September 2006

THOMSON FINANCIAL

IPO Best Practices

Given the recent surge in initial public offerings during the first half of 2006, IPOs appear to be back in favor as an effective means of raising capital for achieving corporate objectives. While market climate is an important consideration in launching an offering, companies must also take the time to adequately prepare for public life before taking that step. This report outlines some of the key steps companies should take in the pre-IPO process in order to maximize their chances of a successful offering and a long and prosperous life as a public enterprise, as well as insight from IROs who have been through the IPO process. For more information, please contact Kara Newman at kara.newman@thomson.com.

Executive Summary
Given the sheer amount of preparation involved, the transition from private to public status should be viewed as a long journey - a transformational process - rather than a one-off financial transaction. For many companies, a successful preparation process takes two to three years, and for some it takes even longer. As Molly Salky, Investor Relations Director at Build-A-Bear Workshop puts it, "The IPO process is best viewed as a marathon, not a sprint." Companies that fail to adequately prepare for public life may greatly diminish their chances of a successful IPO, not unlike a number of technology companies that went public during the 1990s "bubble," only to go belly-up months after their offerings. A lack of preparation may not only diminish the likelihood of achieving optimal stock valuation and financing potential but could actually put a company in a worse situation than before going public. However, a strong and well-planned IPO can provide an excellent head start on life as a public company. Good advice from Barbara Gasper, Senior VP of Investor Relations at MasterCard: The more prepared you can be, and the more you can act like a public company before you actually do an IPO, the easier it will be.

Table of Contents:
Overview - Current Environment for IPOs...................................p. 2 The IPO Process.........................................................................p. 3 Rules of Engagement...................................................................p. 6 Q&A Case Studies MasterCard.......................................................................p. 9 Build-A-Bear Workshop...................................................p. 13 IPO Preparation Checklist.............................................................p. 15
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Overview
As of the end of the second half of 2006, companies increased the amount of capital raised via IPOs by nearly one-third over last year, the most successful IPO market in the past five years. Although a summer slowdown in the equity market has capped the number of companies going public very recently, private companies wishing to go public may be tempted to strike while the IPO iron is still hot, rushing the transition to public status at the expense of key preparations. However, companies that fail to adequately prepare for public life may greatly diminish their chances of a successful IPO. This was especially evident during the 1990s "bubble," when a number of technology companies, seeking to profit from the market's bull run, quickly jumped on the IPO train only to go belly-up months after their offerings. To achieve optimal share value at the IPO and beyond and successfully use the offering to meet corporate and investor objectives, companies planning on going public are well advised to start preparing for public life well before the IPO due to the massive amount of work involved in making the process a success. For many companies, the preparation process takes two to three years, and for some it takes even longer. A lack of preparation may not only diminish the likelihood of achieving optimal stock valuation and financing potential but could actually put a company in a worse situation than it was in before going public. According to Ernst & Young's Global IPO Survey, conducted in 2004, nearly 40% of survey respondents with unsuccessful IPOs reported that their public status actually "impeded their ability to accelerate their business strategy, fund internal growth initiatives, access capital markets and fund acquisitions." As such, an IPO that is done prematurely could actually be detrimental to a company.1 So what should companies do to maximize their chances of a successful IPO? First and foremost, companies should start acting like a public entity well before the actual IPO. That means the systems and processes common to public firms such as strategic planning, accounting and reporting, disclosure rules, legal counsel, investor relations and internal controls should be implemented while the firm is still private. Moreover, companies should have strong and credible investment merits and begin articulating a clear and consistent message about their investment story to potential investors and other stakeholders as early as possible. They should also implement risk management and corporate governance procedures to safeguard their own as well as other stakeholders' interests and to fulfill regulatory requirements. Given the sheer amount of preparation involved, the transition from private to public status should be viewed as a long journey - a transformational process - rather than a one-off financial transaction.

