KremeCo For Sale in Kanada

Operator of Krispy Kreme franchises in Canada on the block after bankruptcy

TORONTO Despite a deal last week with Shell Canada, which began selling the doughnuts in 115 of its gas stations this month, Krispy Kreme has put its Canadian assets up for sale, less than four years after the American doughnut chain's debut there, said the Canadian Press.

KremeKo, which holds the rights to Krispy Kremes in every province except British Columbia, initiated a sale process this week, seven weeks after it filed for bankruptcy protection.

It will take offers for just its assets, or for the rights to operate Krispy [image-nocss] Kreme franchises in Canada, said lawyer David Bish, who is representing one of its landlords, Cadillac Fairview.

One scenario is to keep the Krispy Kreme business in Canada alive as a going concern and the other scenario is to sell off its underlying assets, he said. "People could put in an offer for each of those scenarios," Bish said.

KremeKo warned in court documents that it expects to start dipping into the $1.5 million financing loan that Krispy Kreme has set up for its restructuring.

KremeKo's lawyer could not be reached for comment.

When KremeKo won the Canadian rights to the Krispy Kreme name in 2000, it was required to open 32 stores within seven years, paying Krispy Kreme $40,000 US for each store plus 4.5 per cent of sales. It made headlines across North America in December 2001, with the opening of its Mississauga, Ont., locationKrispy Kreme's first outside of the United States. The store sold more than $70,000 worth of donuts in one day as customers tangled up traffic for blocks around.

The momentum continued and, last March, two Edmonton brothers camped out for two nights to be first in line when the Calgary location opened. But by January of this year, KremeKo had shuttered six of its 18 stores as losses mounted. On April 15 it filed for protection from its creditors, including the Bank of Nova Scotia and GE Capital Canada Equipment Financing Inc., which is owed more than $3 million. Later that month, in an effort to stem the losses, Krispy Kreme closed stores in Richmond Hill, Ont., Kitchener, London and Montreal, letting 135 employees go.

In May, the Ontario Ministry of Labour charged KremeKo with three violations under the Occupational Health & Safety Act, relating to an accident at the now-closed Richmond Hill store, where an employee was injured in the summer of 2004. If KremeKo is found guilty, it could be fined $1.5 million.

The entire company has taken in $3.2 million in sales since filing for court protection.

KremeKo said it expects to spend $1.4 million more in cash than it takes in during the nine-week period ending August 5, the date its current creditor protection order expires. Beginning on June 20, KremeKo will draw on the $1.5 million that Krispy Kreme has made available, the company said in court documents last week.

"There was discussion that [creditors] wanted to see the company get on with the decision as to whether it was going to do the sale or not do the sale," Bish said. "And so the company made that decision June 6, that they would proceed with a sale process."

Krispy Kreme's woes are not limited to its Canadian operations. The Winston-Salem, N.C.-based company has been in a financial tailspin for more than a year, after reporting its first quarterly loss last spring. It is now in the hands of a corporate turnaround specialist, while the U.S. Securities & Exchange Commission (SEC) investigates financial irregularities and allegations that Krispy Kreme exaggerated its revenues.

The company has blamed much of its troubles on the recent fad of low-carbohydrate diets.

It expects to release its overdue fourth-quarter financial reports by the end of August.

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