Initiate Systems to Go Public

HDM Breaking News, November 19, 2007

Initiate Systems Inc., a vendor of identity and data management software, has filed a registration statement with the Securities and Exchange Commission to conduct an initial public offering of stock.

The Chicago-based vendor expects the IPO will raise $75 million. Founded in 1994, the company in 1997 introduced master patient index software for health care organizations. It has since expanded the technology to include a suite of enterprisewide data management tools to match records from disparate information systems and among multiple organizations. The company also has expanded to serve several other sectors, including banking, insurance, financial services, retail, hospitality, high technology and government. The company has more than 100 clients and had 241 employees as of June 30, 2007.

Initiate Systems intends to use IPO proceeds for payment of $5 million in mandatory redemption of preferred stock, mandatory repayment of outstanding amounts on a revolving credit facility, working capital, product development and funding capital expenditures. “We may also use a portion of the net proceeds to expand our current business through acquisition of other businesses, products or technologies,” according to the S-1 registration statement filed with the SEC. “However, we do not have any plans, agreements or commitments for any specific acquisitions at this time.”

Initiate Systems has recorded significant net losses since its inception, with an accumulated deficit of $54 million as of June 30, 2007. “We expect to continue to incur losses and we may not be profitable in future periods,” according to the registration statement. The company had revenue of $15.5 million and a loss of $6.3 million in 2004, revenue of $21.7 million and a loss of $5.1 million in 2005, and revenue of $33.2 million and a loss of $12.3 million in 2006. Research and development expenses in 2006 were $5.9 million, or 18% of total revenue. During the first half of 2007, the vendor had revenue of $22.7 million and a loss of $7.2 million.

In the “risk factors” portion of the registration statement, Initiate Systems reported its executives and public accounting firm have identified material weaknesses in its internal control over financial reporting that must be addressed.

The material weaknesses include improper revenue recognition and a lack of personnel with appropriate skills and experience related to the financial reporting and the closing process. The revenue recognition problem resulted in restating financial results for 2002 through 2005. Inadequate personnel, policies and procedures resulted in numerous audit adjustments for consolidated financial statements for 2006 and the first half of 2007.

Investment firms involved in the IPO include Goldman, Sachs & Co., CIBC World Markets Corp., Jefferies & Company, and Thomas Weisel Partners LLC. The number of shares to be offered and the anticipated price range have not been determined. More information is available at initiatesystems.com and sec.gov.

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