IPO Market Remains Robust

U.S. Initial Public Offerings Proceeds Amount + Overallotment Sold (US$ Mil) 41,806.2 24,039.6 15,487.4 2,325.5 17,089.4 18,330.0 24,206.8

Issue Date 1st half 2000 1st half 2001 1st half 2002 1st half 2003 1st half 2004 1st half 2005 1st half 2006

Number of Issues 196 47 51 10 95 90 92

The bottom line is... the more prepared you can be, and the more you can act like a public company before you actually do an IPO, the easier it will be. -- Barbara Gasper, Senior Vice President of Investor Relations, MasterCard

*through June 30 of each year.

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The Process
Among the key steps in the journey to successful public status:

mount to have a history of earnings and revenue growth and that performance along those measures also stacks up well against competitors. Other financial attributes include return on investment, return on equity and cost control. A company must not only be able to compete well, but must also have a strong grasp of its competitive position, in order to position itself favorably on financial and nonfinancial measures. How does the company compare to competitors in terms of profit and sales growth, cash flow, management quality, market leadership, product quality and other attributes?

Develop a Strong Business Model and Position of Competitive Strength

Before taking steps to build market awareness of their business, companies planning on going public need to ensure they possess many of the qualities sought by investors, including a sound business model, strong growth prospects and an ability to compete well. A failure to have these attributes can make for a rough IPO experience. A comprehensive business plan should be developed that provides a clear road map for the company and can communicate its strategic vision to potential investors and other stakeholders. Moreover, since much of the information contained in the business plan is relevant to the prospectus, having a good business plan can greatly shorten the amount of time required to produce the prospectus. Before the IPO, companies should also map out and consider implementing strategic transactions, such as acquisitions, alliances and joint ventures, aimed at accelerating the company's growth. Further, companies need to take the time to build a track record of performance and a position of competitive strength along both financial and non-financial measures, especially given the characteristics that institutional investors look for when making investment decisions. Studies have shown that while superior financial performance measured against peers is the chief investment criteria, non-financial metrics also play a big role in portfolio managers' buy and sell decisions. A survey conducted by Ernst & Young in 2003 found that non-financial measures made up 35% of portfolio managers' decision making. Some of the key non-financial metrics include quality and credibility of management, innovativeness, strategy execution and effectiveness of executive compensation. Among financial measures, it is para-

Create a Credible IPO Team

Another key step on the road to a successful IPO is to build strong internal and external teams of skilled and experienced professionals drawn from legal, accounting and underwriting backgrounds to guide the company through the IPO process. The external or transactional team includes investment bankers/underwriters, outside legal counsel, public-company oriented auditors and a stock transfer agent, among others. The underwriter is the principal team player, offering superior knowledge of the IPO process, since share issuance is one of its primary business functions. Given underwriters' crucial role, companies should solicit presentations from several investment banks before choosing one. As part of the internal team, it is recommended that companies hire an investor relations professional, with IPO experience, early in the pre-IPO process to the extent they can afford to do so. This provides the company with an expert, who is looking out solely for the company's interests. Outside attorneys and auditors, on the other hand, are concerned with protecting their own interests in addition to that of the company and may feel compelled to charge as many hours The IPO process is best as possible. Mean- viewed as a marathon, not a while, underwriters sprint. -- Molly Salky, have an incentive to Investor Relations Director, complete the deal Build-A-Bear Workshop under conditions as

