Krispy Kreme Unit Files for Chapter 11

Shares of Krispy Kreme Doughnuts Inc. fell sharply Monday after the troubled company announced that a wholly owned subsidiary in the Philadelphia area had filed for bankruptcy protection.

The subsidiary, Freedom Rings, operates six doughnut shops in Philadelphia, Delaware and southern New Jersey. The petition seeking Chapter 11 protection from creditors was filed Sunday in Delaware.

“This is six stores and the company has approximately 360 stores, so that puts it in a little bit of context,” spokeswoman Laura Smith said.

“There are many Krispy Kreme locations across the country that continue to do well. The Philadelphia market has not done well and we believe this is the best course of action, to restructure its finances,” she said.

Freedom Rings owes Krispy Kreme about $24 million, excluding lease obligations, the Winston-Salem, N.C.-based doughnut maker said.

The subsidiary’s petition for Chapter 11 protection said it owed all creditors less than $50 million.

A lawsuit filed this month by two partners in Los Angeles-based Great Circle Family Foods claimed that Krispy Kreme was trying to force their company into bankruptcy. The largest Krispy Kreme franchisee also claimed that company executives misappropriated marketing money and billed for phony charges. The company said it would “vigorously” defend itself against the allegations.

Shares of Krispy Kreme, which traded for $105 in November 2000 before a pair of 2-for-1 stock splits, fell 26 cents Monday to $4.60.