Cointel Seeks to Branch Out, Cash In : After Pay-Phone Fiasco, Video Game Firm Tries Again to Mint a New Image
Most companies keep an eye on the cash flow. At Cointel, they watch the coin flow.
The Calabasas company owns 2,800 video arcade games in 450 movie theater lobbies in 40 states. Last year, Cointel’s share of the take with the theaters was $4.6 million, which comes to more than 18 million quarters.
But the coins aren’t flowing in fast enough. In the first quarter ended March 31, Cointel recorded a small $8,401 profit from its operations, while sales in the quarter fell 3% from a year earlier to $998,286. Overall, the company posted a $119,761 loss because it settled a lawsuit filed by two former business associates.
So Cointel executives now want to diversify by buying a yet-to-be-determined company with better growth prospects. “We need to expand our horizons. We want to grow the company, and the only way to do that is through an acquisition,” said Michael Gates, the company’s executive vice president.
Gates said he believes Cointel can buy a company with as much as $20 million in annual sales. Cointel already has about $1 million in debt, so Gates hopes to find a company with plenty of assets that it can borrow against. Another way Cointel might raise money is through a bond offering secured by its assets--video games.
It wouldn’t be first time Cointel has tried to branch out. Four years ago, it was one of the first of many small companies scrambling to sell pay telephones after the Federal Communications Commission opened up the market to entrepreneurs in 1984.
Pay-Phone Disaster
But the move turned into a financial disaster for Cointel and a number of other companies that underestimated the regulatory labyrinth they were entering, the high fees some local telephone companies charged to hook into their systems and the stiff competition they faced from local operating companies such as Pacific Bell and Southwestern Bell.
“When the FCC originally opened up the competition, there were many people who perceived the pay phone business as nothing more sophisticated or complicated than running a cigarette machine or a Coke machine. They found out quickly that it’s a lot more complicated than that,” said Paul Besozzi, a Washington lawyer who represents pay telephone companies.
Cointel lost $2 million in 1985 and posted another net loss of $11,253 in 1986. As its problems grew worse, market makers, or securities dealers, stopped trading Cointel stock because of its lackluster performance. As a result, the company’s stock in late 1986 was deleted from the National Assn. of Securities Dealers Automated Quotation, a computer service that provides quotes of over-the-counter stocks. Cointel stock is now thinly traded on “pink sheets” with little following among professional investors.
Cointel had other problems as well. It said it received faulty pay telephones from its supplier, Seiscor Technologies, a Tulsa, Okla.-based telecommunications equipment company that is owned by Raytheon Corp.
Cointel filed a $95-million lawsuit against Seiscor, which denied the allegations. The companies settled this year for an undisclosed amount, although a Securities and Exchange Commission filing by Cointel said the settlement was “substantially less than the amount sought.”
To make matters worse, the company’s founder and chairman, Allan M. Glezerman, died in December, 1986. The company is now headed by Glezerman’s widow, Lois--who owns 42.5% of Cointel’s stock--and Gates.
Allan Glezerman, who had spent 26 years in the vending, video game and pinball machine business, founded the company in 1982 and called it Skill Concept. In 1984, the company changed its name to Cointel and started selling pay telephones. By 1985, sales of phones made up $1.8 million, or 29%, of the company’s $6.3 million in sales.
But after the string of losses, the company disconnected its pay telephone business in late 1986 and returned exclusively to video games, which made it profitable again. Last year, Cointel reported net income of $234,153--although $95,202 of the amount is attributable to tax benefits--with sales rising 7% to $4.6 million.
Video arcade games first became popular in the late 1970s and early 1980 with the success of such games as Pong and Pac-Man, but their popularity soon withered as kids became bored. Now, there is something of a revival due to improved graphics and a crop of new children.
Next Generation
“There is a new generation of kids since the initial boom in the industry,” Lois Glezerman said.
The video arcade business is fairly simple and produces steady, albeit unspectacular, profits. Cointel installs machines, which cost an average of $2,500, in lobbies of theaters owned by such large theater chains as General Cinema and Mann. The theaters collect the money, with Cointel providing repairs and service.
Each video game takes in from $60 to $400 a week. The company would not disclose its cut, but industrywide operators usually take 50% to 60% with the theaters or other businesses receiving the rest.
Even while Cointel was taking a loss in the telephone business, its video games continued to make money. In 1985, the year Cointel lost $2 million, the video game business produced a small, $12,403 operating profit. In 1986, the year the company lost $11,253, the video game business showed an operating profit of $351,949.
As for its prospective acquisition, Cointel executives say they do not have a specific business in mind. The only requirements: that the business is profitable and is in Southern California.
And, as part of its plan to diversify, the company next month expects shareholders to approve a name change to Geminex, which is the name of a subsidiary it formed to merge with Cointel. The company also will reincorporate in California from Utah and cut the number of shares of common stock outstanding by more than half to about 9 million.
Money flows in steadily from video games and expenses to operate them are relatively low, but that is not enough for Cointel or its investors to enjoy a big return. By planning to diversify once again, what the company is really looking for is something that will produce more than pocket change.
