Spear Point Capital Partners LLC

400 Poydras, Suite 2100

New Orleans, LA 70130

November 6, 2014

Re:

The Battle for Imation Begins

Dear Common Shareholders of Imation Corp.,

Spear Point Capital Partners LLC1 and other investors supportive of our views currently own more than
936,000 shares of Imations (Company) Common Stock. We believe the Common Stock of the
Company is significantly undervalued and we have concerns about the Companys ability to increase
value for a number of reasons. Despite spending over $800 million in cash and stock for acquisitions
since 20062 and generating over $700 million in revenue over the past 12 months, Imation essentially
has no enterprise value. Today, the Companys market capitalization stands at $121.9 million3 and has
net cash on the balance sheet of $91 million. It also boasts a real estate portfolio we conservatively
value at $25 million as well as more than 300 patents across a broad range of technologies4. Even if you
were to value the patent portfolio at $0, the combination of the cash plus the real estate nearly equals
the Companys market cap. Therefore, investors essentially get a $700 million a year business for free.
Just a little less than two years ago the Company paid $120 million to acquire an $80 million a year
business, namely Nexsan, that surely has some value to someone. The Company also owns or licenses
world renown brands (e.g. Memorex, TDK), a very interesting business in IronKeys Windows to Go
products, a growing audio accessories brand, 20% of the world wide magnetic tape market, over $500
million in net operating losses that could be used to shield future income from taxes, and a tremendous
intellectual property portfolio that could hold significant untapped value. Investors get all of this for
free. The fact that this Company is valued at zero is ludicrous.
Unfortunately, this value reflects the markets judgment on the Companys performance and leadership.
It appears that the only thing Imation has excelled at over the years is the creation of a mountain of net
1

References to Spear Point or we, us or our are references to Spear Point Capital Partners LLC together with its
affiliates.
2

Source: Various Company filings and announcements

Based on 41.2 million shares outstanding as per Companys most recent earnings call

Stated by CEO Mark Lucas in our meeting with him on October 27, 2014

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operating losses. The time has come to make serious changes to the Companys strategy, get the right
people in leadership roles, and push for significant changes at the Board level and demand results rather
than words. From this point forward, the status quo has to go.
Management must know that the time for excuses is long past and either they deliver on the strategic
plan and create shareholder value or they will be replaced. The management team says a lot of the
right things, but still the Company remains shackled with dying, value killing business units, an
incoherent strategy and mounting losses.
Clearly CEO Mark Lucas must bear responsibility for the long suffering shareholders, but the Board is at
least equally culpable, if not more so. Year in and year out the Companys Board of Directors (the
Board) has hired senior management that not only has failed to create shareholder value in the
biggest bull market in history5, but actually destroyed incredible amounts of shareholder value during
that time. Board members own very little stock in the Company yet pay themselves at rates more
appropriate to companies 90x bigger6 than the one in which they have served as shepherds of
shareholder value. In the Companys proxy statement filed March 26, 2014, we note Board members
serving a full term received an average of $288,883. On May 9, 2014, Lee Schafer of the Star Tribune
wrote in an article entitled Imation board's pay is unhinged from results7:
Consider that the average board compensation last year at Imation $288,883 is for
just eight board meetings a year plus a few committee meetings. And the nonexecutive
chairman was paid $443,000.
All shareholders should express their frustration at the Board and demand results or resignations.

History of Our Interactions with the Company

On September 10, 2014, we submitted a letter to the Board urging them to review the Companys
opportunities and assets and devise a strategy to maximize value for the Companys shareholders (full
text of that letter attached). We noted our belief that the separate value of the Companys businesses
and assets may be significantly greater than the value implied by the Companys market capitalization,
and requested the Board consider transactions and other initiatives to realize full value for the
Companys shareholders.
In our letter we stressed three key factors we believe are retarding value creation:
1) Flawed Strategy The Company has lurched from acquisition to acquisition with what can only
be described as disastrous results. In the face of the Companys decline in market value, the
Company has continued to pursue its dual strategy of retaining its eroding Consumer Storage
and Accessories (CSA) segment while simultaneously trying to grow its digital storage and
security business, which it refers to as the Tiered Storage and Security Solutions segment
(TSS). The market has displayed no confidence in this strategy.
5

