Caesars World, Inc.

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Caesars World, Inc.

1801 Century Park East
Suite 2600
Los Angeles, California 90067
U.S.A.
(310) 552-2711

Public Company
Incorporated: 1958
Employees: 9,566
Sales: $908.3 million
Stock Exchanges: New York Pacific

The 1966 opening of Caesars Palace, Las Vegas, was all that founder Jay Sarno had hoped it would be. There were 1,800 guests to sample the tons of filet mignon and 50,000 glasses of champagne supplied by the hotel-casino’s two gourmet restaurants. There was entertainment by Andy Williams, and a plush new casino stood hospitably open. There was also a tab of more than $1 million, which was not excessive considering that the 25,000-square-foot convention complex had already brought the hotel $42 million in bookings by the time opening night rolled around.

Behind the seemingly effortless gala lay years of hotel industry accomplishment that had won Jay Sarno’s Cabana motel chain several prizes. Sarno put all of his expertise and years of meticulous planning into the hotel-casino that he began planning in 1961. Determined to produce a trendsetter completely different from the Western-style hotels popular in Las Vegas at the time, he decided on a lush Roman decor featuring plenty of fountains and statuary. The $25 million it took to realize his vision was money well spent—Caesars Palace immediately became one of America’s favorite places to enjoy gambling, championship sporting events such as boxing matches, and spectacular performing arts.

In 1969 Sarno sold Caesars Palace to Clifford and Stuart Perlman. While the Las Vegas deal was their first venture into the hotel-casino industry, the Perlman brothers were experienced entrepreneurs who owned a string of fast-food restaurants, a processed meat company, and a number of department stores, all based in Florida.

The Perlmans had first plunged into the Florida business scene in 1956, via a small hot dog diner called Lum’s that cost them a scraped-together $12,000. They had worked hard, Clifford commanding, Stuart executing, and within a couple of years a 389-unit franchise chain spanned Canada, Puerto Rico, and 29 American states.

The brothers also owned Dirr’s Gold Seal Meats, a business large enough to supply the Lum’s chain with 25 percent of its packed meat products while keeping other eateries stocked as well. Their third subsidiary, Dade Wholesale Products, was their only concern outside the food industry. Dade owned an 86-unit string of Eagle Army-Navy Discount Stores, which grew to 111 stores under Perlman stewardship.

The three businesses combined to bring Lum’s sales for 1969 totalling $23.2 million, yielding a net income of $2.8 million—too small a bankroll to meet the $60 million purchase price of Caesars Palace. Lum’s chairman, Clifford Perlman, therefore sold both Dade’s and Dirr’s in 1970, raising $8.5 million and $5 million respectively—more than enough to supply the $2 million escrow that was part of the deal between their company and Jay Sarno.

Approved by the Nevada Gaming Commission in August of 1969, the terms of agreement also stipulated that $30 million would be paid to Sarno during the first year, that the $28 million outstanding would be whittled down by a $9.5 million payment in 1971, and that the rest, at 5.5 percent interest, was to be paid in equal installments over the next three years.

However, an economic downturn, plus the Perlmans’ own rapid expansion, made the original agreement impossible to keep. So a second purchase agreement was drawn in September of 1970 to give Lum’s a little more leeway. This time the Perlmans proposed to reduce their $28 million debt to $16 million by giving Sarno 1 million shares of common stock worth $12 million. At the same time, Sarno received a further sum of $2.5 million, leaving the remaining $13.5 million to be divided into equal payments spread over the following three years at 4 percent interest. A rider to the deal made provisions for the Perlmans to repurchase their shares when their obligations had been fully met.

Though the purchase agreement terms were clear enough, the transaction sparked accusations about misrepresentation relating to insider stock information. The three main parties involved in the dispute were a Minneapolis-based mutual fund operator called Investors Diversified Services (IDS), the venerable New York investment firm of Lehman Brothers, and Lum’s itself.

