2. Acquisitions

The Company accounts for business combinations under the provisions of the Business Combination Topic of the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 805. Acquisitions are accounted for by the purchase method, and accordingly, the assets and liabilities of the acquired businesses have been recorded at their estimated fair value on the acquisition date with the excess of the purchase price over their estimated fair value recorded as goodwill. In the event the estimated fair value of the assets and liabilities acquired exceeds the purchase price paid, a bargain purchase gain is recorded in the statement of operations.

Acquisition-related costs are expensed as incurred. Acquisition-related costs are included in selling, general and administrative expenses in the Company’s condensed consolidated statement of operations and were $0.8 million and $1.9 million for the three months ended October 1, 2011 and October 2, 2010, respectively, and $4.9 million and $3.6 million for the nine months ended October 1, 2011 and October 2, 2010, respectively.

2011

Nesbitt

On August 1, 2011, the Company acquired essentially all of the assets of Nesbitt Graphics, Inc. (“Nesbitt”), which had annual net sales of approximately $5.6 million prior to the acquisition by the Company. Nesbitt is a niche content management business that focuses on high end book content development and project management offerings and was acquired to further enhance the Company’s content management operations. The total preliminary purchase price was approximately $5.0 million, and was preliminarily allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at their acquisition date. The Nesbitt acquisition preliminarily resulted in $1.3 million of goodwill, all of which is deductible for income tax purposes, and was assigned to the Company’s commercial printing segment. The Company believes that the recognized goodwill related to Nesbitt is due to expected synergies and a reasonable market premium. The acquired identifiable intangible assets relate to customer relationships of $1.4 million, which are being amortized over their estimated useful life of 10 years.

Nesbitt’s results of operations and cash flows are included in the Company’s condensed consolidated statements of operations and cash flows from August 1, 2011. Pro forma results for the three and nine months ended October 1, 2011 and October 2, 2010, assuming the acquisition of Nesbitt had been made on January 3, 2010, have not been presented since the effect would not be material.

Envelope Product Group

On February 1, 2011, the Company acquired the assets of MeadWestvaco Corporation’s Envelope Product Group (“EPG”). EPG manufactures and distributes envelope products for the billing, financial, direct mail and office products markets and had approximately 900 employees, all of which were located in the United States. Prior to the acquisition, EPG had annual net sales of approximately $240 million. The Company believes EPG will further strengthen its existing envelope operations and will provide for manufacturing efficiencies given EPG’s unique asset base and geographic overlap of facilities that exists between EPG and the Company’s existing envelope operations. EPG was assigned to the Company’s envelopes, forms and labels segment. The purchase price was approximately $55.2 million and was preliminarily allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at their acquisition date. The changes to the Company’s preliminary purchase price allocation primarily relate to inventory fair value of $0.5 million, revisions to property, plant and equipment valuations of $0.4 million and adjustments to certain accruals of $0.2 million to present them at their estimated fair value. The purchase price allocation will be finalized upon completion of property, plant and equipment valuations. The EPG acquisition preliminarily resulted in a bargain purchase gain of approximately $11.7 million, which was recognized in the Company’s condensed consolidated statement of operations. Prior to the recognition of the bargain purchase gain, the Company reassessed the preliminary fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition. The Company believes it was able to acquire EPG for less than the fair value of its net assets due to its operating results prior to the Company's acquisition and given its parent company’s desire to exit a non-core business. The acquired identifiable intangible assets relate to: (i) a trade name of $1.0 million, which is being amortized over its estimated useful life of 10 years and (ii) a patent of $0.5 million, which is being amortized over its estimated useful life of 15 years.

Preliminary Purchase Price Allocation

The following table summarizes the preliminary allocation of the purchase price of EPG to the assets acquired and liabilities assumed in the acquisition (in thousands):

	As of February 1, 2011
Accounts receivable, net	$	29,817
Inventories		21,893
Other current assets		386
Property, plant and equipment		38,388
Other intangible assets		1,500
Other assets		2,240
Total assets acquired		94,224
Current liabilities		25,583
Other liabilities		1,763
Total liabilities assumed		27,346
Net assets acquired		66,878
Cost of EPG acquisition		55,158
Gain on bargain purchase of EPG	$	11,720

The preliminary fair values of property, plant and equipment and intangible assets associated with the EPG acquisition were determined to be Level 3 under the fair value hierarchy. Property, plant and equipment values were estimated based on discussions with machinery and equipment brokers, internal expertise related to the equipment and current marketplace conditions. The trade name and patent intangible assets were valued using a relief from royalty method based on future estimated revenues. The inputs used in the relief from royalty method include discount rates based on a weighted average cost of capital, growth and relief from royalty rates as well as an obsolescence factor.

EPG’s results of operations and cash flows are included in the Company’s condensed consolidated statements of operations and cash flows from February 1, 2011 and are not included in 2010. As a result of the Company’s integration of EPG into the Company’s existing envelope operations, it is impracticable to disclose the amounts of revenues and earnings of EPG since the acquisition date.

