The aggregate monthly lease rate for the properties listed above is $208,000. INSpire also leases satellite facilities with an aggregate monthly lease rate of $63,500.
INSpire's revenues are derived principally from (i) outsourcing services and (ii) software and software services. Revenues from outsourcing services are derived from policy administration services, claims administration services and IT services. Revenues from software and software services are derived from contracts that grant customers a license to use INSpire's software products and contracts that provide for installation, customization, enhancement, conversion and maintenance services. Other revenues principally represent hardware sold in connection with software installations.
or software services are recognized in the period in which they are determined. Unearned revenues consist of payments by 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.
Follow-on Public Offering. On March 27, 1998, INSpire's follow-on public offering of 3,967,500 shares of Common Stock became effective. Pursuant to this offering, INSpire sold 2,700,000 shares of Common Stock. In addition, certain shareholders sold 1,267,500 shares of Common Stock. The shares of Common Stock were sold at a price of $21.00 per share, which resulted in net proceeds to INSpire of approximately $53 million. Pending use of such proceeds, INSpire has invested the net proceeds in short-term, investment grade, interest-bearing securities. See "Business -- Recent Events."
Cost of Revenues. Total cost of revenues was $47.0 million for the year ended December 31, 1998 compared to $33.9 million for the year ended December 31, 1997, an increase of $13.1 million or 38.6%. This increase was primarily a result of (i) increased personnel costs of the software division to support increased implementation and consulting services and (ii) the costs associated with the performance of services under the 13 new outsourcing contracts described above. Cost of revenues as a percentage of total revenues decreased to 53.9% for 1998 from 59.9% for 1997. Cost of outsourcing revenues as a percentage of outsourcing revenues decreased to 51.7% for 1998 from 64.0% for 1997. This decrease was primarily a result of economies of scale associated with spreading certain fixed costs over a larger revenue base and lower personnel and
Research and Development. Research and development expense was $3.0 million, net of capitalized research and development costs of $2.0 million, for the year ended December 31, 1998 compared to $1.2 million, net of capitalized research and development costs of $800,000, for the year ended December 31, 1997, an increase of $1.8 million or 150.0%. 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, EmPower and Value Rate 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 55.0%. 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 depreciable property and equipment of $7.8 million in the aggregate since December 31, 1997 as a result of the expansion in infrastructure to support INSpire's growth.
Other Income. Other income increased to $2.7 million for the year ended December 31, 1998 from $2.0 million for the year ended December 31, 1997, an increase of 35.0%. Other income for the year ended December 31, 1998 was primarily attributable to interest income from cash equivalents and investments on funds received as a result of the IPO in August 1997 and the follow-on public offering in March 1998. Other income for the year ended December 31, 1997 was primarily attributable to a gain on the sale of a subsidiary, AQS.
Net Income. Net income was $11.6 million, or $.58 per diluted share ($.65 per basic share), for the year ended December 31, 1998 compared to net income of $1.7 million, or $.13 per diluted share ($.14 per basic share), for the year ended December 31, 1997. Excluding the impact on net income resulting from the $500,000 write-off of in-process research and development expenses associated with the Paragon Acquisition, net income would have been $12.1 million, or $.61 per diluted share ($.68 per basic share), for the year ended December 31, 1998. In 1997, excluding the impact on net income resulting from the charge to operations of $3.9 million of deferred compensation associated with stock options granted to executive officers, the write-off of in-process research and development of $3.0 million recorded in connection with the SDS Acquisition, the gain on the sale of AQS of $1.6 million, and the tax effects thereof, net income would have been $5.1 million, or $.38 per diluted share ($.42 per basic share).
Revenues. INSpire's total revenues were $56.6 million for the year ended December 31, 1997 compared to $13.7 million for the year ended December 31, 1996, an increase of $42.9 million or 313%. This increase is attributable primarily to (i) the SDS Acquisition and (ii) revenues from three significant outsourcing
Selling, General and Administrative Expenses. Selling, general and administrative expenses, including management fees paid to shareholder, were $10.0 million for the year ended December 31, 1997 compared to $3.1 million for the year ended December 31, 1996, an increase of $6.9 million or 223%. This increase was primarily due to (i) the SDS Acquisition and (ii) additional staffing, office space and computer equipment and software required to expand the infrastructure to support INSpire's growth. Selling, general and administrative expenses as a percentage of total revenues decreased to 18% for the year ended December 31, 1997 from 23% for the year ended December 31, 1996. This decrease was primarily a result of economies of scale associated with spreading certain fixed costs over a larger revenue base and lower personnel and equipment costs as a percentage of revenues.