The current bull market is generally agreed to have begun March 9, 2009 and Imations market capitalization at that time
stood at $265.2 million.
6

See Spear Point Letter to the Board of Directors dated September 10, 2014

Star Tribune: Imation boards pay is unhinged from results (http://www.startribune.com/business/258710371.html)

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2) Lack of Focus The pursuit of multiple, non-related markets has led to confusion by investors
and a lack of sustained execution by Company management. The Company lacks focus and this
has been a key driver of value destruction. Accordingly, we believe the best course of action is
to divest the CSA assets and focus on TSS business.
3) Leadership As Albert Einstein famously noted, Problems cannot be solved with the same
mindset that created them. We believe this accurately describes the state of play at Imation.
Born from the spin-out of 3M, Imation has never seemed to be able to find the right strategy
and laser focus necessary to create shareholder value. The Company has lurched from one
strategy to the next, spending money wildly on ill-suited acquisitions and half-baked ideas.
Ultimately, the Board and Management must be held accountable for results.
To remedy this sorry state of affairs, we recommended five initiatives to the Board:
1) Divest CSA Hire an investment bank to review alternatives for the divestiture of the CSA unit,
including a sale to a strategic buyer or a spin-off to create a stand-alone company.
2) Sell Real Estate Execute on the Companys stated goal of selling the Companys real estate
holdings.
3) Monetize Patent Portfolio Develop a strategy for maximizing the value of the Companys
intellectual property, which may include licensing the right to enforce Companys patents.
4) Realign Compensation Imation operates with a Fortune 500 mindset and Fortune 500
paychecks for the management AND the Board. As stated in our letter to the Board:
"compensation needs to be comparable to companies of similar size. We note that
the companies held out to be peers by the compensation consultant engaged by the
Boards Compensation Committee were in fact all companies significantly larger in
market capitalization than the Company an average of approximately $9.5
BILLION as of this writing compared to the Companys $129.9 MILLION. We are
not alone in our belief that compensation is out of line, as evidenced by the high
number of shareholders voting against the Companys executive compensation plan8

This situation is unconscionable.

5) Change Leadership Replace senior management with new leaders who possess the experience
to execute on a strategy focused on the TSS business and can credibly drive the Company to
profitability. Further, strengthen the Board with new members who share this expertise and
commitment to shareholder value.
In short, our letter called for the Board to adopt a plan of action including the sale of CSA business and
the corporate real estate, with proceeds from both actions flowing to shareholders through special
dividends.9 In our opinion, these steps, combined with new senior management at the Company, would
leave the Company with a strong balance sheet supporting a single business strategy TSS and a pure
play story more readily valued by investors. We concluded our letter by requesting the Board to meet
with us and discuss our concerns.

Source: Imation Corp. Form 8-K dated May 8, 2014

One potentially controversial idea we espoused was returning to shareholders, in the form of dividends, proceeds from the sales of the
Companys real estate portfolio and CSA unit rather than retaining these proceeds in the Companys coffers. We could be swayed to support
retaining these proceeds in the Company if the Company undertakes and executes on substantive strategic changes. However, the current
state of the Company makes it hard to believe that these dollars would be used in ways that create value rather than destroy it.

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The Board has thus far declined our request, although they offered to have Company management meet
and discuss the Companys businesses. Ultimately, we accepted this invitation and met with the
Companys management team at their Oakdale, Minnesota headquarters on October 27, 2014. The
meeting was cordial and attended by CEO Mark Lucas, CFO Scott Robinson, and John Breedlove, the
Companys general counsel.
At the meeting, the Companys management spoke to some of our concerns. Regarding the CSA
segment, CEO Lucas noted they have been working to restructure the business units so that a sale could
be more readily pursued if that were deemed in the best interest of the Company, although he did not
indicate the Company was pursuing the sale of the CSA unit at this time. In fact, rather than discuss
options for exiting the CSA business, Mr. Lucas expressed enthusiasm for the units new consumer
electronics products being introduced to market. The Company is pursuing a sale of its real estate as
previously announced, although there is no consideration of returning any proceeds generated to
shareholders in the form of a special dividend. The management team also claimed to be defending the
Companys patents and intellectual property, although there was no immediate plan to monetize these
assets. Finally, Mr. Lucas reported the Company is reassessing compensation and has recently replaced
key leaders at Nexsan.
The meeting did little to allay our main concerns. We remain of the opinion that value of the Companys
businesses and assets may be far greater than the Companys current market capitalization, and that the
best plan to realize this value would be for the Company to sell the Companys CSA business and real
estate and implement a plan to grow the TSS business under appropriate leadership.

