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The top 25 newsmakers of 2007 – Number 2: Hubert Kelly, Rick Reid, Dave McDonald

While the curtain came down on the long-running NexInnovations drama this year, the final act was far from anti-climatic

The long and painful fall of what was once one of Canada’s largest solution providers came to an end this year, with NexInnovations being sold in pieces to a number of different players after its financial difficulties became too much to bare. The saga ended not with a whimper, however, but with a bang.

The fall of NexInnovations actually began back in August of 2006, when financial difficulties arose and the company filed for protection from its creditors under the Companies’ Creditors Arrangement Act (CCRA). Creditors in the initial filing included Wachovia Capital Financial Corp., IBM Canada Ltd. and Tech Data Canada.

At the time, NexInnovations president and CEO Hubert Kelly, said the company’s limitations on working capital were caused by average price points dropping by 15 to 20 per cent, but he added with the support of its creditors he was hopeful NexInnovations would be able to restructure and emerge stronger on the other side.

“The decision to do a CCAA was difficult and we explored and exhausted every option for several months,” said Kelly. “Clearly a restructuring has to happen and we’ll look at our cost base and what it is. Admittedly, it will be a challenge.”

A challenge it was, but NexInnovations did emerge from creditor protection in the fall of 2006 and would eventually pay off most of its creditors, with the notable exception of Tech Data.

The two companies formed an operating plan that brought NexInnovations out of CCRA and saw Tech Data becoming the exclusive supplier. Tech Data took responsibility for functions like logistics, configuration, distribution and the approval and collection of accounts receivable, and also extended a $15 million credit facility to the solutions provider.

A he said, she said

When NexInnovations shut its doors on October 2 and sent its employees home, again filing for CCRA protection, this relationship with Tech Data was to be at the centre of the drama. A series of affidavits filed in the Ontario Superior Court of Justice in the days leading-up to the closing show a rapid deterioration of the relationship between NexInnovations and Tech Data.

In the affidavits, Kelly sought CCRA protection for ­NexInnovations for a second time to allow the company time to restructure. This move was opposed by Tech Data Canada whose senior vice-president for finance, Howard Tuffnail, argued for the appointment of a receiver to take over NexInnovations and allow Tech Data, by now the company’s largest creditor, to recover monies.

In his affidavit, Kelly said he believed NexInnovations would have had a viable business were it not for Tech Data’s actions.

“Nex believes were it not for the actions of Tech Data, it would not be in this current fiscal crisis,” said Kelly. “Nex can only assume, based upon the pattern of conduct to date by Tech Data, that this destruction of Nex’s business is deliberate.”

On the other side, Tech Data disputed Kelly’s claims that Tech Data was responsible for its downfall, insisting NexInnovations was the author of its own demise. While Tech Data tried to make it work, Tuffnail said in the documents that his company was a distributor, not a bank.

“It is my belief that Nex’s recovery plan is not working,” he said, adding that sales levels did not permit additional draws on the credit line. “Tech Data has even tried to assist NexInnovations by bringing in potential lenders.” Tuffnail added that there wasn’t sufficient time to explore other financing options and NexInnovations was unable to fund its operations.

Speaking after NexInnovations’s downfall, Tech Data Canada president Rick Reid, echoed Tuffnail’s affidavits, saying NexInnovations was having trouble offsetting their high expense base with its current business. This, he says, is what forced it to eventually shut down.

“The decision to shut down NexInnovations was a Tech Data decision,” Reid said. “We consulted with the U.S. and it was a joint decision to do this. We felt it was within our rights.”

Reid said margin pressure was quite likely a contributor to NexInnovations’ troubles, adding the difficulties the company was previously facing with Tech Data had nothing to do with them.

New homes, fresh start

In the end, NexInnovations’ court filing would be successful with most of its employees landing on their feet. Softchoice purchased NexInnovations’ products division for $10 million, including customer relationships and records, bringing over the bulk of the associated staff as well. While NexInnovations was felled by margin pressure and a high cost structure, Softchoice president and CEO Dave MacDonald, said his company’s low cost infrastructure will allow it to succeed.