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favorable to them as possible, such as pricing the IPO low in order to minimize their selling effort. An IR professional with IPO knowledge can help guide the appropriate selection, compensation and behavior of outside experts. An independent consultant with IPO expertise also can be very helpful in this regard. Further, IR professionals can play a major role in smoothing the transition to working with the investment community. Ahead of going public, the need arises for a number of IR functions, such as targeting potential investors, accurately communicating the company story, optimizing market awareness and ensuring compliance with disclosure regulations. Some bigger investment banks prefer to handle the IR function themselves; however, they tend to be more open to IR involvement when its role and value as part of the team is clearly established. If a company cannot afford an IR professional or consultant, the CFO, along with a corporate communications or public relations manager may be called on to play a more active role in communications activities. In addition to hiring outside legal counsel, having legal resources available internally can prove useful, helping the company save time and money as it navigates the myriad of filing requirements and SEC rules and regulations related to going public. Acting like a public company pre-IPO helps to achieve the following objectives: Ensure that the investment community is well informed about the company and is prepared to buy shares when they become available. To that end, potential investor constituencies have been identified and communicated with prior to the roadshow. Train senior management in how the market operates. Give management experience in working with the investment community, including analysts, brokers, portfolio managers and others, so as to become familiar with disclosure regulations and investors' information needs. Have a well-functioning investor relations plan in place by the time the Registration Statement is filed.

Build an Investor Communications Function

A crucial step in preparing for life as a public company is to create and implement an active investor communications function. This serves the dual purpose of boosting the market's knowledge of the business and generating demand for shares while also preparing management to be well versed in investors' information needs when shares are ultimately traded. Investor relations professionals can be very helpful in this process. Communications should be tailored to investors, providing them with the information they desire, such as the company's strategic plans, growth initiatives, sources of revenue and competitive advantages in products or services. Mechanisms for delivering communications should be carefully selected to ensure they reach their intended audiences. Communication efforts should be both broad-based and targeted in nature. Communications aimed at a relatively broad investor audience may include press releases, a company website, media coverage and advertising. Buy- and sell-side analysts in the company's industry can be broadly reached through coverage in industry trade publications and participation in trade shows. Companies may also begin publishing quarterly and annual financial reports aimed at the investment community. This forces management to think about how to present its investment story. In addition to broad outreach, companies should also target specific buy- and sell-side firms. Sell-side targets may include regional firms and industry analysts at national firms, while buy-side targeting may be more sophisticated, involving the identification of Companies should be sure institutions with investto define their disclosure ment disciplines that metrics and parameters are compatible with the very clearly from the start company's fundamental rather than change their characteristics. practices after the IPO. -Molly Salky, IR Director, When meeting with Build-A-Bear Workshop portfolio managers and investors, companies

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should note current market conditions, highlight their fundamental strengths and prospects for growth, and show how and where the company's products or services fit into a particular industry in the market. Other methods of outreach that may help the company prepare for its market debut include perception interviews and attendance at sell-side industry conferences. Sell-side firms can be interviewed to gauge market awareness of the company and help management bet-

ter understand what information interests analysts in the company's industry. Also, attending brokerage-sponsored industry conferences can educate the company on how its peers present their investment story and the kinds of questions they are asked. Moreover, it is not uncommon for brokers to invite private companies planning on going public to give presentations, providing yet another opportunity for the company to educate the market about its investment story.

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Rules of Engagement
Communicating Before and During Offering
In communicating with the investment community, companies must be careful not to violate any restrictions imposed by the SEC on the type and extent of communications an issuing company can engage in during the registration process, including the pre-filing, waiting and quiet periods. The Securities Act of 1933 was created to address the causes of the 1929 stock market crash, when stock promoters made huge profits by actively talking up worthless securities in a time when information about public companies was scarce. To prevent this inequity, the legislation barred a company from hyping its stock via publications or statements not included in the written prospectus filed with the SEC. As such, companies planning on going public have been restricted from certain types of communications during a period of time, that while not specifically defined, has been generally interpreted as several weeks leading up to and following the offering and has come to be known as the "quiet period." However, now that information about issuing companies could be made readily and easily accessible via the Internet and other electronic media, the SEC unanimously adopted new rules last year that greatly eased the Securities Act restrictions on communications during the registration process. The new rules, which went into effect on December 1, 2005, are designed to reflect the myriad of communication methods available in today's world, giving investors greater access to information about issuing companies while still ensuring that the information is accurate and not misleading. The SEC also aimed to dissolve some of the confusion among companies about what types of communications meet securities laws. Such confusion has traditionally led many companies to completely clam up during the registration process. The new rules essentially give companies more leeway in promoting securities, allowing them to disseminate