CSA or TSS: To be or not to be

The Company must focus on one industry segment in order to create value. It does not have the
balance sheet nor the expertise to pursue its current dual market strategy. The two business units have
little synergies: different end users, sales cycles, sales channels, go to market strategies and
manufacturing. Even worse, it confuses investors. Therefore, we believe the Company must divest
either the CSA or TSS units. Our opinion is shareholders would be better served by the Company selling
the CSA unit and retaining the TSS business.
Revenues in the CSA unit have been declining sharply. The following table details performance over the
last two years:

CSA Total Revenue

Cons Storage Media
Audio Accessories

Trailing
12 Month
$418.40

Prior
12 Month
$517.50

$79.40
$12.60

$370.30
$48.10

$475.80
$41.70
Prior
12 Month*
21.33%
$46.00

4Q 2012 1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014

$170.50 $121.80 $116.90
$108.30 $131.30 $100.00
$95.10
$92.00
$157.00
$13.50

$114.20 $107.30
$7.60
$9.60

Gross Margin CSA

18.90%

17.70%

Operating Income CSA

$16.00

$5.90

30.20%
$20.80

$97.30
$11.00

$116.90
$14.40

$89.50
$10.50

$84.50
$10.60

18.50%

28.00%

19.30%

19.00%

21.50%

Trailing
12 Month*
21.95%

$3.30

$22.30

$4.10

$3.20

$5.40

$35.00

Y-to-Y
Change
-24%
-28%
13%

-31%

(* Gross Margin numbers represent an average for the period)

If you go further back in time, the decline is even more ominous. Although the Audio & Accessories
(A&A) product group (which consists of consumer electronics products such as headphones and
speakers) has shown modest growth, it is clearly unable to offset declines in the rest of the CSA unit.
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Most importantly, we have a hard time believing the Company has any meaningful and sustainable
competitive advantage in the consumer electronics market.
The TSS unit has also seen overall declines due to erosion in the Commercial Storage Media product
group (primarily magnetic tape products), but we believe the Storage and Security Solutions (S&S)
product group boasts several product lines that are well positioned to drive sustainable long term
competitive advantages and profitability. More importantly, we believe the Company has a compelling
strategy that positions it to win in the TSS product marketplace.
TSS revenues have been as follows:

TSS Revenue
Com Storage Media
Storage Security Solutions

Gross Margin TSS

Operating Margin TSS

Trailing
12 Month
$346.90

Prior
12 Month
$377.00

$54.30
$28.70

$227.70
$119.20

$260.40
$116.90
Prior
12 Month*
19.13%
-$21.70

4Q 2012 1Q 2013 2Q 2013 3Q 2013 4Q 2013 1Q 2014 2Q 2014 3Q 2014

$96.00 $102.60 $94.80
$83.60 $101.50
$78.90
$83.50
$83.00
$77.40
$18.90

$66.90
$35.70

$61.80
$33.00

$54.30
$29.30

$68.00
$33.50

$51.40
$27.50

$54.00
$29.50

13.50%

22.00%

21.70%

19.30%

18.20%

18.30%

18.90%

19.30%

Trailing
12 Month*
18.68%

-$7.60

-$3.00

-$2.90

-$8.20

-$2.00

-$8.80

-$8.50

-$8.10

-$27.40

Y-to-Y
Change
-9%
-14%
2%

-21%

(* Gross Margin numbers represent an average for the period)

