Wednesday, Aug. 14, 2002 | 9:48 a.m.
ORLANDO, Fla. -- Planet Hollywood International Inc. wrote off $5 million in loans to celebrities and created a "tangled web" of insider deals that benefited top executives and other insiders, an independent review of the bankrupt company shows.
The once high-flying restaurant company, which counted Arnold Schwarzenegger, Bruce Willis, Demi Moore and Sylvester Stallone as celebrity backers, is now struggling to emerge from bankruptcy for a second time in two years.
The company operates a restaurant on the Las Vegas Strip at the Forum Shops at Caesars, but has abandoned plans to build a Las Vegas hotel-casino.
The independent examiner's report, ordered by the court at the request of the company's unsecured creditors who are owed $20 million, was filed Monday in U.S. Bankruptcy Court in Orlando. The names of celebrities who had loans forgiven weren't made public.
The examiner, Soneet R. Kapila, criticized Planet Hollywood's founders, CEO Robert Earl and Keith Barrish, for being too chummy with the celebrities.
"It would appear that both Earl and Barrish were more concerned with preserving their personal relationships with the celebrities at the expense of the business, creditors and shareholders," Kapila wrote.
The Orlando-based company might have been able to recover the loans if executives hadn't decided to write them off, the 57-page report said.
The celebrity backers had been given shares of Planet Hollywood, a themed restaurant that relies on movie memorabilia and star appearances, when the company went public in 1996, but many of them later wanted to divest their shares.
Planet Hollywood's IPO shares sold for $18 apiece in October 1996 and traded in the low $30 range later that year.
To avoid bad publicity from celebrity sales, Planet Hollywood helped the celebrities arrange loans secured against the company's stock. Later, the company "effectively stepped into the shoes of the financial institution" and posted the full value of the loans, the report said.
Earl and Planet Hollywood's bankruptcy attorney, Scott Shuker, said the company didn't recover the loans because they were backed by stock that is now worthless and the loans were written off the first time the company filed for bankruptcy.
"We didn't have the opportunity to recover them," Earl said Tuesday from London.
Moreover, trying to recover the loans would be a bad business decision for a company reliant on celebrities, Shuker said.
"You're trying to keep these people happy at a time the company isn't performing," Shuker said. "When you start suing their friends, it's not a good idea."
A legal analysis is needed to see whether the loans constitute fraud or whether there was management misconduct on other matters, Kapila said.
Earl and chief financial officer Tom Avallone made sweetheart deals for themselves and others by creating a "tangled web" of arrangements between the company and franchises that were owned or controlled by the executives or board members, according to the report.
The report faulted Planet Hollywood managers for being ineffective in collecting fees from franchises, many of which were owned or controlled by company officers and directors.
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