information more widely to investors and the media during the marketing of initial public offerings. For example, under the new rules, company executives are now allowed to be interviewed by the media, provided that the company files any published articles with the SEC soon after they are completed. Traditionally, companies had avoided talking to the media during the registration process since under the old rules news articles published during the period could have violated securities laws. Still, issuing companies are well advised to work closely with their legal counsel when providing any communications during the registration process, given that a number of restrictions remain. For example, any public statement permitted under the new rules must be accurate and not misleading, meeting the legal standard that applies to a company's prospectus. While there may be some lingering confusion about what types of communications are permissible, companies should avoid complete silence, since studies have shown that companies releasing positive news toward the end of the so-called quiet period tend to enjoy a greater increase in stock price when the quiet period ends than those remaining silent. The initiation of sellside analyst coverage right after the quiet period expires has been shown to be especially beneficial in terms of stock price performance.2

Minimize Window Dressing Companies may be tempted to dress up their investment story prior to the IPO in an effort to obtain the best valuation. However, they should avoid portraying a level of financial health and competitive strength that is not sustainable post-IPO. Investors may be unforgiving of a company that fails to live up to its promises. Moreover, once investors' trust in a company's credibility has been lost, it can be difficult to regain.

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Corporate Governance/Internal Controls

In order to ensure readiness for life as a public entity and the ability to attract and sustain investor interest, companies must address corporate governance issues and put the systems, processes and internal controls in place that will guarantee compliance with the myriad of regulations imposed on public companies by the Securities and Exchange Commission, National Association of Securities Dealers and the stock exchanges, among others. Among the numerous regulations, the 2002 SarbanesOxley Act requires public companies' management to certify both internal controls and financial results to the SEC. There are also a number of requirements related to the composition of the board of directors and the audit committee. For example, audit committee members must be independent and the company must disclose whether at least one member is a "financial expert." The board of directors should also be independent and have financial expertise. Additionally, companies should avoid any questionable accounting policies, such as aggressive revenue recognition and excessive employee stock options expense. Also, any compensation extremes between the lowestpaid and highest-paid executives should be eliminated, and compensation should be largely performance based. Early regulatory compliance and steps taken to avoid corporate governance issues can help to achieve a higher-value IPO by demonstrating to investors that management understands and appreciates the importance of internal controls in the post-Enron world.

Prepare an Effective Roadshow

Traditionally, investment banks have been primarily responsible for preparing the roadshow presentation, since they have a good sense of what attributes investors are seeking. However, in the post-research settlement, post-Sarbanes-Oxley world, senior management has been playing an increasingly bigger role in preparing and delivering the company's story to potential investors, since sell-side analysts are now prohibited from attending IPO roadshows, and investment bankers can no longer look to analysts for assistance in marketing deals. The roadshow presentation content comes largely from all the legwork that was done ahead of the offering such as preparation of the prospectus, financial statements, descriptions of operations, markets served and more. The presentation should be geared to the audience, namely institutional analysts and portfolio managers. It should focus largely on the company's vision, strategies, competitive strengths, key initiatives, and operating and financial performance. During the presentations, investors also evaluate management qualities such as intelligence, knowledge of the company and industry, strength of personality and more. As such, it is crucial that management be prepared to put its best foot forward when making road show presentations. It is recommended that companies prepare a list of anticipated questions and appropriate responses in advance and that management rehearse both the presentation and Q&A sessions. Companies may also find it valuable to track meeting attendance. Looking at the profiles of attendees can give the company a better idea of fundamental characteristics that appear to attract institutional investors. This information in turn can be used in further targeting efforts. Also, companies should take steps to ensure that institutions likely to be interested in the company are invited to the roadshow presentations. Providing management with profiles of attending institutions in advance of the meetings can help them prepare for certain questions and ensure that institutions' information needs are met. Following the roadshow, sell-side analysts can still play
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Market Conditions Before going public, companies also need to consider whether market conditions are well suited for IPOs. In determining suitability, companies should consider general stock market conditions, industry market conditions and the frequency and size of IPOs in both the industry and the broader market.