CEO Lucas deserves some credit here. At first blush, many market observers and investors may be
surprised and perhaps a bit dismayed to learn that Imation is a global market leader in the magnetic
tape industry (the Company claims approximately 20% of worldwide market share). This legacy
technology must be destined to the same fate as the T-Rex. Or is it?
For information that has to be accessed on a regular basis, digital storage is a more efficient solution to
having to track down a tape and reload data. In these situations, solutions like Nexsans products are
superior to magnetic tape, despite a higher cost of storage. However, in cases where data needs to be
stored for archival purposes, magnetic tape is sufficient and delivers significant cost savings. Our
experience with legacy technology companies has been that initial rates of decline during a paradigm
shift to a newer technology solution occur in a bell curve: initial slow adoption by early adopters of the
new technology; followed by mass market adoption where the legacy solution sees significant declines;
and finally a tapering off in the rate of decline of the legacy solution as satisfied customers see no need
to change. We suspect magnetic tape may be entering this third phase. It has also been our experience
that legacy technologies that still solve a real problem can last much, much longer than most people
believe. Therefore, we expect the Commercial Storage Media group to continue to decline, but at a
slower rate than it has over the past several years.
While the prospect of a long, slow death for the magnetic tape business is hardly a compelling case for
building a growth company, there is a significant strategic advantage to the Commercial Storage Media
group - the fact that through its magnetic tape business, Imation has access to or a commercial
relationship with many of the worlds largest IT groups10. As anyone who has ever tried to sell to large
organizations can attest, it can take tremendous effort and great amounts of time (measured in years
not weeks or months) to get the target organization to trust you and in most cases even just to approve
you as a potential vendor. Imation intends to use its current relationships to introduce existing
10

Source: As characterized CEO Lucas in our October 27, 2014 meeting.

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customers to its Nexsan and IronKey product lines11. If they are able to execute on this strategy, it could
serve as a sort of Trojan Horse sales model that could result in significant overall sales growth in a
relatively short period of time.
We believe this strategy holds tremendous promise, but only if the Company can execute.
Unfortunately, the recent write down of goodwill related to the Nexsan acquisition does not bode well
coming out the gate. According to CFO Scott Robinson, the write down was due to a lack of projected
growth in the Nexsan unit. Mr. Lucas noted during our meeting that the Company recently made
significant leadership changes at the Nexsan unit which was having a negative impact on performance.
Our understanding was that these changes were unanticipated. In his defense, Mr. Lucas did say the
Nexsan deal was consummated rather quickly after having been rejected a year earlier. Despite this
need to move quickly, we would have expected a better understanding of senior management of a
$100+ million acquisition target and a solid leadership plan from the outset. Mr. Lucas explanation of
recent changes sounded and awful lot like Nancy Pelosis unfortunate comment about Obamacare
where she said we have to pass the bill so that you can find out what is in it. This may be good
enough for a senior member of Congress, but it totally unacceptable for the stewards of our money.
Notwithstanding our reservations about the various stumbles surrounding Nexsan, Mr. Lucas deserves
credit for entering this market with a solid suite of products and positing the TSS group for potential
growth and profitability. As such, we are inclined to continue to support his leadership for now and give
him some time to demonstrate his ability to execute.
IronKeys Windows to Go product represents another bright spot for the TSS unit. According to the
Company, this innovative product has the highest security capabilities in the market and is poised for
growth. One of the drawbacks of this product is its reliance on the enterprise adoption of Microsoft
Windows 8.0 and 8.1 (and later, the upcoming release of Windows 10). The Company has noted many
IT departments chose to skip upgrading to Windows 8.1, opting instead to stay with Windows 7.
Furthermore, the Company noted in its most recent earnings call that Microsofts focus has shifted to
the release of the upcoming Windows 10, stalling some sales cycles of its Windows 8.1 IronKey
solutions.
In reality, we suspect the Windows 8.1 market for IronKeys products will screech to a near halt at
almost every customer that isnt already using Windows 8.1. Therefore, we would expect little to no
growth in this product segment in the near term. Even once Windows 10 is released, supposedly next
year; adoption times in large organizations of new operating systems can be very long, drawn out
affairs.
Despite all of these eventualities and possibilities, we still believe IronKeys Windows to Go product will
be a success, provided expectations are managed appropriately and the Company can execute on its
sales and marketing plans. Earlier this week, Microsoft caused a major stir by announcing a
fundamental change to its pricing model for enterprise clients. On November 5th, 2014 the CIO Journal
reported:
Microsoft is moving away from its complex system of licensing software based on the
number of devices a customer has, and towards a new model based on people, a
decision in keeping with todays mobile and cloud world. With the Enterprise Cloud Suite,
11