Other Income. Other income for the year ended December 31, 1997 includes a $1.6 million gain on the sale of AQS. Interest income, attributable primarily to short-term investments purchased with unused proceeds from the IPO, was $681,000 for the year ended December 31, 1997. During 1996, INSpire did not have investments that earned interest income. Interest expense, attributable primarily to a bank credit facility with NationsBank, was approximately $304,000 for the year ended December 31, 1997. INSpire did not have any interest-bearing debt during 1996.
Net Income. In 1997, excluding the impact on net income resulting from the charge to operations of $3.9 million of deferred compensation associated with stock options granted to executive officers, the write-off of in-process research and development of $3.0 million recorded in connection with the SDS Acquisition, the gain on the sale of AQS of $1.6 million, and the tax effects thereof, net income would have been $5.1 million, or $.39 per diluted share ($.42 per basic share). There were no such unusual charges during 1996.
Prior to the IPO in August 1997 and its follow-on public offering in March 1998, INSpire funded its operations through cash generated from operations, as well as borrowings and capital contributions from Millers Mutual. Net cash provided by operating activities was $4.3 million for the year ended December 31,
1998 compared to $4.5 million for the year ended December 31, 1997. In 1998, cash flow provided by operating activities included depreciation and amortization expense of approximately $6.2 million and the charge-off of in-process research and development expenses of $500,000, which was offset by an increase in accounts receivable of approximately $7.3 million and an increase in prepaid expenses and other current assets of approximately $3.1 million. Net cash used in investing activities was $58.0 million for the year ended December 31, 1998, primarily attributable to investments made by INSpire, the Paragon Acquisition and the Arrowhead Acquisition, compared to $19.1 million for the year ended December 31, 1997. Net cash provided by financing activities was $53.2 million for the year ended December 31, 1998, primarily due to INSpire's follow-on public offering, compared to $42.3 million for the year ended December 31, 1997, primarily due to the IPO.
INSpire is continuing its assessment of Year 2000 issues and taking steps to prevent these issues from adversely affecting its future operating results. This readiness process includes, but is not limited to, preparing an inventory of potential Year 2000 issues, determining functions affected, performing remediation as necessary, developing testing and recording results.
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income," ("SFAS 130") which establishes standards for reporting and display of comprehensive income and its components, as defined. SFAS 130 requires that all items that must be recognized under accounting standards as components of comprehensive income be reported in a financial statement displayed with the same prominence as other financial statements. Comprehensive income is defined as the total of net income and all other non-owner charges in equity. In addition, SFAS 130 requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a balance sheet. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Company adopted SFAS 130 during 1998 and comprehensive income does not differ from net income (loss) as reported in INSpire's Consolidated Statements of Operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," ("SFAS 131") which requires public enterprises to report certain financial and descriptive information about operating segments, as defined, in annual financial statements and selected information in condensed financial statements for interim periods issued to shareholders, if practical. INSpire adopted SFAS 131 in 1998, and management has determined that the disclosures in INSpire's Consolidated Financial Statements are adequate.
In February 1998, the Accounting Standards Executive Committee of the 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. INSpire believes the adoption of SOP 98-1 will not have a material effect on its financial position, results of operations or cash flows.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"). SOP 98-5 is effective for INSpire's fiscal year ending December 31, 1999. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. INSpire believes the adoption of SOP 98-5 will not have a material effect on its financial position, results of operations or cash flows.
The following table sets forth certain unaudited historical quarterly financial data for each of the eight consecutive quarters in fiscal 1998 and 1997. 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 INSpire's Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.
(4) Represents $3.9 million of deferred compensation expense relating to the grant of stock options to executive officers.
(3) Represents $3.0 million of in-process research and development expenses relating to the SDS Acquisition.