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an important role in communication efforts by being available to respond to investor inquiries about the company and its industry. Because analysts are still allowed to participate in a potential deal's due diligence leading up to the offering, they are knowledgeable about the deal. Moreover, while they can no longer market deals alongside bankers and management, they are still allowed to answer investors' questions about any given deal.

implemented the infrastructure for effectively conveying that story to the investment community. Moreover, time is needed to allow the company to start behaving like a public entity well before becoming one. As such, companies wishing to maximize their chances of a successful public company are encouraged to do the following in advance of the offering: Start preparations early and view the IPO as a process, rather than a one-off financial event. Develop a good business plan. Ensure that the company has solid growth prospects and a track record of performance along both financial and non-financial measures. Define key metrics to describe performance and outlook. Set realistic and compelling expectations for future performance. Ensure that the company competes well with its peers along both financial and non-financial measures. Choose strong, reliable internal and external IPO teams. Implement the systems and processes common to public companies such as strategic planning, accounting and reporting, investor relations and internal controls. Employ an investor communications function and use it to build market awareness of the com pany while also keeping in mind rules governing acceptable communications in the period surrounding the IPO. Resolve corporate governance and accounting issues. Assess whether market conditions are suitable for going public.

Who's running the company while the boss is away? It goes without saying that the company must continue to perform well during the long-running IPO process. However, this objective can be complicated by the substantial involvement required of C-level executives in certain steps of the pre-IPO process, such as the road show. As such, it is imperative that the CEO and CFO feel comfortable delegating significant responsibility to lower level management during periods in which their time and energy are monopolized by IPO preparations, which can be drawn out over a number of months or even years.

After the IPO

Following the IPO event, companies must meet the operational requirements of being public and fulfill shareholders expectations. The communications strategy that was put in place in the pre-IPO process should continue to build the company's reputation and credibility in the investment community. Companies should also seek to update their strategic vision, stay competitive on financial and non-financial measures and continue to grow.

Conclusion
Given the massive amount of work involved in succesfully taking a company public and the ramifications of a failed IPO, private firms planning on going public need to allow enough time to manage this transition properly. Time is needed to ensure that, prior to the IPO, the company has a compelling investment story and has

Notes
1Ernst & Young. 2004. Ernst & Young Global IPO Survey - 2004. 2Bradley, D. , B. Jordan, J. Ritter. 2003. "The Quiet Period Goes Out With A Bang."
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Q&A with MasterCard Inc. (NYSE: MA)

