The Company leases all of its office space which, as of December 31, 1996, totaled approximately 156,000 square feet. The home office aggregates approximately 53,000 square feet. In addition, the Company leases and subleases approximately 18,000 square feet of office space in the same building as home office. Branch locations range from 270 to 4,600 square feet. See Note 12 of Notes to Consolidated Financial Statements.
On March 14, 1996, the Company merged with Condor Services, Inc. in a transaction accounted for as a pooling of interests (the "Merger").The following analysis has been prepared as if Condor Services, Inc. ("CSI") were wholly owned for all periods presented herein.
General operating costs also decreased as a percentage of net premiums earned from 16.8% or $14,309,000 in 1995 to 14.5% or $12,698,000 in 1996. The decrease in the actual amount of general operating costs is primarily attributable to significantly reduced bonus accruals in 1996 due to the Company's 1996 results as well as efficiencies related to the merger between the Company and Condor Services, Inc. which occurred in March of 1996.
Interest expense decreased 5.4% from $1,056,000 in 1995 to $999,000 in 1996 due to an decrease in the average interest rate on the bank indebtedness. The $12,500,000 in outstanding indebtedness has a variable rate which averaged 7.8% during 1995 but decreased to an average rate of 7.4 % during 1996 due to fluctuations during 1996 in the London Interbank Offered Rate (LIBOR) which is used as the benchmark for the Company's rate on bank indebtedness. The interest rate on the Company's bank indebtedness at December 31, 1996 was 6.88 %.
Other revenue decreased 99.8% from $797,000 in 1995 to $2,000 in 1996. Included in this number for 1995 is revenue earned from independent third parties by the Company's subsidiary, Raven Claims Services. During 1996, the Company performed minimal loss adjusting activities for outside sources.
Net premiums earned increased 4.8% from $81,289,000 in 1994 to $85,170,000 in 1995. The increase in net premiums earned reflects the increased premium writings in the latter half of 1994 which were earned during 1995. The Company earns premiums ratably over the estimated bond and/or policy terms.
Policy acquisition costs as a percentage of net premiums earned remained relatively constant at a ratio of 45.0% or $36,607,000 in 1994 as compared to 44.7% or $38,070,000 in 1995.
General operating costs also decreased as a percentage of net premiums earned from 19.2% or $15,616,000 in 1994 to 16.8% or $14,309,000 in 1995. The decrease in the actual amount of general operating costs is primarily attributable to earthquake related charges and a loss on subleasing a portion of the Company's headquarters during 1994. No such charges were incurred during 1995.
Interest expense increased 25.7% from $840,000 in 1994 to $1,056,000 in 1995 due to an increase in the interest rate on the bank indebtedness. The $12,500,000 in outstanding indebtedness has a variable rate which averaged 6.7% during 1994 but increased to an average rate of 7.8% during 1995 due to higher average short term interest rates in 1995 versus 1994. The interest rate on the Company's bank indebtedness at December 31, 1995 was 7.9375%. Collateral interest expense decreased 11.6% from $1,921,000 in 1994 to $1,698,000 in 1995. This decrease is attributed to an overall reduction in funds held as collateral during 1995. At December 31, 1994 and 1995, the collateral balances accrued interest daily at an average rate of 3.9% and 3.5% per annum, respectively.
Income before income taxes decreased 29.6% from $6,393,000 in 1994 to $4,498,000 in 1995 due to the factors outlined above. Excluding the Proposition 103 accrual income before income taxes increased to $6,498,000 in 1995. The Company's net income for 1995 includes a one time recovery of $890,000 related to previously misappropriated funds from Condor Insurance Company which was acquired in March of 1996 in a transaction accounted for as a pooling of interests.
As of December 31, 1996, the Company had total cash and cash equivalents and investments of $126,699,000. Included in these amounts is an aggregate of $29,928,000 in funds held as collateral which are shown as a liability on the Company's consolidated balance sheet. As of December 31, 1996, the Company's investment balances were comprised of $102,494,000 in fixed maturities held at market, $9,779,000 in common equity securities, $4,253,000 in preferred equity securities, $2,849,000 in other invested assets and $890,000 in short-term investments.
The Company's off balance sheet collateral which primarily consists of irrevocable letters of credit and certificates of deposit declined from $228,428,000 at December 31, 1995 to $215,315,000 at December 31, 1996. This decrease is primarily attributable to competitive market conditions and a decrease in contract performance and payment bond writings in 1996.
Because the Company depends primarily on dividends from its insurance subsidiaries for its net cash flow requirements, absent other sources of cash flow, the Company cannot pay dividends materially in excess of the amount of dividends that could be paid by the insurance subsidiaries to the Company. See Note 8 of Notes to Consolidated Financial Statements.
On August 6, 1993, the Company entered into a revolving credit agreement with Union Bank for $12,500,000 which refinanced the 1988 Loan. This loan was amended on April 24,1995 and again on July 10, 1996 to increase the amount available under the revolving line of credit from $12,500,000 to $15,000,000. The loan has a variable rate based upon fluctuations in the London Interbank Offered Rate (LIBOR) with amortizing principal payments beginning September 30, 1996 and maturing September 30, 2001. The interest rate at December 31, 1996 was 6.88%. The credit agreement contains certain financial covenants with respect to capital expenditures, business acquisitions, liquidity ratio, leverage ratio, tangible net worth, net profit and dividend payments.
The Company is a party to a lease with Trillium/Woodland Hills regarding its corporate headquarters. During 1996, the Company signed of a definitive agreement to terminate the Company's lease at its Corporate headquarters prior to its scheduled termination in August 1998. The Company's lease at its current headquarters will now terminate on June 30, 1997. On January 26, 1996, the Company entered into a lease agreement for new home office space in the City of Calabasas, California. The expected occupancy date for this office space is June 1997. The lease term is for a period of 15 years and contains provisions for scheduled lease charges. The Company's minimum commitment with respect to this lease in 1997 is approximately $515,000. The Company also has the option to purchase this new home office building and land three years into the lease period at a predetermined rate for the building, with the value of land based on then existing market rates. See Note 12 of Notes to Consolidated Financial Statements.