DEFERRED INCOME TAXES. The deferred income tax asset decreased $664,000 to $2.3 million as of December 31, 2001 from $2.9 million as of December 31, 2000, primarily due to the sale of the Company's common stock portfolio, which had an unrealized loss of $1.7 million as of December 31, 2000.
NET PREMIUMS EARNED. Net premiums earned increased 51.0% to $20.3 million for the year ended December 31, 2000 from $13.5 million for the year ended December 31, 1999. The increase in net premiums written discussed above was partially offset by the increase in the deferral of premiums over the life of the policies.
COMMISSION INCOME. Commission income decreased 37.0% to $2.8 million for the year ended December 31, 2000 from $4.4 million in 1999. Commission income consists of fees earned by Company-owned agencies placing business with third-party insurers and third-party premium finance companies. The decrease is attributable to a higher percentage of commissions from Federated National and Assurance MGA, which are eliminated in consolidation.
Interest and service income, resulting from the financing of insurance premiums and pay advances, is recognized using a method that approximates the effective interest method. Late charges are recognized as income when chargeable.
And finally, any unamortized negative goodwill existing at the date SFAS No. 142 is adopted must be written off as the cumulative effect of a change in accounting principle.
Depreciation of property, plant, and equipment was $396,047, $323,743 and $199,537 during 2001, 2000 and 1999 respectively.
The Company, through its wholly owned subsidiary, Federated Premium Finance, Inc. ("Federated Premium") is a party to a revolving loan agreement ("Revolving Agreement") with Flatiron Funding Company LLC ("Flatiron"). The Revolving Agreement is structured as a sale of contracts receivable under a sale and assignment agreement with FPF, Inc. (a wholly-owned subsidiary of Flatiron), which gives FPF Inc. the right to sell or assign these contracts receivable. Federated Premium, which services these contracts, has recorded transactions under the Revolving Agreement as secured borrowings. The Revolving Agreement, which was amended and revised in September 2001, allows for a maximum credit commitment of $7.0 million plus an initial additional amount of $700,000 for the transition from September 30, 2001 when the previous agreement expired. This initial additional amount declines by $100,000 each month beginning November 1, 2001. The amount of an advance is subject to availability under a borrowing base calculation, with maximum advances outstanding not to exceed the maximum credit commitment. The annual interest rate on advances under the Revolving Agreement is the prime rate plus additional interest varying from 1.25% to 2.75% based on the prior month's ratio of contracts receivable related to insurance companies with an A. M. Best rating of B or worse to total contracts receivable. The Revolving Agreement contains various operating and financial covenants, with which the Company was in compliance at December 31, 2001 and 2000. The Revolving Agreement, as amended, expires September 30, 2004. Outstanding borrowings under the Revolving Agreement as of December 31, 2001 and 2000 were $6,676,817 and $8,091,034, respectively, including $211,522 on the overline availability as of December 31, 2000. Interest expense for the years ended December 31, 2001, 2000 and 1999 totaled approximately $592,000, $643,000 and $341,000, respectively.
At December 31, 2001, 2000 and 1999, warrants issued to two employees to purchase 62,500 shares of common stock at $9 per share were outstanding. At December 31, 2001, 2000 and 1999, warrants sold as part of an underwriting agreement at a price of $0.0001 per warrant, entitling the holder to purchase 125,000 shares of common stock at $10.86 per share, were outstanding. All of these potential common shares were excluded from the computation of net income (loss) per share for 2001, 2000 and 1999 because their inclusion would have an anti-dilutive effect.
The Company initiated a stock option plan in November 1998 that provides for the granting of stock options to officers, key employees and consultants. The objectives of this plan includes attracting and retaining the best personnel, providing for additional performance incentives, and promoting the success of the Company by providing employees the opportunity to acquire common stock. Options outstanding under this plan have been granted at prices, which are either equal to or above the market value of the stock on the date of grant, vest over a four-year period, and expire ten years after the grant date. Under this plan, the Company is authorized to grant options to purchase up to 600,000 common shares, and, as of December 31, 2001, the Company had granted options to purchase 412,572 shares.