Long before MasterCard launched its IPO in May 2006, the credit card giant functioned like a public company, including SEC filings and SOX compliance. Heres what Barbara Gasper, Senior VP of Investor Relations and Linda Kirkpatrick, VP of Investor Relations had to say about the IPO experience.
How did you measure your IPO's success? And based on those benchmarks, how successful was it? Barbara Gasper (BG): These days, probably the best short-term measure of an IPO's success is whether the stock is still trading above the price where it launched, especially since the stock performance for many recent IPOs has fallen off immediately after they're launched. MasterCard has stayed above its launch price since Day One. One of the longer-term measures of an IPO's success is to track how many of the targeted fundamental long term investors who participated in the IPO are still holders after a period of time. For MasterCard, it's too soon to comment on that, but it's something that we will be watching closely. What steps did your company take to start behaving like a public company before the IPO launch? Linda Kirkpatrick (LK): The first step we took as far as this evolution was to ensure that our global structure was appropriate. In 2002, we merged with our European counterpart, Europay International and became a private share company. By doing so, we made our company more global and aligned the interests of management. In 2002, we also started filing with the SEC. Although our stock wasn't publicly traded, when we became a "private share" company we had more than 300 shareholders (which were our Member Banks) and, consequently, we had to register with the SEC. We weren't listed on any exchange, but we acted like a public company in almost every other sense. As a result, we started taking the necessary steps to achieve compliance with Sarbanes-Oxley. We actually complied with SOX 404 two years in advance of the deadline for companies in our category. How did Sarbanes Oxley influence your company's preparations for going public? LK: While we had transparency with our financial results since becoming a SEC-registered company, achieving SOX 404 compliance demonstrated the continued strength of our reporting and governance process and took us to a higher standard of internal control compliance. We have actually heard of smaller companies who had to delay their IPOs because they were unable to achieve the required level of compliance. BG: Any company looking at going public needs to be sure it understands what the requirements are, what may have to be done with the company's systems to be compliant, and determine whether or not management is willing to live with those requirements.

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Q&A with MasterCard Inc. (cont)

Please describe your company's efforts to reach out to the investment community prior to going public? (i.e. investment banks, sell-side, institutional investors) LK: We aligned ourselves with investment bankers with whom we had worked before, both as customers and advisors. BG: In terms of roadshow statistics, we visited 20 cities, in 6 countries, over 13 days. We hosted 17 group meetings, held 76 one-on-one meetings and met with over 800 potential investors. The bankers were pressing us to add more sessions (such as conference calls in the car between face-to-face meetings) but we felt it was important to give management a little down time to recharge so we pushed back. What challenges did you encounter in pricing the deal? BG: There was a lot going on in the market around the time of our road show, so we had many factors to consider when determining the final price. We launched our IPO with a target price range of $40 to $43 per share. During the roadshow, we saw a combination of down market performance and peer valuation declines. We also priced the same day Vonage began trading, which cast a shadow on any IPO's pricing. After a lengthy discussion, we decided to price at $39 per share. Everyone was pleased when we closed up $7 the first day and the underwriters decided to exercise the greenshoe on the very first day of trading, which represented a 7.5% increase to the share count. Prior to the IPO, did your company implement any strategic initiatives aimed at accelerating the company's growth rate? BG: The strategic initiatives that were in place were the ones that were most appropriate for the company's long-term plans, and there weren't any special initiatives added around the IPO launch. Did you take any steps while still private to prepare for handling publicity, whether positive or negative? LK: We created an IR function, and we hired Barbara, who had many years of IR experience and had been a professional IRO for many years. BG: One of the first decisions a company needs to make is about the reporting structure of the IR function. Will it be part of the corporate communications function, or will it report directly to the CFO or CEO as a separate but related function? In either case, IR and PR have to work very closely together to insure consistent messaging among all audiences. At MasterCard, IR reports directly to the CFO, which is similar to other companies where I've worked. LK: We also spoke with CEOs and CFOs of other public companies who had recently completed IPOs to get their thoughts and perspectives about how we should be preparing ourselves for the change. It was an internally-initiated effort to speak with people who had been there and done that.

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Q&A with MasterCard Inc. (cont)

