media advertising the first time the advertising takes place. Certain direct-response advertising costs are capitalized. Direct-response advertising consists of direct mail advertisements. Such capitalized costs are amortized over the expected period of future benefits following the delivery of the direct media in which it appears.

The Consolidated Balance Sheets include capitalized direct-response advertising costs of $318,000 and $857,000 at February 4, 2012, and February 5, 2011, respectively. Advertising expense for 2011, 2010 and 2009 was $26.1 million, $28.1 million and $30.7 million, respectively.

Defined Benefit Plans

The Company maintains a qualified, noncontributory pension plan that covers all full-time U.S. employees meeting certain age and service requirements. At the measurement date of February 4, 2012, plan assets are measured and recorded at fair value. The net pension plan and supplemental executive retirement plan (“SERP”) benefit obligations and the related periodic costs are based on, among other things, assumptions of the discount rate, estimated return on plan assets and estimated salary increases. These obligations and related periodic costs are measured using actuarial techniques and assumptions. While management has determined the assumptions are appropriate, differences in actual experience or changes in assumptions may affect the Company’s pension obligation and future net periodic benefit cost. The actuarial cost method used to compute the pension plan liabilities and related expense is the Projected Unit Credit method. Market related value of assets is valued with a five-year phase-in of gains and losses. The SERP has no assets.

Effective February 20, 2009, the Company implemented a freeze of future benefit accruals related to its pension plan for the remaining grandfathered participants.

Postemployment Benefits

In the ordinary course of business, the Company may provide postemployment benefits to employees who have been terminated. The Company does not accrue obligations related to these benefits over the service period as the obligation, if any, cannot be reasonably estimated. Obligations are accrued when terminations are probable and estimable.

Income Taxes

The Company provides deferred income tax assets and liabilities based on the estimated future tax effects of operating losses and tax credit carryforwards, as well as the differences between the financial and tax bases of assets and liabilities based on currently enacted tax laws. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The tax balances and income tax expense recognized by the Company are based on management’s interpretation of the tax laws of multiple jurisdictions. Income tax expense also reflects the Company’s best estimates and assumptions regarding, among other things, the level of future taxable income, interpretation of the tax laws and tax planning. The Company assesses temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are shown on our consolidated balance sheet.

The Company regularly assesses the likelihood that deferred tax assets will be recovered through future taxable income. To the extent the Company believes that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. When a valuation allowance is established or increased in an accounting period, a corresponding tax expense is recorded in our consolidated statement of operations.

Stock-based Compensation Plans

At February 4, 2012, the Company had various stock-based employee compensation plans, which are described more fully in Note 13 to the Notes to Consolidated Financial Statements. The Company accounts for its stock-based compensation plans under FASB ASC Topic 718, “Compensation – Stock Compensation” (“ASC Topic 718”) which requires companies to recognize the cost of awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant.

Per Share Calculations

Basic (loss) income per common share is computed by dividing net losses or earnings attributable to common shareholders by the weighted-average number of common shares outstanding for the periods presented. Diluted (loss) income per common share also includes the dilutive effect of potential common shares (primarily dilutive stock options) outstanding during the period for the periods presented.

Adoption of New Accounting Standards

In December 2010, the FASB issued ASU No. 2010-28, "Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts" ("ASU No. 2010-28"). ASU No. 2010-28 affects all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The guidance in ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. ASU No. 2010-28 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company adopted the applicable requirements of ASU No. 2010-28 on February 6, 2011.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”). ASU No. 2010-06 amended existing disclosure requirements under ASC Topic 820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”) by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchases, sales, issuances, and settlements on a gross basis relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about inputs and valuation techniques and the level of disaggregation. The new disclosures and clarifications of existing disclosures were effective for interim and annual periods beginning after December 15, 2009, except for the requirement to provide level 3 activity of purchases, sales, issuances and settlements on a gross basis, which is effective for interim and annual periods beginning after December 15, 2010. The Company adopted the applicable requirements of ASU No. 2010-06 on February 7, 2010, with the exception of the requirement to provide level 3 activity of purchases, sales, issuances and settlements on a gross basis, which the Company adopted on February 6, 2011, and there was no effect to the Company’s financial statements.

In October 2009, the FASB issued ASU No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (a consensus of the FASB EITF)” (“ASU No. 2009-13”). ASU No. 2009-13 significantly improves the reporting of transactions to more closely reflect the underlying economics of the transactions by requiring allocation of the overall consideration to each deliverable using the estimated selling price in the absence of vendor-specific objective evidence or third-party evidence of selling price for deliverables. Additionally, ASU No. 2009-13 will improve financial reporting because the relative selling price method spreads any discount in an arrangement across all of the deliverables in that arrangement rather than allocating the entire discount to the delivered items. The disclosures required by ASU No. 2009-13 also significantly improve financial reporting by providing users of financial statements with greater transparency of how a vendor allocates revenue in its arrangements, the significant judgments made, and changes to those judgments in allocating that revenue, and how those judgments affect the timing and amount of revenue recognition. ASU No. 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. The Company adopted the applicable requirements of ASU No. 2009-13 on February 6, 2011, and there was no material effect to the Company's financial statements.