Unaudited Pro Forma Financial Information

The following supplemental pro forma consolidated summary financial information of the Company for the three months ended October 2, 2010 and the nine months ended October 1, 2011 and October 2, 2010 presented herein has been prepared by adjusting the historical data as set forth in its condensed consolidated statements of operations to give effect to the EPG acquisition as if it had been made as of January 3, 2010 (in thousands, except per share amounts):

	Three Months Ended
	October 2, 2010
	As Reported					Pro Forma
Net sales	$		455,127			$		514,800
Operating loss			(156,129		)			(158,701	)
Loss from continuing operations			(159,989		)			(162,573	)
Net loss			(157,189		)			(159,773	)
Income (loss) per share – basic and diluted:
Continuing operations	$		(2.56		)	$		(2.60	)
Discontinued operations			0.04					0.04
Net loss	$		(2.52		)	$		(2.56	)

Weighted average shares outstanding:
Basic and diluted			62,473					62,473
		Nine Months Ended								Nine Months Ended
		October 1, 2011								October 2, 2010
		As Reported				Pro Forma				As Reported			Pro Forma
Net sales		$		1,498,816		$	1,519,598			$	1,354,325		$	1,539,216
Operating income (loss)				87,246			92,010				(124,552	)		(128,502	)
Income (loss) from continuing operations				5,963			1,731				(179,302	)		(180,498	)
Net income (loss)				5,963			1,731				(176,624	)		(177,820	)
Income (loss) per share – basic and diluted:
Continuing operations		$		0.09		$	0.03			$	(2.88	)	$	(2.90	)
Discontinued operations				—			—				0.04			0.04
Net income (loss)		$		0.09		$	0.03			$	(2.84	)	$	(2.86	)

Weighted average shares outstanding:
Basic				62,891			62,891				62,268			62,268
Diluted				63,157			63,157				62,268			62,268

The supplemental pro forma consolidated summary financial information is presented for comparative purposes only and does not purport to be indicative of the Company’s actual condensed consolidated results of operations had the EPG acquisition actually been consummated as of the beginning of the period noted above or of the Company’s expected future results of operations. The adjustments related to the EPG acquisition supplemental pro forma consolidated summary financial information above include the elimination of sales between the Company and EPG, removal of acquisition related expenses and bargain purchase gain related to the acquisition, an estimate of the interest expense related to the increased debt resulting from the EPG acquisition and an adjustment to the statutory income tax rate. In addition, the Company has performed its preliminary assessment of the purchase price allocation by identifying intangible assets and estimating the fair value of intangible and tangible assets, including a trade name, patent and property, plant and equipment for which pro forma adjustments have been made to depreciation and amortization expense related to these estimated fair values. Differences between the preliminary and final purchase price allocation could have a material impact on the supplemental pro forma consolidated summary financial information and the Company’s financial statements.

2010

Gilbreth

On November 29, 2010, the Company acquired the common stock of Impaxx, Inc., the sole owner of CMS Gilbreth Packaging Solutions, Inc. (“Gilbreth”), which had annual net sales of approximately $17.0 million prior to its acquisition by the Company. This acquisition expands the Company’s packaging platform to include shrink sleeve printing. Gilbreth focuses on manufacturing full body shrink sleeves and tamper evident neck bands, mainly in the food and beverage, pharmaceutical and neutraceutical markets. The total purchase price was approximately $18.7 million and was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair value at the acquisition date. The changes to the Company’s purchase price allocation of $2.4 million primarily relate to the completion of the pre-acquisition period income tax returns and the allocation of tax loss attributes to the Company on a post-acquisition basis. The Gilbreth acquisition resulted in $3.1 million of goodwill, none of which is deductible for income tax purposes, and which was assigned entirely to the Company’s commercial printing segment. The acquired identifiable intangible assets relate to: (i) the Gilbreth trade name of $3.9 million, which is being amortized over its estimated useful life of 20 years, and (ii) customer relationships of $3.1 million, which are being amortized over their estimated weighted average useful lives of 15 years.

Gilbreth’s results of operations and cash flows are included in the Company’s condensed consolidated statements of operations and cash flows from November 29, 2010. Pro forma results for the three and nine months ended October 2, 2010, assuming the acquisition of Gilbreth had been made on January 4, 2009, have not been presented since the effect would not be material.

Glyph

On May 31, 2010, the Company acquired all of the common stock of Glyph International and its subsidiaries (“Glyph”), which had annual net sales of approximately $9.0 million prior to its acquisition by the Company. Glyph is a leading provider of content solutions to publishers, with operations in Bangalore and New Delhi, India, and was acquired to further enhance the Company’s content management operations. Glyph specializes in full suite content production, from project management through editorial, composition, artwork, and XML creation. The total purchase price was $15.1 million, net of cash acquired of $2.3 million and was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The Glyph acquisition resulted in $9.5 million of goodwill, none of which is deductible for income tax purposes, and which was assigned entirely to the Company’s commercial printing segment. The acquired identifiable intangible assets relate to: (i) customer relationships of $3.1 million, which are being amortized over their weighted average useful lives of seven years, and (ii) a trade name of $0.4 million, which is being amortized over its useful life of four years.

Glyph’s results of operations and cash flows are included in the Company’s condensed consolidated statements of operations and cash flows from June 1, 2010. Pro forma results for the nine months ended October 2, 2010, assuming the acquisition of Glyph had been made on January 4, 2009, have not been presented since the effect would not be material.

Clixx

On February 11, 2010, the Company acquired the assets of Clixx Direct Marketing Services, Inc. (“Clixx”), which had annual net sales of approximately $16.7 million prior to its acquisition by the Company. The acquisition of Clixx allows the Company’s Canadian operations an opportunity to provide certain customers with end-of-production capabilities. The total purchase price was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The Clixx acquisition resulted in $5.3 million of goodwill, all of which is deductible for income tax purposes, and was assigned entirely to the Company’s commercial printing segment. The acquired identifiable intangible asset relates to customer relationships of $1.3 million, which are being amortized over their weighted average useful lives of nine years.

Clixx’s results of operations and cash flows are included in the Company’s condensed consolidated statements of operations and cash flows from February 11, 2010. Pro forma results for the nine months ended October 2, 2010, assuming the acquisition of Clixx had been made on January 4, 2009, have not been presented since the effect would not be material.