Legal Contingencies The Company is subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. Given the inherent unpredictability of litigation, it is difficult to estimate the impact of litigation on the Company's financial condition or results of operation. SFAS 5, Accounting for Contingencies, requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a loss has been incurred. The Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. The Company has established an accrued liability it believes will be sufficient to cover estimated damages in connection with various cases, which at December 31, 2003 was $3.3 million. This process requires subjective judgment about the likely outcomes of litigation. Liabilities related to most of the Company's lawsuits are especially difficult to estimate due to the nature of the claims, limitation of available data and uncertainty concerning the numerous variables used to determine likely outcomes or the amounts recorded. Litigation expenses are recorded as incurred and the Company does not accrue for future legal fees. It is possible that an adverse outcome in certain cases or increased litigation costs could have an adverse effect upon the Company's financial condition, operating results or cash flows in particular quarterly or annual periods. See "Legal Proceedings."
Membership Retention versus Membership Age - ----------------------------------------------------------- Membership Yearly Yearly End of Year Year Lapse Rate Retention Memberships - ---------- ---------- ---------- ------------- 0 100.0 1 49.0% 51.0% 51.0 2 28.7% 71.3% 36.4 3 21.1% 78.9% 28.7 4 17.0% 83.0% 23.8 5 15.2% 84.8% 20.2 6 11.9% 88.1% 17.8 7 9.4% 90.6% 16.1
Since the actual population of Memberships in force at any time is a distribution of ages from zero to more than 20 years, the expected remaining Membership life of the entire population at large greatly exceeds three years per Membership. As of December 31, 2003, based on the historical data described above, the current expected remaining Membership life of the actual population is over six years per Membership. This measure is used by the Company to estimate the future revenues expected from Memberships currently in place.
Net cash used in investing activities was $36.9 million, $11.1 million and $7.0 million for 2003, 2002 and 2001, respectively. During 2001 the Company received dividends of $2.8 million from UFL and received $1.2 million in proceeds from the sale of UFL during 2001. In addition to capital expenditures of $27.0 million, $15.2 million and $8.3 million during 2003, 2002 and 2001, respectively, the Company's purchases of available-for-sale investments exceeded the maturities and sales of such investments by $9.9 million and $7.4 million in 2003 and 2001, respectively, but maturities and sales exceeded purchases by $4.1 million during 2002.
The Company believes that it has significant ability to finance expected future growth in Membership sales based on its existing amount of cash and cash equivalents and unpledged investments at December 31, 2003 of $47.4 million. The Company expects to maintain cash and cash equivalents and investment balances on an on-going basis of approximately $20 million to $30 million in order to meet expected working capital needs and regulatory capital requirements. Balances in excess of this amount would be used for discretionary purposes such as treasury stock purchases, after repayment of the stock purchase line of credit.
All investment securities are adjusted for amortization of premiums and accretion of discounts. Amortization of premiums and accretion of discounts are recorded to income over the contractual maturity or estimated life of the individual investment on the level yield method. Gain or loss on sale of investments is based upon the specific identification method. Income earned on the Company's investments in certain state and political subdivision debt instruments is not generally taxable for federal income tax purposes.
Membership fees receivable The Company's Membership fees receivable consists of amounts due from members for services provided pursuant to their Membership contract. Membership fees are principally collected on a monthly basis. Membership fees receivable is a result of a portion of members, mostly group members, who pay their Membership fees in arrears and are recorded at amounts due under the terms of the Membership agreement. An allowance for doubtful accounts is not necessary as the recorded amount is adjusted to net realizable value at period-end based on the Company's historical experience and the short period of time after period-end in which the accounts will be collected.
Year Ended December 31, 2004............................................... $ 67 2005............................................... 862 2006............................................... 71 2007............................................... 71 2008............................................... 71 Thereafter......................................... 1,479 ---------- Total minimum lease payments....................... 2,621 Less: Imputed interest............................. (915) ---------- Present value of net minimum lease payments........ 1,706 Less: Current portion.............................. (19) ---------- Non current portion of capital leases payable...... $ 1,687 ----------
Year Ended December 31, ------------------------------- Basic Earnings Per Share: 2003 2002 2001 --------- --------- --------- Earnings: Income from continuing operations............... $ 39,907 $ 36,014 $ 27,614 --------- --------- --------- Shares: Weighted average shares outstanding............. 17,530 19,674 21,504 --------- --------- --------- Diluted Earnings Per Share:
Options to purchase shares of common stock are excluded from the calculation of diluted earnings per share when their inclusion would have an anti-dilutive effect on the calculation. Options to purchase 799,000 shares, 921,000 shares and 903,000 shares with an average exercise price of $27.48, $29.76 and $29.57, were excluded from the calculation of diluted earnings per share for the years ended December 31, 2003, 2002 and 2001, respectively.