The scandal began with an information leak from Lum’s president Melvin Chasen, who unwisely shared a revised income schedule with a Lehman Brothers employee named Benjamin Simon. Chasen’s confidante learned that Lum’s casino and restaurant revenues were generally lower than expected, and would soon affect earnings for the January quarter of 1970; projected income increase would be around $750,000 rather than the $3.2 million that had originally been anticipated. Spelling this out for Simon, Chasen made it clear that the lower figure would mean smaller per-share earnings for fiscal 1970. Simon, in turn, passed the news of the lower income schedule on to two friends at IDS in Minneapolis before it had been publicly announced by Lum’s. Acting swiftly on the insider information they had just received, the two IDS employees immediately sold all 83,000 Lum’s shares held by their company and a related one, receiving a total price of $1.5 million.

Just a few hours later the revised income schedule was publicly announced. Results were predictable—infuriated new shareholders lost no time in calling their lawyers; one major buyer sued the company for the $3.2 million allegedly overpaid for their shares.

The Securities and Exchange Commission (SEC) pounced simultaneously, instituting a lawsuit that barred the Perlmans from transferring the 1 million shares to Sarno until the matter was finally settled, in 1974. Further curbs imposed on the company by the court included the creation of an escrow account, into which all money connected with the Caesars Palace purchase had to be paid, plus submission to the SEC of a full account of assets, income and other funds handled during the operative time.

Soon after acquiring Caesars Palace, the Perlmans decided to bow out of the restaurant business and concentrate solely on leisure and recreation resorts. They changed the company name from Lum’s to Caesars World, at the same time selling the Lum’s franchise chain to Restaurant Franchise Industries’ John Y. Brown, Jr., who also owned Kentucky Fried Chicken. The $4 million selling price did not include the company’s own Lum’s restaurants, which were closed shortly thereafter.

In 1971 Caesars World entered into an association that was to have unpleasant consequences. With an eye to condominium development the company leased (and later bought) some 400 acres of land in Florida from Alvin Malnik, a Miami Beach lawyer who had previously been indicted for income tax evasion and fraud. Malnik’s partner, Samuel Cohen, had earlier served a year in jail for his part in a $36 million profit-skimming scheme at Bugsy Siegel’s Flamingo Hotel in Las Vegas.

The Florida land purchase attracted little notice from outside observers. But a year later, Perlman entered into a business agreement with Malnik and Cohen’s two sons. This deal involved a lease on a property outside Miami called the California Club. The venture came to the attention of the Nevada Gaming Control Board, whose chairman told Clifford Perlman about the bad reputation shared by Malnik and Cohen, and strongly advised him to stay away from them.

The 1972 financial year was an expensive one that made the Gaming Control Board’s warning difficult to heed, for company resources were stretched to the limits by the Florida land deal as well as the litigation over the Caesars Palace acquisition. During the year the company also spent $13.2 million on a Las Vegas hotel called the Thunderbird; along with the others, this third item pared the company’s year-end net earnings to $1.64 million on gross revenues of $65.1 million.

Finalized in a bottomed-out Florida real estate market, the land purchase forced an $8 million company write-down in 1975. The same year, the company had to note a $9.6 million write-off for the Thunderbird, whose scheduled demolition and replacement with a $150-million hotel-entertainment-casino complex had been scrapped because of lack of financing. (A year later some of this money was recouped when the hotel was sold to a group of private investors for $9 million.)

With ready money in short supply, Perlman was tempted into a third deal with the Malnik-Cohen partnership. This time the venture concerned two honeymoon resorts in the Pocono Mountains of Pennsylvania. Cove Haven and Paradise Stream had joined the Caesars World lineup in 1969, and had since been extensively promoted in such magazines as Modern Bride. In 1975, when revenues for these resorts were at a high of $6.4 million, Clifford Perlman sold both properties to Cohen’s sons and Malnik, who financed the deal with money borrowed at 9 percent, then leased them back to Caesars World at 14 percent interest.