What advice did you receive? LK: Executives who spoke with Bob [Robert Selander, president and CEO] and Chris [Chris McWilton, CFO] told them that they now needed to carve out a portion of their time, which previously hadnt been necessary, for the investment community to ensure that analysts and investors are apprised of our company's strategy, business model, and how we are moving forward. BG: Senior management needs to realize that this is an additional time commitment that they need to add to their workload. The amount of time will vary depending on what's going on with the company at any given time. There are times when they have to play a more active role, and times when they can step back a little. But either way, it's going to be more of a time commitment than just a couple of hours per quarter. What lessons did you learn during your first earnings release as a public company (Q2 2006)? BG: MasterCard made a decision to hire someone with previous IR experience, so I've been through this before. I've headed up IR functions at companies such as Ford, Lucent and Raytheon. Then, I was lucky enough to get Linda, who has been with the company for nine years, to work with me. So together, we have a good combination of IR and company experience. If a company decides to identify an internal candidate to assume the IR responsibilities, that person should reach out to their outside advisors and professional sources such as NIRI in order to better understand what the IR function entails. In terms of the earnings release process, it's important to set up a schedule to ensure good coordination between Investor Relations, Corporate Communications, Finance and Legal because everybody's working as a team. Make sure you brief your executives on what they can expect: what the conference call is going to be like, who and how many people are expected to be on it and what some of the likely questions will be. When you are preparing for your earnings announcement and conference call, try to anticipate what the big issues are going to be for the investment community so that you can pro-actively address them rather than waiting for the issue to come up in Q&A. What advice would you give to a colleague at a company that is considering an IPO now? BG: To some extent, it was easier for a well-established company like MasterCard to do this than it would be for a start-up company. MasterCard is a 40-year old business with a very well recognized brand. Because of its private share structure, we have been required to make SEC filings since 2002. The bottom line is the more prepared you can be, and the more you can function like a public company before you actually do an IPO, the easier it will be. But there is a big commitment that management needs to understand (in terms of time, resources, in reporting requirements) before making the decision to go public.

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Q&A with MasterCard Inc. (cont)

The other piece of advice is don't rely only on what the investment bankers tell you. Do what MasterCard did and go out and talk to CEOs and CFOs yourself. Get some first-hand feedback from companies that have gone public in the last couple of years. What did they learn having just gone through the process? It's good for senior management to hear it from their counterparts at other companies.

About the Company Profile: MasterCard Incorporated advances global commerce by providing a critical economic link between financial institutions, businesses, cardholders and merchants worldwide. As a franchisor, processor and advisor, MasterCard develops and markets payment solutions, processes close to 14 billion transactions each year, and provides industry-leading analysis and consulting services to financial institution customers and merchants. Through its family of brands, including MasterCard, Maestro and Cirrus, MasterCard serves consumers and businesses in more than 210 countries and territories.

Date Went Public: May 25, 2006 Proposed Offer Price: $40.00 to $43.00 Actual Offer Price: $39.00 First Day Open: $40.30 First Day Close: $46.00

Shares Offered (mil.): 61.52 Offering Amount (mil.): $2,399.00 Post-Offering Shares (mil.): 79.63

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Q&A with Build-A-Bear Workshop, Inc. (NYSE: BBW)

Two years after Build-A-Bear's $172 million IPO, heres what IR Director Molly Salky had to say about the company's process for transitioning to public status.
How did you measure your IPO's success? And based on those benchmarks, how successful was it? Not only was the offering successfully priced in a very busy IPO market but the deal was multiple times subscribed two days before pricing, justifying upsizing the entire offering and an increase in price range. The entire offering was upsized by over 10% (the $172 million includes the greenshoe). The pricing range upsized by $2 ($18 at the midpoint), and shares were priced at $20, the high end of the revised range. Also, one-on-one meetings had a hit ratio of 92%. Today, we have eight sell-side analysts providing active research coverage. What steps did BBW take to start behaving like a public company before its October 2004 IPO launch? From the founding of BBW in 1997, the long-term plan was to become a public company; therefore, from day one the company structured and grew its infrastructure with that goal in mind. Strategic planning, finance and accounting systems, IT infrastructure, etc. were in place. The position of President and Chief Operating Officer was established about six months prior to the IPO. The executive selected to fill this position possessed Wall Street experience. Other key personnel additions related to the IPO included general counsel, IR director and SEC reporting director. Please describe your companys efforts to reach out to the investment community prior to going public? Relationships were established with five investment banking firms - AG Edwards, Citigroup, CSFB, JP Morgan and T. Weisel. Prior to the IPO several meetings were held with the sell-side analysts at these firms. Via the IPO roadshow, the company was introduced to over 235 high quality institutional investors. These meetings were planned and organized by the investment banking team. Prior to the IPO, did BBW implement any strategic initiatives aimed at accelerating the company's growth rate? The company made some strategic investments including new retail concept development begun in the fall of 2004 (friends2Bmade) and national TV advertising begun in early 2004. In your view, how important are non-financial measures in institutional investors' investment decisionmaking processes? On a scale of 1 (low importance) to 10 (high importance) - about a 7.5.

