The following table sets forth certain information with respect to the principal facilities used in INSpire's operations, all of which are leased:
The selected financial data of INSpire presented below as of December 31, 1998, 1997, 1996 and 1995, and for the years ended December 31, 1998, 1997 and 1996 and the period April 28, 1995 through December 31, 1995 have been derived from the audited financial statements of INSpire. The selected financial data should be read in conjunction with "
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 as revenue as hours are expended 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
INSpire incurs research and development costs that relate primarily to the development of new products and major enhancements to existing services and products. Research and development costs are comprised primarily of salaries. INSpire expenses or capitalizes, as appropriate, these research and development costs in accordance with Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed." All research and development costs incurred prior to the time management believes a project has reached "technological feasibility" are expensed. Software production costs incurred subsequent to reaching technological feasibility are capitalized, if material, and reported at the lower of unamortized cost or net realizable value. Capitalized costs are amortized over the expected service life of the related software, generally five to seven years, using the straight-line method. The cost and related accumulated amortization of projects are written off as they become fully amortized.
Arrowhead Acquisition. On December 1, 1998, INSpire acquired all of the outstanding capital stock of ACM for $13.5 million in cash and certain assets of AGIA related to its policy administration services for $6.5 million in cash and an option to purchase up to 299,466 shares of Common Stock. In addition, pursuant to ten-year outsourcing agreements, INSpire agreed to provide policy administration services to, and ICM agreed to provide claims administration services to, AGIA. See "Business -- Arrowhead Acquisition."
The following table sets forth, with respect to INSpire and for the periods indicated, the percentage of total revenues represented by certain revenue, expense and income items:
(1) INSpire was incorporated April 28, 1995 and commenced operations July 1, 1995.
Revenues. INSpire's total revenues were $87.2 million for the year ended December 31, 1998 compared to $56.6 million for the year ended December 31, 1997, an increase of $30.6 million or 54.1%. Outsourcing revenues were $50.9 million for 1998 compared to $32.5 million for 1997, an increase of 56.6%. This increase was attributable primarily to revenues from 13 new outsourcing contracts entered into during 1998, including the outsourcing agreements entered into with AGIA in connection with the Arrowhead Acquisition. Software and software services revenues were $34.0 million for 1998 compared to $21.1 million for 1997, an increase of 61.1%. This increase was attributable primarily to increased licensing of software products resulting from intensified marketing efforts in 1998 and increased installation, customization and modification services performed for customers.
equipment costs as a percentage of revenues. Cost of software and software services revenues as a percentage of software and software services revenues increased to 56.2% for 1998 from 50.7% for 1997. This increase resulted primarily from an increase in the number of software and software services personnel and a lower utilization rate for such personnel during 1998.
Nonrecurring Expenses. In connection with the Paragon Acquisition, $500,000 of in-process research and development expenses was charged to operations in April 1998. In the purchase price allocation of the SDS Acquisition, $3.0 million was assigned to in-process research and development. This amount was charged to operations in March 1997. In addition, $3.9 million was charged to operations as deferred compensation associated with stock options granted to executive officers during 1997.
contracts entered into in mid-1996 under which INSpire performed outsourcing services during all of 1997. These three contracts included a claims administration agreement with HOW Insurance Company, Home Warranty Corporation and Home Owners Warranty Corporation and a policy administration agreement and a claims administration agreement with Blanch whereby services are provided to Clarendon.
Research and Development. Research and development expense was $1.2 million, net of capitalized research and development costs of $800,000, for the year ended December 31, 1997. This expense was comprised primarily of personnel, equipment and occupancy costs related to software development. Prior to the SDS Acquisition, INSpire did not incur any significant research and development expenses.
INSpire entered into a bank credit facility with NationsBank (the "NationsBank Facility") on March 12, 1997, pursuant to which INSpire borrowed $5.0 million under a term credit facility and $2.5 million under a $4.0 million revolving credit facility, subject to a borrowing base formula, to finance in part the SDS Acquisition. INSpire used a portion of the net proceeds of the IPO to repay these amounts. On July 3, 1998, INSpire terminated the NationsBank Facility.
In its assessment of Year 2000 issues, INSpire is specifically focusing on its software applications and associated software products, hardware, facilities, communications equipment and security systems. INSpire has not yet completed its Year 2000 compliance testing of, and remediation efforts on, if necessary, these items. There can be no assurance that these items will be Year 2000 compliant by December 31, 1999. If any of these items are not Year 2000 compliant by December 31, 1999, then the Year 2000 issue could have a material adverse effect on the financial condition and results of operations of INSpire. INSpire has, however, made upgrades to its facilities, communications equipment, and security systems that, it believes, will make them completely operational after December 31, 1999.
In addition to evaluating its own systems for Year 2000 compliance, INSpire is also communicating with its significant suppliers and customers to determine the extent to which interfaces with such entities are vulnerable to Year 2000 issues and the extent to which any products purchased by or from, or internal systems of, such entities are vulnerable to Year 2000 issues. There can be no assurance that such entities, or interfaces with or products purchased from such entities, will not be vulnerable to Year 2000 issues or that such vulnerability will not have a material adverse effect on the financial condition or results of operations of INSpire.
Total costs associated with INSpire's Year 2000 readiness process, consisting of both internal and external resources, are expected to range between $2.0 and $2.5 million. INSpire anticipates financing these costs with cash generated from operations. INSpire has not yet fully completed its Year 2000 assessment and remediation efforts. The estimated time to complete assessment, testing and full compliance is June 30, 1999. INSpire will develop contingency plans as it finds that, through compliance testing, any of its applications, products, hardware, facilities, communication equipment or security systems are not Year 2000 compliant or that any of its significant suppliers or customers are significantly vulnerable to Year 2000 issues, and that such noncompliance or vulnerability cannot be remedied in a timely manner.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if so designed, the type of hedge transaction. INSpire does not expect that the adoption of SFAS 133 will have a material impact on its financial statements because INSpire does not currently hold any derivative instruments.
In October 1997, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position No. 97-2, "Software Revenue Recognition" ("SOP 97-2"). SOP 97-2 is effective for transactions entered into in fiscal years beginning after December 15, 1997. The adoption of SOP 97-2 did not have a material effect on INSpire's financial position, results of operations or cash flows.
(5) Primarily attributable to the gain on sale of AQS of $1.6 million.
INSpire has experienced in the past and will experience in the future quarterly variations in net revenues and net income. Thus, operating results for any particular quarter are not necessarily indicative of results for any future period. Factors that have affected quarterly operating results include the introduction of new or enhanced services and products by INSpire or its competitors, customer acceptance or rejection of new services and products, product development expenses, the timing of significant orders, the timing of large scale catastrophes, the volume of usage of INSpire's services and products, acquisitions, competitive conditions in its industry, general economic conditions and the level of selling and administrative expenses.