(1) In conjunction with the Robert Plan Acquisition, The Robert Plan agreed to allocate approximately 30,500 square feet in its Edison office to INSpire through April 1, 2001, at which time INSpire intends to relocate to another facility. INSpire reimburses The Robert Plan rental expense for this allocated office space, as well as for space allocated to INSpire in The Robert Plan's satellite facilities, on a monthly basis.
(2) In conjunction with the Island Acquisition, Island Group agreed to allocate approximately 34,400 square feet in its Honolulu office to INSpire through December 31, 2000. INSpire reimburses Island Group rental expense for this allocated space on a monthly basis. Effective January 1, 2001, INSpire intends to sublease approximately 25,800 square feet from Island Group in the Honolulu office for monthly rental expense of approximately $48,800.
The aggregate monthly rental expense for the properties listed above is $348,000. INSpire also leases satellite facilities with an aggregate monthly lease rate of $102,000.
Revenues from outsourcing services are recognized as services are rendered. INSpire is typically paid a percentage of premiums written for policy administration services, a percentage of premiums earned or claims paid for claims administration services and a percentage of premiums written subject to a minimum fee for IT services. Outsourcing services contracts generally are for terms of two to ten years. Due to the ongoing nature of these outsourcing services and the length of the terms of the service contracts, outsourcing services generate recurring revenues. Initial installations of software systems generally include a one-time license fee and a
contract for the installation and customization of the system to meet the customer's specifications, which INSpire bills at an hourly rate. Amounts charged for the initial license and the installation and customization of systems are recognized as revenue during the installation period in proportion to the hours expended for installation compared to the total hours projected for installation. In other instances, revenues are recognized based on performance milestones specified in the contract. INSpire recognizes the annual fee charged for maintenance of the customer's system over the maintenance contract period. Revenues from computer hardware and equipment sales, included in other revenues, are recognized when INSpire receives notification that the equipment has been shipped by the manufacturer and title has passed to the customer. Changes in estimates of percentage of completion or losses, if any, associated with outsourcing or software services are recognized in the period in which they are determined. Unearned revenues consist of billings to customers in advance of revenues recognized on such services. Unbilled receivables consist of revenues recognized in advance of billings due to timing differences related to billing schedules specified in contracts.
Revenues. Total revenues were $140.6 million for the year ended December 31, 1999 compared to $87.2 million for the year ended December 31, 1998, an increase of $53.4 million or 61%. Outsourcing services revenues were $111.7 million for the year ended December 31, 1999 compared to $50.9 million for the year ended December 31, 1998, an increase of $60.8 million or 119%. The growth in outsourcing services revenues is due primarily to: (i) the Company performing outsourcing services under a policy administration agreement with Arrowhead entered into effective December 1, 1998 and the Company's subsidiary performing outsourcing services under a claims administration agreement with Arrowhead entered into effective December 1, 1998, (ii) the Company performing outsourcing services under a policy and claims administration agreement with The Robert Plan entered into effective April 1, 1999, (iii) the Company performing outsourcing services under a policy and claims administration agreement with Island Group entered into effective June 1, 1999, and (iv) the Company performing outsourcing services under five additional outsourcing contracts entered into during 1999. Software and software services revenues were $26.9 million for the year ended December 31, 1999 compared to $34.0 million for the year ended December 31, 1998, a
Cost of revenues. Cost of revenues, which is comprised mainly of personnel costs, was $101.8 million for the year ended December 31, 1999 compared to $47.0 million for the year ended December 31, 1998, an increase of $54.8 million or 117%. Cost of outsourcing services was $81.5 million for the year ended December 31, 1999 compared to $26.3 million for the year ended December 31, 1998, an increase of $55.2 million or 210%. This increase is primarily attributable to costs associated with the performance of outsourcing services under the contracts described above. Cost of outsourcing services as a percentage of outsourcing services revenues increased to 73% for the year ended December 31, 1999 from 52% for the year ended December 31, 1998. This increase is a result of additional staffing and equipment to support the growth of the outsourcing division, and lower operating margins during the initial phases of the new outsourcing contracts described above. Cost of software and software services remained relatively constant at $19.2 million for the year ended December 31, 1999 compared to $19.1 million for the year ended December 31, 1998. Cost of software and software services as a percentage of software and software services revenues increased to 71% for the year ended December 31, 1999 from 56% for the year ended December 31, 1998, primarily as a result of the costs associated with providing consulting services, which comprised a larger proportion of total software revenues during the year ended December 31, 1999 compared to the year ended December 31, 1998, as well as a decrease in the productivity of software personnel.
Selling, general and administrative expenses. Selling, general and administrative expenses were $18.3 million for the year ended December 31, 1999 compared to $14.6 million for the year ended December 31, 1998, an increase of $3.7 million or 25%. This increase is primarily due to additional executive management, staffing, office space and computer equipment and software required to expand the infrastructure to support the Company's growth. Selling, general and administrative expenses as a percentage of total revenues decreased to 13% for the year ended December 31, 1999 from 17% for the year ended December 31, 1998. This decrease is due to the increased revenue base over which to spread these costs.