This third contact with Malnik proved to be Perlman’s undoing. Trouble reared its head in 1978, when Caesars World formed a subsidiary called Caesars New Jersey to tap into the market created by that state’s newly lifted gambling ban. Perlman entered into a long-term lease on the Howard Johnson Regency Hotel, applied for a license, and constructed a complex incorporating a 54,000-square-foot casino.

Company hopes for rapid growth soon came up against the ultra-strict New Jersey Casino Control Commission, which grudgingly issued a temporary license along with the command that Perlman’s ties with the Malnik-Cohen partnership be severed immediately. There would be no permanent license otherwise.

Instantly severing Caesars World/Cohen-Malik ties was impossible, since $4.8 million was still outstanding on the Florida real estate deal. Company chairman Clifford Perlman was forced to take a leave of absence from Caesars New Jersey in 1979, while the company considered its troubling options. Keeping Clifford Perlman and leaving Atlantic City was one choice. Caesars World was tempted, for Perlman was a spectacular marketer whose policies of free accommodations and shows for the high rollers had built the company a solid bulwark of loyal patrons. He had also brought in business with such gimmicks as the one-way moving sidewalk that carried guests into the hotel, but made it an effort for them to leave. Still, the company knew that marketing flair would not compensate for the rash of shareholders’ lawsuits that would certainly result if Perlman’s presence forced the Boardwalk Regency to close.

The company next considered the possibility of cutting off all contact with the Perlman brothers. This would not have been easy. With 18 percent of the stock between them, Clifford and Stuart Perlman were by far the largest stockholders, with the ability to bring in a formidable and probably unwelcome voting force by selling all their shares to one buyer. This option was discarded immediately.

Whopping revenues of $821,090 for the Boardwalk Regency’s first week of operation proved to be a good omen for the hotel’s future. Even though they were operating under a temporary license, valid only until October 1980, Caesars shareholders knew that closing the hotel would be a mistake.

They deliberated until November 1981, when they decided to spin off the Perlmans by buying them out for $98.2 million. This figure was twice the market value of the brothers’ shares, but ensured that the brothers would resign from the boards of both the Las Vegas and the Atlantic City operations. Clifford, however, stayed on as the salaried chairman of the Las Vegas operations until 1989, when he left to head the new $700 million MGM Grand resort and theme park in Atlantic City.

The New Jersey Casino Control Commission made two further licensing stipulations. One was that the $4.8 million mortgage debt still outstanding to Malnik for the Florida land was to be prepaid. Since only one phase of the intended condominium development had been completed, 280 undeveloped acres were therefore sold or contracted to independent developers. This move raised $7.6 million, allowing the debt to be expunged.

Focusing on the Pocono Mountains honeymoon resorts that had been sold to Malnik and Cohen and then leased back, the other Casino Control Commission order demanded that a trust be set up by Caesars World so that all due lease funds could be funneled to the new owners without personal contact. This stipulation was met by the middle of 1981.

While the hotel-casinos were the most visible of the Perl-man-era ventures, they were not the only money-spinners. Another was Ontel Corporation, a 95-percent-owned subsidiary that manufactured and sold computers. Another was Online Distributed Processing Corporation, a subsidiary that designed and sold computer programs and equipment for the hotel industry. Despite Caesars World’s 1979 net income of $32.7 million, Ontel lost $283,000, though it recouped a year later by selling a 6.7 percent equity investment to the $7.7 billion AEG-Telefunken group. In 1983, the remaining 93.3 percent of the corporation was sold to Visual Technology, a Massachusetts company, for $9.5 million.

Another Perlman legacy was Caesars Tahoe, acquired under a long-term lease agreement. The casino opened in November 1979, with 446 hotel rooms, stores, and the pool following shortly thereafter. As was company policy, the new complex was staffed with operating management trained in other Caesars World facilities, who oversaw the same customer service policies Perlman had long lavished on patrons in Las Vegas and Atlantic City.

In 1983, the company welcomed Wharton graduate Henry Gluck as the new chairman and chief executive officer. Gluck did not find his new job clear sailing. He had just taken the helm when the Boardwalk Regency had a brush with the law; the hotel was fined $257,000 by the New Jersey Casino Control Commission for allowing a wealthy Italian patron to bypass the proper scrutiny of the casino cage, thus giving him the opportunity to “pay” a $1.2 million gambling debt with improperly drawn checks submitted in his hotel room.

