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NexInnovations’ court documents reveal $72M debt

The solution provider's CEO says it received at least two acquisition offers as a way of getting out of its financial troubles.

NexInnovations, which has recently sought and received protection from its creditors, is more than $72 million in debt and the company has received two acquisition offers, according to Ontario court documents obtained Monday by CDN.

In an affidavit, NexInnovations president and CEO Hubert Kelly said his application under the Companies’ Creditors Arrangement Act was triggered when Wachovia Capital Finance Corp. (Canada) declared that NexInnovations was in default under its lending agreements as a result of a failure to meet the minimum EBITDA financial covenant in January.

However, Wachovia has taken no steps to enforce its security and, along with IBM, is working with the solution provider in its restructuring. The affadavit says the bank has agreed to help Nex with its needs of up to $7 million in financing to meet customer commitments.

NexInnovations, one of Canada’s largest resellers, went public with its financial difficulties late last week.

Among the leading creditors are Wachovia ($17 million from a secured loan), IBM ($13 million in a secured inventory and equipment agreement) and Tech Data Canada ($10 million in a secured goods and services agreement.

According to the affidavit, the company expects a loss of $9.4 million for the fiscal year that ended May 31 on total sales and services revenues of $524 million. That follows a loss of $11 million in fiscal 2005.

From January onwards Kelly said the company explored and exhausted many options, including seeking a buyer. A total of 51 parties were contacted as potential purchasers. Of those, two made preliminary non-binding letter of intent offers.

But given the state of the VAR’s financial situation both offers were unable to advance to the transactional stage.

In the document Kelly said for the last four years his company’s revenues have declined by approximately 24 per cent, or $168 million. In those years Nex didn’t earn any net income.

In his affidavit Kelly said that if NexInnovations is allowed to implement the restructuring plan that a significant portion of its 1,126 workforce –-which in the past seven months has been reduced by five per cent to save money — will remain employed.

The company has also been shedding unprofitable customers to get its balance sheet in order, Kelly said.

Rick Reid, president of Tech Data Canada, the third largest secured creditor, confirmed to CDN that NexInnovations owes more than $10 million to the Mississauga, Ont.-based distributor.

Reid added that Tech Data is also committed to working with the troubled firm during the restructuring. NexInnovations is still able to source products from Tech Data under a new strict payment procedure, Reid said.

Reid did not elaborate on how this new payment procedure would work.

”We want to be part of the cure and not the reason of its continuing trouble. We want to be part of the solution for them,” he said.

At one time the distributor had extended Nex a $23 million credit line. But by March that had been decreased to $15 million and by the time of the bankruptcy protection application to $10 million.

Reid said it is too early to tell if the NexInnovations situation will hurt Tech Data Canada in any way.

“NexInnovations has always been a good customer and we have enjoyed a long and mutually rewarding relationship. We will be working with them on a number of options and we clearly hope they will come out of this as a strong viable national reseller.”

According to the Kelly affidavit, NexInnovations’ five largest unsecured creditors are Cisco Systems Canada Inc. at $4.6 million, Microsoft Licensing Inc. at $2.4 million, Avnet International Canada Ltd. at $1.4 million, HP Canada at $1.3 million and TekStar International Inc. at $1 million.

Reid fully expects the solution provider to emerge from this situation. “No one in this industry wants to see NexInnovations falter,” he said.

The Ontario court order gives Nex protection from creditors until Sept. 8, by which time it has to file a plan of rearrangement with creditors. That plan has to be approved by a judge before the protection can be lifted.