Krispy Kreme's Canadian assets for sale

Krispy Kreme's Canadian assets have been put up for sale seven weeks after the U.S.-based doughnut company had the firm that owns and operates stores in Canada placed under bankruptcy protection.

KremeKo Inc., which has exclusive franchise and licensing arrangements with Krispy Kreme Doughnut Corp., was forced on April 15 to file for protection from its creditors.

It decided this week that the greatest value could be achieved by an asset sale. The plan has the backing of Krispy Kreme and the company's secured creditors, including the Bank of Nova Scotia and GE Capital Canada Equipment Financing Inc., which is owed more than $3 million.

KremeKo could end up selling the business as a going concern or it could entertain offers for the rights to operate Krispy Kreme franchises in Canada.

"People could put in an offer for each of those scenarios," lawyer David Bish told the Canadian Press. Bish represents one of KremeKo's landlords, Cadillac Fairview.

In a court filing this week, the company warned that it will need to begin drawing on a $1.5 million loan provided by Krispy Kreme for its restructuring by the week of June 20.

Cash flow projections show it expects to lay out nearly $1.4 million more cash than it takes in during the nine-week period ending Aug.5, when its current creditor protection order is due to expire.

Under an agreement reached in 2000, KremeKo was required to open 32 stores within seven years and pay Krispy Kreme $40,000 US for each store plus 4.5 per cent of sales.

However, by January this year rising losses had forced it to close six of its 18 stores, followed by another four outlets in April.

The company's woes mounted in May when the Ontario Ministry of Labour charged it with three violations of the Occupational Health and Safety Act relating to an accident in which an employee was injured in 2004. Each charge carries a maximum penalty of $500,000.

North Carolina-based Krispy Kreme's once-rosy financial fortunes began dimming in the spring of 2004, when it reported its first quarterly loss, placing much of the blame on the rising popularity of low-carbohydrate diets.

The company is now being run by a corporate turnaround specialist while the U.S. Securities and Exchange Commission investigates allegations of financial irregularities and exaggerated revenues.