updated 10/22/2004 10:19:26 AM ET 2004-10-22T14:19:26

Lights! Camera! IPO!

No, wait. Keyboard! Mouse! Computer-generated animation! Hot deal!

Nearly everyone knows DreamWorks Animation SKG, a maker of computer-generated animated feature films, and most investors will love the company's planned initial public offering — at least in early trading. The deal comes with big-name backing, including Paul Allen and Steven Spielberg. Corporate backers include Microsoft. (MSNBC is a Microsoft-NBC joint venture.)

Movies are a boom-or-bust business, and earnings are wildly unpredictable. Tastes change, marketing can misfire and sometimes good movies are commercial flops while low-cost sleepers, or even stinkers, are box office hits.

DreamWorks Animation's financial performance has been erratic. In 2003, the company lost $187.2 million on revenue of $301 million; in 2002, it lost $25.1 million on revenue of $434.3 million; and in 2001, the company earned $2.3 million on revenue of $661.1 million. The accumulated deficit is about $200.7 million.

DreamWorks has released nine animated films, including four computer-generated features — “Shark Tale”, “Antz”, “Shrek” and “Shrek 2”. Its films using traditional animation techniques are “The Prince of Egypt”, “The Road to El Dorado”, “Chicken Run”, “Spirit: Stallion of the Cimarron” and “Sinbad”. The company's next computer-generated feature, “Madagascar”, is scheduled to be released in the spring of 2005.

With the company releasing about two animated films each year, the importance of each title increases, and the failure of one can hammer profits. This year, the studio bet on “Shark Tale”. So far, the box office take is about $120 million.

Animated films generally take three to four years to produce, compared with 12 to 18 months for live-action movies. The longer lead time increases the risk that the subject or story line will fall out of favor with audiences, or that a competitor will release a similar movie before or at about the same time.

Other studios producing computer-generated animated films include The Walt Disney Co., Pixar, Blue Sky Studios and DNA Productions. Sony and Lucasfilm have said they plan to enter the computer-generated animated film market.

Pixar plans to release “The Incredibles” in November and “Cars” in the spring. The company made the first fully computer-animated feature film, “Toy Story”, in 1995. It released “A Bug's Life” in 1998, “Toy Story 2” in 1999, “Monsters Inc.” in 2001 and “Finding Nemo”, its top-grossing film, in 2003. Pixar releases films through Disney, its strategic partner, but the relationship is scheduled to end in 2006. Last month, Disney President Robert Iger said a new distribution deal with Pixar seemed unlikely.

Steve Jobs, a co-founder of Apple Computer, serves as Pixar's chairman. Pixar, based in Emeryville, Calif., launched its IPO in November 1995 when it priced 6.9 million shares at $22 each. The stock recently traded at $79.31 per share.

Glendale, Calif.-based DreamWorks Animation plans to offer 29 million shares, including 4 million by current shareholders, at $23 to $25 each through underwriters led by Goldman Sachs. The company plans to use net proceeds raised in the IPO to repay debt and for general corporate purposes, including working capital. It won't receive anything from the sale of stock by existing shareholders.

The proposed New York Stock Exchange Symbol is DWA. The deal is expected to be priced the week of Oct. 25.

This is Hollywood, and the IPO wouldn't be complete without a bit of vanity and foolishness stashed deep in the SEC registration statement. CEO Jeffrey Katzenberg “will be entitled to … perks as normally made available to entertainment industry studio chiefs.” The perks aren't defined, but it sounds more expensive than the ho-hum provisions for travel expenses, a car allowance and security personnel.

It's a given that DreamWorks Animation's revenue will be uneven in the future as the success of its feature films varies and the release of home videos with proven titles kicks in.

But none of this matters in the IPO worlds of short horizons and quick turnover of shares by shrewd investors. DreamWorks Animation's deal comes with big names and a pedigreed lead underwriter. Expect the IPO to turn handstands in early trading. But this isn't a new company. DreamWorks released its first film in 1998, and investors will want steady profits as soon as the golly-gee-wow of the company's big names wears off.

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