Source: CEO Lucas in our October 27, 2014 meeting

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CIOs may run Windows and Office applications across every device an employee uses for
the cost of a single enterprise license.
We believe this is may be a positive for IronKey as it may serve as a compelling reason to deploy
Microsofts new Windows version at large enterprises a key target market for IronKey. Furthermore,
the proliferation of devices and cloud based access to enterprise resources could enhance IronKeys
value proposition to customers.
Thus, despite a forecast of continued declines in magnetic tape revenues, we believe the TSS unit has a
solid suite of products positioning it for potential growth and profitability.

What could a pure play Imation TSS company be worth?

The following table represents a list of comparable companies in the digital storage industry that are
generally in the same revenue range as Imations TSS unit, sans the Commercial Storage Media business.

Company
Nimble
Violin
Average

Ticker
NMBL
VMEM

Mkt Cap
$2,064.01
$438.18

TTM Rev Mkt Cap/Rev Ent Value Ent Val/Rev

$175.44
11.76
$1,849.48
10.54
$93.08
4.71
$371.11
3.99

$1,251.10

$134.26

8.24

$1,110.30

7.26

The TSS unit is not experiencing the growth rates of its peers, but it does have comparable revenue
levels, differentiated products targeted at addressable markets, AND the aforementioned advantages
the Commercial Storage Media business brings to the Company. We also note that neither Nimble nor
Violin generate profits.
To be clear, the TSS unit generated approximately $119.2 million from its Storage Security Solutions
(S&S) and $227.7 million from the Commercial Storage Media products in the trailing twelve month
period. We believe the TSS group could be driven to profitability and growth could materialize on the
back of the new product offerings from Nexsan12 and IronKeys 100+ proof of concepts under way.
The following table gives an idea of possible valuation metrics based on the comps above. The table
uses the average and low values for Market Cap/Rev multiples and applies them to TTM Revenue of
$119.2 million for the S&S products only.

Imation S&S Implied Market Valuation

Current Shares Outstanding

12

41.2

Peer Group Mkt Cap/Rev

TTM Rev
Average
Low
$119.20 $ 981.75 $ 561.14
Implied Per Share Value
Average
Low
$
23.83 $
13.62

Nexsan NST 4000 was launched in Q3 2014 and is expected to start shipping this month

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A more conservative valuation can be gleaned from Lake Street Capital Market senior research analyst
Eric Martinuzzi, who placed a BUY recommendation and $5/share price target on Imation in his
November 4, 2014 research report by assigning zero value to all of the operations of the Company
except the Storage and Security Solutions business. Quoting Mr. Martinuzzi:
Our$5 target is a 1.0x EV/2015 Revenue multiple on our forecast $108 million S&S
revenue forecast. The math works out to 1.0x 108 million + 91 million net cash, divided
by 41.2 million shares outstanding.
Note, this analysis projects LOWER revenue in 2015 for the S&S product group and zero value for the
corporate real estate, the entire CSA unit, magnetic tape product group, and the Companys patent
portfolio.
Regardless of which valuation method one chooses to look at, it is clear to us that a well-run, focused
Imation TSS business could see significant shareholder value creation.

What is the rest of the Company worth?

In comparison to the TSS unit, the rapidly contracting CSA unit, even under the best of circumstances,
would not afford nearly as much upside to shareholders as the TSS unit. The Consumer Storage Media
product group continues to experience sharp declines, from $594.3 million in twelve month period
ended December 31, 2012 to a projected $349.3 million for the year ending December 31, 201413. It is
hard to put a value on this business unit, but we believe there would be a buyer at some price point, if
for nothing more than the brands, inventory, and intellectual property. The Company should move to
end this distraction immediately. For our valuation analysis purposes, we assign zero value to the
Consumer Storage Media group.
The growing Audio and Accessories (A&A) business however does have value. The following table
highlights two comparable companies to A&A:

