Acquisitions and Divestitures

Acquisitions

Nexsan Corporation

On December 31, 2012, we acquired Nexsan Corporation (Nexsan) which is a provider of disk-based storage systems and has a portfolio of disk-based and hybrid disk-and-solid-state storage systems with existing customers worldwide. This acquisition is intended to significantly accelerate our growth in the small and medium-sized business and distributed enterprise storage markets. The purchase price consisted of a cash payment of $104.6 million (subject to adjustment based primarily on working capital received) and 3,319,324 shares of our common stock which was the equivalent of $15.5 million based on the fair value of our stock on the date of acquisition. Nexsan is a part of our TSS reporting segment.

The preliminary purchase price allocation during the fourth quarter of 2012 resulted in goodwill of $65.5 million, primarily attributable to strategic synergies and intangible assets that do not qualify for separate recognition and is not deductible for tax purposes. During 2013, we recorded an adjustment to the purchase price related to working capital in the amount of $1.6 million. This adjustment resulted in a decrease to goodwill and a cash receipt for this amount. Goodwill associated with the acquisition of Nexsan is included in our Storage Solutions reporting unit, which consists primarily of the Nexsan business, for the purposes of goodwill impairment testing. See Note 6 - Intangible Assets and Goodwill for more information regarding goodwill. The purchase accounting for this acquisition was final as of December 31, 2013. The purchase price remained preliminary prior to December 31, 2013 pending final evaluation of income tax balances of which there were no further adjustments upon finalization of these balances. The following table illustrates our allocation of the purchase price to the assets acquired and liabilities assumed as of December 31, 2013:



	Amount
	(In millions)
Cash	$	0.8
Accounts receivable	14.6
Inventory	6.9
Prepaid and other	9.0
Property, plant and equipment	5.2
Intangible assets	42.6
Goodwill	63.9
Other assets	0.6
Accounts payable	(5.3		)
Accrued expenses	(10.0		)
Deferred revenue - current	(4.3		)
Deferred revenue - non-current	(2.5		)
Other long-term liabilities	(3.0		)
	$	118.5

Of the $120.1 million of consideration paid in 2012, approximately $11.9 million was paid directly to creditors of Nexsan in full satisfaction of Nexsan obligations that were required to be repaid at the time of closing based on the merger agreement.

Our allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible assets:



			Weighted
			Average
	Amount		Life
	(In millions)
Trade names	$	3.1	5 years
Other - developed technology	19.4		3-7 years
Other - research and development technology	1.7		NA
Customer relationships	18.4		12 years
	$	42.6

Nexsan did not contribute to the revenue or earnings of Imation for the year ended December 31, 2012, as it was acquired on December 31, 2012. The following unaudited supplemental pro forma information is provided for illustrative purposes only, giving effect to the combination as if the acquisition of Nexsan had occurred on January 1, 2011 and should not be relied upon as being indicative of the historical results that would have been obtained if the acquisition had actually occurred on that date, nor of the results that may be obtained in the future.



	Pro Forma Year End
	December 31
	(Unaudited)
	2012			2011
	(In millions)
Net revenue	$	1,088.7		$	1,247.2
Loss from continuing operations	$	(328.5	)	$	(44.7	)

The unaudited pro forma amounts have been calculated as if the acquisition had occurred on January 1, 2011 and include the following adjustments: (i) additional amortization expense of $5.1 million for each of the years ended December 31, 2012 and 2011 that would have been recorded for the intangible assets recognized as part of the acquisition, (ii) adjustment of $0.6 million and $1.1 million and for the years ended December 31, 2012 and 2011, respectively, associated with the deferred revenue recorded as part of the purchase accounting for the acquisition, (iii) the elimination of transaction related variable compensation expense of $15.4 million for the year ended December 31, 2012, recognized as a result of the acquisition, (iv) the elimination of interest expense of $0.9 million and $1.0 million for the years ended December 31, 2012 and 2011, respectively, related to Nexsan debt obligations that were repaid upon closing of the acquisition and (v) the elimination of transaction costs incurred of $4.3 million for the year ended December 31, 2012 directly associated with the acquisition of Nexsan. Pro forma loss from continuing operations has also been calculated to reflect estimated adjustments to Imation’s income tax provision as if the acquisition had occurred on January 1, 2011. There were no material pro forma adjustments necessary as a result of conforming Nexsan’s accounting policies to those utilized by Imation.

IronKey Systems, Inc.

On October 4, 2011, we acquired the secure data storage hardware business of IronKey Systems Inc. (IronKey) for a cash payment of $19.0 million. During 2012, we purchased the IronKey license for its secure storage management software and service and the IronKey brand for secure storage products for $4.0 million (we held a license for brand use in 2011 with the acquisition of IronKey). IronKey is a part of our TSS reporting segment.

