Note 3: Acquisitions

We acquired Alphagraph, Prism, Entrac, and Streamline during 2011, while Radius was acquired in 2010. These acquisitions were accounted for as purchase business combinations. In accordance with ASC 805, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the acquisition date based on the valuation performed by management with the assistance of a third party. Excess purchase consideration was recorded as goodwill. Factors contributing to a purchase price that results in goodwill include, but are not limited to, the retention of research and development personnel with skills to develop future technology, support personnel to provide maintenance services related to the products, a trained sales force capable of selling current and future products, the opportunity to cross-sell Streamline and Radius products to existing customers, the opportunity to sell PrintSmith, Pace, Monarch, and Radius products to Alphagraph and Prism customers, and the positive reputation of each of these companies in the market.

We engaged a third party valuation firm to aid management in its analyses of the fair value of these acquired businesses. All estimates, key assumptions, and forecasts were either provided by or reviewed by us. While we chose to utilize a third party valuation firm, the fair value analyses and related valuations represent the conclusions of management and not the conclusions or statements of any third party. The purchase price allocations are subject to change within the respective measurement periods as valuations are finalized. We expect to continue to obtain information to assist us in finalizing the fair value of the net assets acquired at the respective acquisition dates during the respective measurement periods. Measurement period adjustments determined to be material will be applied retrospectively to the appropriate acquisition date in our consolidated financial statements and, depending on the nature of the adjustments, our operating results subsequent to the acquisition period could be affected.

alphagraph team GmbH

On December 6, 2011, we purchased privately-held Alphagraph, a German company headquarterd in Essen, Germany, for approximately $9.5 million, net of cash acquired, plus an additional future cash earnout, which is contingent on achieving certain performance targets. Alphagraph provides business process automation solutions for the graphic arts industry. Support and operations of Alphagraph will be integrated into the APPS operating segment, which will provide PrintSmith, Pace, Monarch, and Radius products, while continuing to support existing Alphagraph customers.

The fair value of the earnout is currently estimated to be $2.5 million by applying the income approach in accordance with ASC 805-30-25-5. Key assumptions include a discount rate of 4.9% and a probability-adjusted level of Alphagraph revenue. Probability-adjusted revenue is a significant input that is not observable in the market, which ASC 820-10-35 refers to as a Level 3 input. This contingent liability is reflected in the Consolidated Balance Sheet as of December 31, 2011, as a current and noncurrent liability of $1.3 and $1.2 million, respectively.

Prism Group Holdings Limited

On August 2, 2011, we purchased privately held Prism, a U.K. limited liability company, the parent holding company of Prism Group Holdings Limited, Prism USA Holdings, Inc., and QTMS 2006 Limited (UK) ("Prism"), for cash consideration of approximately $11.5 million, net of cash acquired. Headquartered in New Zealand, Prism is a provider of business process automation software for the printing and packaging industry including automated shop floor management and work in progress tracking. Support and operations of Prism will be integrated into the APPS operating segment, which will provide PrintSmith, Pace, Monarch, and Radius products, while continuing to support existing Prism customers.

Entrac Technologies, Inc.

On July 25, 2011, we purchased privately-held Entrac, a Canadian company headquartered near Toronto, Canada, which was a subsidiary of GLIC Corporation Limited, for cash consideration of approximately $6.4 million, net of cash acquired, plus an additional future cash earnout contingent on achieving certain performance targets. Entrac provides self-service and payment solutions for business services including mobile printing and has been incorporated into the Fiery operating segment.

The fair value of the earnout is currently estimated to be $2.8 million by applying the income approach in accordance with ASC 805-30-25-5. Key assumptions include a discount rate of 5.8% and a probability-adjusted level of Entrac revenue. Probability-adjusted revenue is a significant input that is not observable in the market, which ASC 820-10-35 refers to as a Level 3 input. This contingent liability is reflected in the Condensed Consolidated Balance Sheet as of December 31, 2011, as a current and noncurrent liability of $1.4 and $1.4 million, respectively.

Streamline Development, LLC

On February 16, 2011, we purchased privately-held Streamline for cash consideration of approximately $6.8 million, net of cash acquired, plus an additional future cash earnout contingent on achieving certain performance targets. Streamline is the provider of PrintStream business process automation software, which we acquired to establish our APPS operating segment presence in mailing and fulfillment services for the printing industry.

The fair value of the earnout is currently estimated to be $1.3 million by applying the income approach in accordance with ASC 805-30-25-5. Key assumptions include a discount rate of 6.1% and a probability-adjusted level of Streamline revenue. Probability-adjusted revenue is a significant input that is not observable in the market, which ASC 820-10-35 refers to as a Level 3 input. This contingent liability has been reflected in the Condensed Consolidated Balance Sheet as of December 31, 2011, as a current and noncurrent liability of $0.5 and $0.8 million, respectively.

The potential undiscounted amount of future contingent consideration cash payments that we could be required to make related to the Alphagraph, Entrac, and Streamline acquisitions, beyond amounts currently accrued, is $0.6 million as of December 31, 2011.