Company
Koss Corp
Skullcandy Inc.
Average

Ticker
KOSS
SKUL

Mkt Cap
$11.74
$240.00

TTM Rev Mkt Cap/Rev Ent Value Ent Val/Rev

$23.84
0.49
$12.25
0.51
$210.09
1.14
$205.63
0.98

$125.87

Imation A&A Implied Market Valuation

Current Shares Outstanding

13

$116.97

0.82

$108.94

0.75

Peer Group Mkt Cap/Rev

TTM Rev
Average
Low
$48.10 $
39.32 $
23.69

41.2

Implied Per Share Value

Average
Low
$
0.95 $
0.57

Source: Lake Street Capital Markets report on Imation dated November 4, 2014

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The unit grew 10% year over year and is poised to see even more growth during this holiday season,
therefore we assign a $25 million valuation on the A&A business.
The Company should be able to add a minimum of $50 million in cash to the balance sheet.

Business Unit/Asset
Consumer Storage Media
Audio & Accessories
Corporate Real Estate Portfolio
Total

Spear Point
Est. Val ($MM)
0
25
25
50

Conclusion
In closing, Imation is an extremely asset rich company that has been mismanaged for over a decade.
The day Imation acquired Memorex on April 28, 2006, the Companys market capitalization stood at
$1.465 billion. From that point to now, the Company has spent more than $800 million on numerous
acquisitions, most of which have been disastrous, leading to a Company that has a market capitalization
of $121.9 million. This is nothing short of shocking.
It is not too late to save this Company from further decline and create a vibrant, healthy, profitable
enterprise, but time is clearly running out. As shareholders, we believe the Company should take the
following actions immediately:
1) Hire an investment banker to divest the CSA unit in the first quarter
2) Complete the sale of the Companys real estate portfolio in the first quarter
3) Implement compensation policies for management and the Board tied to performance and
at levels consistent with competitive companies of similar size
4) Reinstate a dividend for common shareholders
5) Eliminate the staggered Board structure thereby allowing shareholders to elect the entire Board
at the annual shareholder meeting
6) Discontinue the granting of restricted stock to Board members and replace such grants with
stock options
We hope to see the Company begin to take these steps without delay. Without significant actions, there
may be a need for more affirmative steps, and we are evaluating actions, including Board nominations
and other efforts, in order to protect our investment and enhance value at Imation.
Sincerely,
Spear Point Capital Partners LLC
/s/ Rodney A. Bienvenu
___________________________
By: Rodney A. Bienvenu
Its: Managing Member

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Notice and Disclaimer: As of the publication date of this letter, Spear Point has a long position in and may own
options on the stock of the Company and stands to realize gains in the event that the price of the stock increases.
On or after the date hereof, Spear Point may transact in the securities of the Company. All content in this letter
represent the opinions of Spear Point. Spear Point has obtained all information herein from sources it believes to be
accurate and reliable. However, such information is presented as is, without warranty of any kind whether express
or implied. Spear Point makes no representation, express or implied, as to the accuracy, timeliness, or completeness
of any such information or with regard to the results obtained from its use. All expressions of opinion are subject to
change without notice, and Spear Point does not undertake to update or supplement this letter or any information
contained herein. This document is for informational purposes only and it is not intended as an official confirmation of
any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and
are subject to change without notice. The information included in this document is based upon selected public market
data and reflects Spear Points views as of this date, all of which are accordingly subject to change. Spear Points
opinions and estimates constitute a judgment and should be regarded as indicative, preliminary and for illustrative
purposes only. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate
liquidity, and the potential complete loss of principal. This letters estimated fundamental value only represents an
estimate of the potential fundamental valuation of a specific security, and is not expressed as, or implied as,
assessments of the quality of a security, a summary of past performance, or an actionable investment strategy for an
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have positions in financial derivatives that reference this security and stand to potentially realize gains in the event
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This could represent a potential conflict of interest in the statements and opinions in Spear Points documents. The
information contained in this document may include, or incorporate by reference, forward-looking statements, which
would include any statements that are not statements of historical fact. Any or all of Spear Points forward-looking
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forward-looking statements can be affected by inaccurate assumptions or by known or unknown risks, uncertainties
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any investment decision.

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