Research and development. Research and development expense was $5.2 million for the year ended December 31, 1999 compared to $3.0 million for the year ended December 31, 1998, an increase of $2.2 million or 73%. This increase is primarily due to increased efforts to expand the functionality of current software products and the development of new software products to be utilized in INSpire's outsourcing operations. This expense is comprised primarily of personnel, equipment and occupancy costs related to software development. Research and development expense for the year ended December 31, 1999 and 1998 is net of capitalized software production costs of approximately $1.6 million and $2.0 million, respectively.
Depreciation and amortization. Depreciation and amortization expense was $9.2 million for the year ended December 31, 1999 compared to $6.2 million for the year ended December 31, 1998, an increase of approximately $3.0 million or 48%. This increase is primarily attributable to amortization of goodwill and depreciation on fixed assets recorded in connection with the Arrowhead Acquisition, the Robert Plan Acquisition and the Island Acquisition, and the acquisition of additional property and equipment to expand the infrastructure to support the Company's growth.
Litigation expenses of $1.2 million include expenses associated with the collection of accounts receivable, as well as penalties or settlements to be paid in connection with various pending matters.
The Company recognized an impairment charge of $16.8 million for certain intangible assets, including a substantial portion of the goodwill and software purchased in the SDS Acquisition and the Paragon Acquisition, the software license associated with the Company's agreement with Cover-All Systems, Inc. entered into in October 1997, and internally capitalized software production costs. The Company periodically evaluates the carrying value of long lived assets to determine if impairment exists based upon estimated undiscounted future cash flows. The impairment, if any, is measured by the difference between net book value and estimated discounted future cash flows, and is charged to expense in the period identified. The impairment charge was necessitated by the Company's determination, based on recent operating results, that the future expected sales and cash flows from the Company's software operations would be significantly lower than previously expected.
the year ended December 31, 1997, an increase of $5.5 million or 26%. This increase primarily was a result of the costs associated with the performance of services under the outsourcing contracts described above. Cost of outsourcing services as a percentage of outsourcing services revenues decreased to 52% in 1998 from 64% in 1997. This decrease was primarily a result of economies of scale associated with spreading certain fixed costs over a larger revenue base. Cost of software and software services was $19.1 million for the year ended December 31, 1998 compared to $10.7 million for the year ended December 31, 1997, an increase of $8.4 million or 79%. This increase primarily was a result of increased personnel costs of the software division to support increased implementation and consulting services. Cost of software and software services as a percentage of software and software services revenues increased to 56% in 1998 from 51% in 1997. This increase resulted primarily from increased personnel costs and a lower utilization rate for such personnel during 1998.
Research and development. Research and development expense was $3.0 million, net of capitalized software production costs of $2.0 million, for the year ended December 31, 1998, compared to $1.2 million, net of capitalized software production costs of $800,000, for the year ended December 31, 1997, an increase of 150%. This expense was comprised primarily of personnel, equipment and occupancy costs related to software development. The increase in this expense was due to the further development of such existing products as WPC and EmPower into new platforms and integration within product lines.
Depreciation and amortization. Depreciation and amortization expense was $6.2 million for the year ended December 31, 1998 compared to $4.0 million for the year ended December 31, 1997, an increase of $2.2 million or 55%. This increase was primarily attributable to (i) amortization of goodwill and capitalized software recorded in connection with the Paragon Acquisition, (ii) amortization of goodwill recorded in connection with the Arrowhead Acquisition, and (iii) acquisitions of property and equipment as a result of the expansion in infrastructure to support INSpire's growth.
Other income. Other income for the year ended December 31, 1998 increased to $2.7 million from $350,000 for the year ended December 31, 1997, an increase of $1.8 million or 619%. Other income for the year ended December 31, 1998 is primarily attributable to interest income on funds received as a result of the Company's initial public offering ("IPO") in August 1997 and follow-on public offering in March 1998.
INSpire believes that cash generated from operations will satisfy the Company's anticipated working capital requirements for at least one year. The Company, however, may require substantial additional funds for potential acquisitions and expansion. In the normal course of business, INSpire evaluates acquisitions of businesses, products and technologies that complement the Company's business. INSpire has no present commitments or understandings with respect to the acquisition of any business, although the Company continues to monitor potential acquisition opportunities.
In February 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 is effective for transactions entered into in fiscal years beginning after December 31, 1998. The adoption of SOP 98-1 did not have a material effect on the Company's consolidated financial position or results of operations.
The following table sets forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in fiscal 1999 and 1998. This information is derived from unaudited financial statements that include, in the opinion of INSpire, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation when read in conjunction with the financial statements of INSpire and notes thereto included elsewhere in this Form 10-K. The amounts related to shares of Common Stock have been adjusted to give effect to the Stock Dividend.