Radius Solutions Incorporated

On July 2, 2010, we purchased privately held Golflane, a U.K. private limited company, the parent holding company of Radius, for approximately $14.1 million, net of cash acquired, plus an additional future cash earnout contingent on achieving certain performance targets. Radius is a print management software company headquartered in Chicago, Illinois, that provides business process automation solutions for the label and packaging industry and has been incorporated into our APPS operating segment.

The fair value of the earnout was estimated to be $2.3 million by applying the income approach in accordance with ASC 805-30-25-5. Key assumptions included a discount rate of 6.3% and probability-adjusted level Radius revenues. Probability-adjusted revenue is a significant input that is not observable in the market, which ASC 820-10-35 refers to as a Level 3 input. As of December 31, 2011, approximately $4.2 million had been earned against the earnout. The $1.9 million excess above the valuation at the acquisition date was expensed as a component of general and administrative expense in accordance with ASC 805.

Valuation Methodology

Intangible assets acquired consist of customer relationships, trade names, existing technology, and IPR&D. Each intangible asset valuation methodology assumes a discount rate between 15% and 23%.

Alphagraph, Prism, Streamline, and Radius customer relationships were valued using the excess earnings method, which is an income approach. The value of customer relationships lies in the generation of a consistent and predictable revenue source and the avoidance of the costs associated with developing the relationships. Customer relationships were valued by estimating the revenue attributable to existing customer relationships, probability-weighted in each forecast year to reflect the uncertainty of maintaining existing relationships based on historical attrition rates.

Entrac customer relationships were valued based on the "with and without" method, which is an income approach. Customer relationships were valued by assessing the profitability improvement resulting from the acquisition of Entrac's customer relationships assuming that it would take us four years to develop these relationships on our own, assuming reasonable customer development costs. Revenue was also probability-weighted in each forecast year to reflect the uncertainty of maintaining these acquired relationships based on historical attrition rates.

Alphagraph, Prism, Streamline (PrintStream), and Radius trade names were valued using the relief from royalty method with royalty rates based on various factors including an analysis of market data, comparable trade name agreements, and consideration of historical advertising dollars spent supporting the trade names.

Alphagraph, Prism, Streamline, and Radius existing technology and IPR&D were valued using the relief from royalty method based on royalty rates for similar technologies. Entrac existing technology and IPR&D were valued using the excess earnings method. The value of existing technology is derived from consistent and predictable revenue, including the opportunity to cross-sell Prism, Entrac, and Streamline products to existing customers, and the avoidance of the costs associated with developing the technology. Revenue related to existing technology was adjusted in each forecast year to reflect the evolution of the technology.

Using each of these methodologies, the value of IPR&D was determined by estimating the cost to develop purchased IPR&D into commercially viable products, estimating the net cash flows resulting from the sale of those products, and discounting the net cash flows back to their present value. Project schedules were based on management's estimate of tasks completed and tasks to be completed to achieve technical and commercial feasibility.


	Prism	Entrac			Streamline
Discount rate for IPR&D	23%		22	%		20	%
IPR&D percent complete at acquisition date	50%		48 -79%			78 -89%
IPR&D percent complete at December 31, 2011	95%		87 -95%			92 -98%

The preliminary allocation of the purchase price to the assets acquired and liabilities assumed (in thousands) with respect to each of these acquisitions at their respective acquisition dates is summarized as follows:


	Alphagraph					Prism					Entrac				Streamline				Radius
	Weighted average useful life		Purchase Price Allocation			Weighted average useful life		Purchase Price Allocation			Weighted average useful life		Purchase Price Allocation		Weighted average useful life		Purchase Price Allocation		Weighted average useful life		Allocation at December 31, 2010
Customer relationships		6 years	$	4,220			5 years	$	2,870			5 years	$	2,340		5 years	$	3,060		5 years		3,101
Existing technology		4 years		1,270			3 years		1,120			2 - 5 years		1,290		3 years		670		5 years		2,850
Trade names		4 years		360			5 years		400			—		—		5 years		340		6 years		1,050
IPR&D		—		—			3 years		186			5 years		410		5 years		110		—		—
Goodwill				8,645					8,011					4,611				3,364				13,774

				14,495					12,587					8,651				7,544				20,775
Net tangible assets (liabilities)				(1,970	)				(665	)				579				1,154				(4,075	)

Total purchase price			$	12,525				$	11,922				$	9,230			$	8,698			$	16,700

IPR&D is subject to amortization after product launch over the product life or otherwise subject to impairment in accordance with the acquisition accounting guidance that became effective in 2009. Pro forma results of operations for these acquisitions have not been presented because they are not material to our consolidated results of operations. Goodwill, which represents the excess of the purchase price over the net tangible and intangible assets acquired, is not deductible for tax purposes.

Alphagraph generates revenue and incurs operating expenses in Euros; accordingly, we have adopted the Euro as the functional currency for Alphagraph. Prism generates revenue and incurs operating expenses in British pounds sterling; accordingly, we have adopted British pounds sterling as the functional currency for Prism.

The U.S. operations of Radius were integrated into our U.S. operations and its U.K. entities were integrated into our U.K. operations. Radius U.K. generates revenue and incurs operating expenses in British pounds sterling. This resulted in a change in the functional currency of our EFI U.K. entity to the British pound sterling.