Iwerks Pins Its Theater Plans on Stock Offering : Entertainment: The Burbank firm hopes to raise about $20 million. Part of the money would be used to create films for its futuristic-format movie houses.

Iwerks Entertainment Inc. has big plans to create the movie theater of the future. But for now it confines itself to more mundane matters--such as raising the cash to pay for those theaters of tomorrow.

The Burbank company is planning to go public in an initial stock offering of 2 million shares at $11 apiece, which would net Iwerks about $20 million after expenses. Another 400,000 shares are being offered by stockholders.

Iwerks plans to use part of the money to develop and produce films for its special-format movie theaters. Founded in 1986 by former Walt Disney Co. executives Don Iwerks and Stan Kinsey, Iwerks’ products have included motion simulation, giant screen, 360-degree and three-dimensional theaters, plus the films that run in these theaters.

Iwerks has installed more than 50 attractions in 15 countries at theme parks, expositions, museums and special events, making it an industry leader in these specialized theaters. Iwerks now has more than twice the revenue of rivals Showscan Corp. and Omni Films International Inc.

For Paramount Parks in Charlotte and Richmond, Va., Iwerks created “Days of Thunder--The Ride,” a motion-simulation theater based on the Daytona 500 auto race. “Haunts of the Olde Country,” a 3-D movie theater with a ghost theme was designed for Busch Gardens in Williamsburg, Va., and “RoboCop--The Ride,” a motion-simulation ride based on the movie about a futuristic robot cop, is appearing at various sites, including the Los Angeles County Fair. Iwerks has also done projects for Disney, Universal Studios-Florida and NASA, and it operates seven touring simulation theaters.

These projects, while often risky, have made Iwerks modestly profitable. In its fiscal year ended June 30, Iwerks earned $1.3 million on $32.2 million in revenue, according to its stock prospectus. A year earlier, Iwerks turned a profit of $230,000 on $18.2 million in revenue. The company has no long-term debt.

But Iwerks could be entering riskier territory by using $7 million from the stock sale for its ambitious, but unproven concept: Cinetropolis entertainment centers. Set in urban complexes, these centers would offer theaters, themed restaurants and interactive “virtual-reality” rides, which use computer imagery to create artificial environments.

Iwerks sees Cinetropolis as a lower-cost successor to the theme park. Instead of building rides that require several acres outside of urban areas, a 50,000-square-foot Cinetropolis could easily fit on a city street. And at $12 million to $18 million apiece, a Cinetropolis would cost considerably less than the $1-billion cost of a traditional theme park. What’s more, the attractions could be easily updated with new software, for which Iwerks would receive licensing fees.

One Cinetropolis complex might have a theater that simulates a roller-coaster ride with chairs that bounce around as in flight simulators, while another room could show high-resolution, big-screen movies of flights over the Grand Canyon or the Egyptian pyramids. A third theater might feature rock videos on a 360-degree screen.

Iwerks is also developing a virtual reality ride with Evans & Sutherland, a Salt Lake City manufacturer of flight simulators, in which customers would man controls that determine what images they see. The first concept under development will feature a computer-simulated underwater world where participants search for the Loch Ness monster.

So far, the only Cinetropolis in construction is at the Foxwoods casino in Ledyard, Conn., owned by the Mashantucket Pequot Indian tribe. That project is due to open in December.

Iwerks previously said it hopes to develop 60 Cinetropolis centers in the United States and Asia, primarily through various partnership deals. The prospectus cautions, however, that if the Foxwoods Cinetropolis is not successful, Iwerks “may find it more difficult to attract financial partners.”

Richard West, senior security analyst at Sherwood Research Group in New York, believes that entertainment venues such as Cinetropolis will prove very successful, and ultimately could fill a void as fewer large theme parks are built. “As we go forward with computerized entertainment,” he said, “this is going to be very big.”

Bob Mescal, a research analyst at the Institute for Econometric Research in Ft. Lauderdale, Fla., which tracks new stocks, agreed that “the basic concept is certainly interesting.” Mescal said he was troubled, however, by too high a price for the stock relative to Iwerks’ profits. “Another Snapple this ain’t,” he said, referring to the hot beverage company that has been a Wall Street favorite.

He also sees warning flags when company insiders intend to sell stock in an initial offering--as Iwerks executives Kinsey and Iwerks intend to do. It sends a message that “they might be selling at what they think is the high price,” Mescal said.

Kinsey, Iwerks’ chief executive, countered that he and Don Iwerks are each selling less than 4% of their holdings. He said each of them also received relatively paltry compensation--well under $150,000 each annually--at least when compared with other entertainment companies.

If Iwerks’ stock sale is completed in October as planned, about 47% of the stock will be held by officers and directors. Kinsey will hold a 16.8% stake, and Iwerks, the vice chairman and chief technical officer, will own 16.9%.

Another large shareholder will be the huge Japanese trading concern Itochu Corp., which earlier this year invested $5 million in Iwerks and has a joint venture to develop Cinetropolis centers in Asia. After the offering, Itochu would hold a 9.1% stake.

But the prospectus notes other risks.

Iwerks’ business tends to be seasonal, and it could post losses in its fiscal 1994 first and second quarters.

The company also warned that the ongoing success of its theaters is dependent on the software. That’s why a large portion of Iwerks’ money will go into film and video development, with individual production budgets ranging from $100,000 to $4 million. The company said it has never attempted as ambitious a production schedule as the one it now plans.

Another risk outlined in the prospectus is that for the past couple of years about half of Iwerks’ revenues came from world expositions. There are no such expos scheduled to open during Iwerks’ 1994 and 1995 fiscal years. “There can be no assurance that the company will be able to replace these revenues with growth in its other markets,” the company said.

Iwerks also faces tough competition in the race for the emerging specialized theater business, a likely motivation behind Showscan and Omni Films’ proposal to merge last spring. That deal fell apart, but if consummated it could have given the companies more of an edge in challenging Iwerks.

Iwerks also said it expects competition from larger, better financed companies in upcoming urban entertainment centers. Obvious rivals could be major film studios and theme park operators such as MCA Inc., which recently opened its Universal CityWalk retail and entertainment center in Universal City featuring a Showscan simulator-ride theater.

But analyst West believes that as bigger companies get more involved in simulation theaters and other new entertainment formats, they will do so through acquisitions or by licensing technology from Iwerks and others.

Iwerks Entertainment Inc. at a Glance

Iwerks Entertainment was founded in 1986 by former Walt Disney Co. executives Don Iwerks and Stan Kinsey. The Burbank company designs specialized movie theaters with large-format and 360-degree screens, motion simulation attractions and interactive “virtual reality” rides. It is also hoping to develop 60 of its Cinetropolis entertainment centers, combining movie theaters, themed restaurants and other features in an urban setting. The company is now hoping to go public in a stock offering that would raise net proceeds of $20 million.