The purchase price allocation resulted in goodwill of $9.4 million, primarily attributable to expected strategic synergies and intangible assets that do not qualify for separate recognition and is deductible for tax purposes. Goodwill associated with the acquisition of IronKey is included in our Mobile Security reporting unit for the purposes of goodwill impairment testing. See Note 6 - Intangible Assets and Goodwill for more information regarding goodwill. During 2012, we recorded an adjustment to the purchase price related to working capital in the amount of $0.6 million. As the purchase accounting for this acquisition was finalized in 2011, the adjustment was recorded as a charge to restructuring and other in our Consolidated Statements of Operations. The comparability of our results with this acquisition was not materially impacted and therefore, pro forma disclosures have not been presented.

The following table illustrates our allocation of the purchase price to the assets acquired and liabilities assumed:



	Amount
	(In millions)
Accounts receivable and other assets	$	3.5
Inventories	2.1
Intangible assets	7.8
Goodwill	9.4
Accounts payable and other liabilities	(3.8		)
	$	19.0

Our allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible assets:



			Weighted
			Average
	Amount		Life
	(In millions)
Tradename	$	0.8	2 years
License	1.9		7 years
Customer relationships	0.4		7 years
Distributor relationships	0.9		9 years
Proprietary technology	3.8		4 years
	$	7.8

These intangible assets were not impaired as a part of the impairment recorded during the fourth quarter of 2012 as discussed further in Note 6 - Intangible Assets and Goodwill.

Memory Experts International, Inc. (MXI Security)

On June 4, 2011, we acquired the assets of MXI Security, a leader in high-security and privacy technologies, from Memory Experts International Inc., (MXI). MXI sells encrypted and biometric USB drives, encrypted and biometric hard disk drives, secure portable desktop solutions, and software solutions. MXI products contain various security features such as password authentication, encryption and remote manageability. The purchase price consisted of a cash payment of $24.5 million and contingent consideration for potential additional future payments of up to $45.0 million (considered to have an estimated fair value of $9.2 million at the time of the acquisition) for a total purchase price of $33.7 million. MXI is a part of our TSS reporting segment.

The purchase price allocation resulted in goodwill of $21.9 million, primarily attributable to expected strategic synergies and intangible assets that do not qualify for separate recognition and is deductible for tax purposes. Goodwill associated with MXI is included in our Mobile Security reporting unit for the purposes of goodwill impairment testing. See Note 6 - Intangible Assets and Goodwill for more information regarding goodwill. The comparability of our results with this acquisition was not materially impacted and therefore, pro forma disclosures have not been presented.

The following table illustrates our allocation of the purchase price to the assets acquired and liabilities assumed:



	Amount
	(In millions)
Accounts receivable and other assets	$	0.8
Inventories	1.1
Intangible assets	10.6
Goodwill	21.9
Accounts payable and other liabilities	(0.7		)
	$	33.7

Our allocation of the purchase price to the assets acquired and liabilities assumed resulted in the recognition of the following intangible assets:



			Weighted
			Average
	Amount		Life
	(In millions)
Trademark	$	0.7	10 years
Supply agreement	1.4		3 years
Customer relationships	1.0		8 years
Proprietary technology	7.5		6 years
	$	10.6

During 2012, the MXI trademark was abandoned due to consolidation of our brands and we recorded a charge of $0.6 million in our Consolidated Statement of Operations.

The amount of contingent consideration for this acquisition was based on incremental gross profit (revenue less cost of goods sold) and gross margin percent from MXI branded products, IronKey products and all other Mobile Security branded products, as well as future Imation mobile security products.

During 2012 and 2013, we remeasured the estimated fair value of any contingent consideration each reporting period. At December 31, 2012, our estimated fair value of this contingent consideration obligation was determined to be $0.6 million. The decrease in the fair value of this contingent consideration obligation from December 31, 2011 was $8.6 million which was recorded as a benefit in restructuring and other in our Consolidated Statements of Operations. During 2013, the contingent consideration agreement expired and the criteria for the contingent consideration payments were not achieved. Therefore, the associated liability was adjusted to zero and we recorded a benefit of $0.6 million in restructuring and other in our Consolidated Statements of Operations.

We used the income approach in calculating the fair value of our contingent consideration during the period in which this arrangement was outstanding.

BeCompliant Corporation (doing business as Encryptx)

On February 28, 2011 we acquired substantially all of the assets of BeCompliant Corporation, doing business as Encryptx (Encryptx), a technology leader in encryption and security solutions for removable storage devices and removable storage media. The purchase price was $2.3 million, consisting of a cash payment of $1.0 million and the estimated fair value of future contingent consideration of $1.3 million. Encryptx is a part of our TSS reporting segment.

