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 was made for the intention 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 did not qualify for separate recognition and are 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 exclusively 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

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, 2012 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
	(In millions)
Net revenue	$	1,088.7
Loss from continuing operations	$	(328.5	)

The unaudited pro forma amounts have been calculated as if the acquisition had occurred on January 1, 2012 and include the following adjustments: (i) additional amortization expense of $5.1 million that would have been recorded for the intangible assets recognized as part of the acquisition, (ii) adjustment of $0.6 million 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 recognized as a result of the acquisition, (iv) the elimination of interest expense of $0.9 million 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 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, 2012. There were no material pro forma adjustments necessary as a result of conforming Nexsan’s accounting policies to those utilized by Imation.

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 sold the assets directly associated with these businesses, which primarily included inventory, tooling and intangible assets.

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 was 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 was recorded in other current assets on our Consolidated Balance Sheets. During 2014, the remaining $2.9 million note receivable balance was restructured into four installments with final payment due in 2015. Imation received $1.6 million of the note balance during 2014 and the remaining $1.3 million is recorded in other current assets on our December 31, 2014 Consolidated Balance Sheets. The second receivable was 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) and during 2014, we received the required payment on this note which was due within the year. We recorded this receivable at its estimated fair value which was calculated to be $4.5 million and $4.0 million as of December 31, 2014 and 2013, respectively. The sale of this business resulted in a net gain of $0.9 million which was recorded as an element of discontinued operations during the year ended 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 non-interest bearing receivable referenced above that was 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, 2014 and 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 included additional future cash consideration originally estimated at $3.0 million and which was based on the proceeds the purchaser was able to achieve from selling the acquired inventory. During 2013, we adjusted downward our estimate of the expected consideration to be received by $1.2 million. Accordingly, we adjusted the carrying value of the XtremeMac disposal group, and recorded a charge of $1.2 million in 2013 which brought our total full-year 2013 impairment charge associated with this disposal group to $6.7 million. We recorded a charge of $1.2 million in 2014 which is included in the loss on sale of discontinued businesses. The impairment charges are 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 were eliminated from our ongoing operations. See Note 7 - Restructuring and Other for disclosure of severance expense that was recorded relating to these planned divestitures.

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



	Years Ended December 31,
	2014			2013			2012
	(In millions)
Net revenue	$	0.4		$	40.7		$	92.9

(Loss) gain on sale of discontinued businesses, net of income taxes	$	(1.7	)	$	0.9		$	—
Loss from operations of discontinued businesses, before income taxes	(0.6		)	(14.2		)	(17.7		)
Adjustment to carrying value of disposal group	—			(6.7		)	—
Income tax benefit	—			—			(1.8		)
Loss from discontinued businesses, net of income taxes	$	(2.3	)	$	(20.0	)	$	(15.9	)