Gluck’s lengthy list of challenges did not stop there. He was also faced with the $21 million loss the company suffered in 1983, partly because of too-generous complimentary food, entertainment, and transportation for high rollers, and partly because of unpaid gambling debts. Gluck solved this problem promptly—he removed credit responsibilities from the casinos by creating a special subsidiary to check out high-spending gamblers before their arrival at Caesars.

He also broadened his market base to cater to the middle-to low-income gambler in Las Vegas. Twenty million dollars went into another casino, a 30,000-square-foot complex offering sports, betting, and parking facilities placed so that upscale and lower-income clientele did not mix.

A net income of $33.7 million at the end of fiscal 1987 showed that Gluck’s strategy had paid handsome dividends. A second indicator was attention from New York financier Martin Sosnoff, who in 1986 had raised his Caesars World stake from 12.1 percent of the shares to 13.6 percent (or 4,110,675 shares), and had then asked for Securities and Exchange Commission clearance to increase it to more than 15 percent, while simultaneously seeking a seat on the Board. Calmly, Gluck piloted the company through the unwelcome possibility of a takeover by buying back more than 30 percent of all outstanding shares. This move chalked up a long-term company debt of $431 million that soured it for other raiders.

Nevertheless, in 1988 there was another attempt to gain a foothold in Caesars World. This time the company drafted a “poison-pill” defense plan, allowing shareholders to buy stock in Caesars World or any acquirer at a 50 percent discount. However, Gluck stressed that this strategy would not be employed unless an outside buyer tried to acquire 20 percent or more of the company on terms unfavorable to all parties concerned.

By decade’s end another threat presented itself. Courtesy of a building boom, two new competitors arose to compete with Caesars World. In Atlantic City the novelty was Donald Trump’s much-publicized Taj Mahal. The Mirage, a Las Vegas hotel-casino, was harder to ignore. The Mirage was a $620 million venture that boasted such amenities as a mini-zoo featuring white tigers and a “volcano” in the lobby that gushed tropical drinks.

Looking to the long term rather than the immediate future, Gluck decided against meeting this stiff competition by simply enlarging his hotels and casinos. Instead, he loosened the company’s credit policy and instituted new marketing programs to attract well-heeled overseas gamblers. At the same time he invested $40 million in a 3,000-slot garage to beat the tight Atlantic City parking situation, and spent $150 million to give the Las Vegas casino and bedrooms a facelift. Drawing on his previous retail experience, Gluck also welcomed outside developers, who spent $100 million to build a 240,000-square-foot shopping complex between Caesars Palace and the Mirage, at which new perfumes and sporting goods bearing the Caesars brand name were among the high-priced luxury items offered.

After a couple of anxious years—earnings for three-quarters of 1989 were 42 percent lower than they had been for the same period in 1988—Gluck’s long-range strategy brought him handsome rewards. By the end of 1991, Caesars World sales were almost $908.3 million, up from $870.2 million in 1990. Net income was $49.6 million, far surpassing the 1990 year-end total of $36.9 million.

Securely in the black, Caesars World announced plans in March 1992 for a cooperative business venture with fellow hotel-casino operators Circus Circus Enterprises and Hilton Hotels. Aware that Illinois had recently legalized riverboat gambling, the three corporations hoped to persuade Governor Edgar that land-based casinos should follow. If approved, this would pave the way for a new $2 billion entertainment complex, to include a theme park, casinos, and showcases for the performing arts.

Principal Subsidiaries

Caesars Palace Corporation; Caesars Cove Haven; Caesars New Jersey; Caesars Tahoe; Caesars Paradise Stream; Caesars Pocono Palace; Caesars Brookdale; Caesars World Merchandising, Inc. (CA); Caesars World Entertainment, Inc.; Caesars World Sports; Caesars World Marketing Corporation.