The purchase price allocation resulted in goodwill of $1.6 million, primarily attributable to expected strategic synergies and intangible assets that do not qualify for separate recognition and is deductible for tax purposes. Goodwill associated with MXI is included in our Mobile Security reporting unit for the purposes of goodwill impairment testing. See Note 6 - Intangible Assets and Goodwill for more information regarding goodwill. During 2013 and 2012 we paid contingent consideration payments of $0.8 million and $0.7 million, respectively, based on certain milestones. The contingent consideration arrangement expired in 2013 and, as a result, the contingent consideration liability is zero as of December 31, 2013.

Discontinued Operations

On February 13, 2013, we announced our plans to divest our XtremeMac and Memorex consumer electronics businesses. The consumer storage business under the Memorex and TDK Life on Record brands and the consumer electronics business under the TDK Life on Record brand are being retained. These divestitures are part of the acceleration of our strategic transformation that we announced during the fourth quarter of 2012 in conjunction with our plan to increase focus on data storage and data security and were included in our CSA reporting segment. As a part of exiting these disposal groups, we are selling the assets directly associated with these businesses, which primarily include inventory, tooling and intangible assets. As a result of this decision, beginning in the first quarter of 2013, we classified these assets as held-for-sale which is included in other current assets on our Consolidated Balance Sheets.

On October 15, 2013 we completed the sale of the Memorex consumer electronics business for $9.3 million of total consideration consisting of two separate receivables from the purchaser. The first is a $3.8 million note receivable that required a $0.9 million payment in December 2013 with the remainder to be paid by March 31, 2014. We received the required $0.9 million cash payment during the fourth quarter of 2013, leaving a $2.9 million note receivable balance as of December 31, 2013 which is recorded in other assets on our Consolidated Balance Sheets. The second receivable is for $5.5 million and does not bear interest. This receivable requires payments between 2014 and 2018 in increasing annual increments (ranging from $0.2 million in 2014 to $2.2 million in 2018). We recorded this receivable at its estimated fair value which was calculated to be $4.0 million and as of December 31, 2013, $0.2 million and $3.8 million are recorded in other current assets and other assets, respectively, on our Consolidated Balance Sheets. The sale of this business resulted in a net gain of $0.9 million which was recorded as an element of discontinued operations as of December 31, 2013. Our arrangement for the sale of this business also provides Imation with the ability to receive additional consideration through 2018 to the extent the purchaser’s sales exceed certain thresholds. We will record this additional consideration, if any, only upon these sales levels being achieved by the purchaser in the future.

We use the income approach in calculating the fair value of the $5.5 million non-interest bearing receivable associated with this acquisition. Our expected cash flows are affected by various significant assumptions, including the discount rate and cash flow projections. Our valuation as of December 31, 2013 utilized a discount rate of 9.0 percent.

On January 31, 2014 we completed the sale of the XtremeMac business. The sales price consisted of $0.3 million of cash consideration received at closing and an interest-bearing note receivable of $0.3 million due on December 15, 2015. The sales price also includes additional cash consideration estimated at $3.0 million to be received based on the proceeds the purchaser is able to achieve from selling the acquired inventory. Based on the estimated value of the expected total consideration received, we adjusted the carrying value of the XtremeMac disposal group as of December 31, 2013, and recorded a charge of $1.2 million in the fourth quarter of 2013 bringing our total full-year 2013 impairment charge associated with this disposal group to $6.7 million. The impairment charge is recorded as an element of discontinued operations.

The operating results for these businesses are presented in our Consolidated Statements of Operations as discontinued operations for all periods presented and reflect revenues and expenses that are directly attributable to these businesses that will be eliminated from ongoing operations. See Note 7 - Restructuring and Other for disclosure of severance expense that was recorded relating to these planned divestitures. As of December 31, 2013, the XtremeMac assets are classified as held-for-sale.

The key components of the results of discontinued operations were as follows:



	Years Ended December 31,
	2013			2012			2011
	(In millions)
Net revenue	$	40.7		$	92.9		$	123.8

Gain on sale of discontinued businesses, net of income taxes	$	0.9		$	—		$	—
Loss from operations of discontinued businesses, before income taxes	(14.2		)	(17.7		)	(12.7		)
Adjustment to carrying value of disposal group	(6.7		)	—			—
Income tax benefit	—			(1.8		)	(1.2		)
Loss from discontinued businesses, net of income taxes	$	(20.0	)	$	(15.9	)	$	(11.5	)

We had $5.2 million and $2.5 million of assets classified as held for sale as of December 31, 2013 and 2012, respectively.