Krispy Kreme Doughnuts Inc. (KKD) said Monday that a majority-owned affiliate and franchisee partner in the Philadelphia region filed for Chapter 11 bankruptcy protection.

"It shows the difficult time Krispy Kreme is having in turning around the business," said John Owens, an equity analyst with Morningstar.

The company's stock, which fell 9.5 percent in premarket trading on the Inet electronic brokerage system, was halted for regular hours trading on the New York Stock Exchange (search).

Krispy Kreme, still grappling with an accounting investigation that prompted it to restate earnings over several years, said it agreed to provide funding to Freedom Rings LLC (search) during the restructuring process.

Freedom Rings operates six stores in the Philadelphia region, a Krispy Kreme representative said. The parent company has about 360 stores and 50 satellites in 45 U.S. states.

Krispy Kreme had expected the joint venture to open 16 stores in Philadelphia, New Jersey and Delaware, according to a March 2001 statement.

"In addition to the bankruptcy filing of its franchisee partner today, some of its largest franchisees have sued Krispy Kreme, which shows that the company has a very strange relationship with its franchisees," Owens said. "All this speaks to the troubles Krispy Kreme continues to have."

Earlier this month, Krispy Kreme said it had been served with a lawsuit by two principals of Great Circle Family Foods (search), LLC, Krispy Kreme's financially troubled Southern California franchisee.

Owens said Morningstar does not have a rating on Krispy Kreme because of inadequate financial information and a lack of details on management's turnaround plan, which also makes the company's shares prone to speculative trading.

On Oct. 12, Krispy Kreme shares fell to an all-time low on high trading volume, but the struggling chain said it did not know what prompted the sell-off.