We completed the merger of our wholly-owned subsidiary, ACS Systems, Inc., with and into Micro General on May 14, 1998. This transaction was accounted for as a reverse merger of Micro General into ACS, with Micro General as the surviving legal entity. The selected consolidated financial data above includes the balance sheet accounts of Micro General at December 31, 2001, 2000, 1999 and 1998 and the results of its operations for the years ended December 31, 2001, 2000 and 1999 and for the period from May 14, 1998 through December 31, 1998. As of December 31, 2001, we owned 61.7% of Micro General.
Our financial results for the year ended December 31, 2000 include the operations of Chicago Title for the period from March 20, 2000, the merger date, through December 31, 2000.
Interest expense for the years ended December 31, 2001, 2000 and 1999 was $46.6 million, $59.4 million and $15.6 million, respectively. The decrease in interest expense in 2001 as compared with 2000 is due to a decrease in outstanding notes payable, primarily as a result of using proceeds from our common stock offering in January 2001 and our public offering of 7.3% notes in August 2001 to pay down amounts outstanding under our credit facility. Also included in interest expense in 2001 is the write-off of $3.9 million of debt issuance costs associated with paying down our credit facility. The increase in interest expense in 2000 as compared with 1999 is attributable to the increase in outstanding notes payable, primarily related to the financing of the Chicago Title merger, and an increase in certain indices on which our variable interest rates are based.
The credit agreement and other debt facilities impose certain affirmative and negative covenants on us relating to current debt ratings, certain financial ratios related to liquidity, net worth, capitalization, investments, acquisitions and restricted payments, and certain dividend restrictions. We are in compliance with all of our debt covenants as of December 31, 2001.
The assets acquired, including cost in excess of net assets acquired, which is amortized over a period of 20 years (see Note P), and liabilities assumed in the Chicago Title merger were as follows (dollars in thousands):
The change in unrealized gains (losses) on fixed maturities for the years ended December 31, 2001, 2000, and 1999 was $2.6 million, $29.1 million and ($13.9) million, respectively.
Pursuant to statutory accounting requirements of the various states in which the Company’s title insurance subsidiaries are licensed, they must defer a portion of premiums earned as an unearned premium reserve for the protection of policyholders and must maintain qualified assets in an amount equal to the statutory requirements. The level of unearned premium reserve required to be maintained at any time is determined on a quarterly basis by statutory formula based upon either the age, number of policies and dollar amount of policy liabilities underwritten or the age and dollar amount of statutory premiums written. As of December 31, 2001, the combined statutory unearned premium reserve required and reported for the Company’s title insurance subsidiaries was $761.8 million.
In connection with the Chicago Title merger, the Company assumed Chicago Title’s contributory defined contribution savings and profit sharing plan for eligible Chicago Title employees. Eligible employees contributed up to 13% of their pretax base compensation, up to the amount allowed pursuant to the Internal Revenue Code. The Company matched employee contributions from a minimum of $0.25 up to a maximum of $1.50 for each dollar of employee contribution up to six percent of the employee’s base salary, subject to the Company’s return on equity for the year. The Company’s cost for this plan was $8.2 million for the period from April 1, 2000 to December 31, 2000. Effective January 1, 2001, this plan was merged with and into the 401(k) Plan.
During 1998, stockholders approved the adoption of the 1998 Stock Incentive Plan (“1998 Plan”). The 1998 Plan authorizes up to 6,094,000 shares of common stock, plus an additional 242,000 shares of common stock on the date of each annual meeting of the stockholders of the Company, for issuance under the terms of the 1998 Plan. The 1998 Plan provides for grants of “incentive stock options” as defined in Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options and rights to purchase shares of common stock (“Purchase Rights”). The term of options may not exceed 10 years from the date of grant (five years in the case of a person who owns or is deemed to own more than 10% of the total combined voting power of all classes of stock of the Company). The option exercise price for each share granted pursuant to an incentive stock option may not be less than 100% of the fair market value of a share of common stock at the time such option is granted (110% of fair market value in the case of an incentive stock option granted to a person who owns more than 10% of the combined voting power of all classes of stock of the Company). There is no minimum purchase price for shares of common stock purchased pursuant to a Purchase Right, and any such purchase price shall be determined by the Board of Directors.
In connection with the merger of Chicago Title, the Company assumed the options outstanding under Chicago Title’s existing stock option plans: the 1998 Long-Term Incentive Plan and the Director’s Stock Option Plan. Pursuant to the terms of the merger, options under these plans, totaling 3,492,811, became fully vested on March 20, 2000. The options granted in accordance with these two plans generally have a term of five to 10 years.
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, leases, residual interests in securitizations, trade receivables and notes receivable.