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Q&A with Build-A-Bear (cont)

How did Sarbanes Oxley influence your company's preparations for going public? Our systems and controls were strong; however documentation of internal controls was not as complete as necessary for Sarbanes Oxley compliance. We utilized outside resources to assist us with the documentation process and ultimately to assist us with testing and evaluation of controls. Did you take any steps while still private to prepare for handling publicity, whether positive or negative? We established a company disclosure policy, disclosure committee and Disclosure Committee Charter. BBW had always maintained an active marketing/public relations program. Review and approval processes were put into place to ensure that the marketing/PR teams' activities received proper review and approval prior to public statements/releases. What were some of the most crucial steps your company took in the pre-IPO process that you feel made the company's IPO successful? Financial and brand building success prior to the IPO was a big contributing factor. Telling the company story was also key. We focused on key BBW differentiating characteristics, such as the store contribution model, strong and stable merchandise margins, store execution and the importance of the 'experiential' component. A broad based and successful IPO roadshow upon which to build continued investor communications efforts was also important.

About the Company Profile: Build-A-Bear Workshop provides a make-your-own-stuffed-animal interactive retail-entertainment experience. As of July 1, 2006, the company operated over 255 Build-A-Bear Workshop stores in 44 states, Canada, the United Kingdom and Ireland, and had 22 franchised stores in international locations.

Date Went Public: Oct 28, 2004 Proposed Offer Price: $18.00 to $20.00 Actual Offer Price: $20.00 First Day Open: $27.00 First Day Close: $25.05

Shares Offered (mil.): 6.80 Offering Amount (mil.): $129.20 Post-Offering Shares (mil.): 19.55

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IPO Preparation Checklist

Although a number of company-specific factors may influence the IPO preparation process, here is a general checklist of recommended pre-IPO tasks that can help to maximize the chances of a successful IPO.

Start preparations early (several months to several years before the planned offering). Behave like a public company by implementing the following systems and processes: Strategic planning Accounting Reporting Investor relations Internal controls Executive compensation Create a reliable IPO team, including underwriters, an IR professional, public-oriented auditors, outside legal counsel, and a stock transfer agent. Have a compelling investment story. Prepare a comprehensive business plan. Have strong growth prospects. Have a track record of financial and non-financial performance. Be in a position of competitive strength along both financial and non-financial measures. Have clear understanding of how company compares to peers. Map out and implement improve ment initiatives and/or strategic transactions. Minimize window dressing. Pay close attention to corporate governance. Address any questionable accounting policies. Ensure compliance with SarbanesOxley and other regulations.

Build an investor communications function and market awareness. Hire an IR Professional. Start publishing quarterly and annual financial reports. Implement broad outreach efforts. Press Releases Company Web Site Media Coverage Advertising Coverage in trade publications Participation in trade shows Implement targeted outreach efforts. Target buy-side firms. Target sell-side firms. Conduct perception interviews with the sell-side. Attend brokerage-sponsored industry conferences. Comply with rules for communicating during registration period. Prepare an effective roadshow. Gear presentation to the audience. Invite institutions that are likely to be interested in company. Track meeting attendance. Prepare management for investor scrutiny during presentation. Assess market climate for IPOs. General stock market conditions Industry market conditions Frequency and size of IPOs Frequency and size of IPOs in industry

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