| DST SYSTEMS INC Item 1A Risk Factors COMPANY-SPECIFIC TRENDS AND RISKS There are many risks and uncertainties that can affect our future business, financial performance or share price |
| Here is a brief description of some of the important factors that could have a material negative impact on our future business, operating results, financial condition or share price |
| You should refer to the description of the qualifications and limitations on forward-looking statements in the first paragraph under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K Unless otherwise indicated or the context otherwise requires, reference in this section to “we,” 27 ______________________________________________________________________ “ours,” “us” or similar terms means the Company, together with its subsidiaries |
| The level of importance of each of the following trends and risks may vary from time to time, and the trends and risks are not listed in any specific order of importance |
| Trends or events affecting our clients or their industries could decrease the demand for our products and services |
| We derive our consolidated revenues from the delivery of products and services to clients in the mutual fund, investment management, brokerage, insurance, banking, securities, financial planning, communications, video/broadband/satellite TV, mortgage, healthcare and other industries |
| A decline or lack of growth in demand for our products and services in the any of the industries we serve could adversely affect our business and earnings |
| Demand for our products and services among companies in those industries could decline for many reasons |
| Consolidation or limited growth in an industry could reduce the number of our clients and potential clients |
| Events that adversely affect our clients’ businesses, rates of growth or numbers of customers they serve, including decreased demand for our customers’ products and services, adverse conditions in our customers’ markets or adverse economic conditions generally, could decrease demand for our products and services and the number of transactions we process |
| We cannot always predict the needs of changing industries or whether potential customers will accept our products or services |
| Concentrating our resources based on trends or events that do not occur as we expected could negatively impact any of our various businesses |
| The demand for our products and services could decrease if we do not continually address our and our clients’ technology and capacity requirements |
| We must substantially invest in technology and systems to meet customer demand for transaction processing and volume capacities |
| If we do not meet clients’ technology and capacity demands in advance of our competitors or if the investments we make are not cost effective or do not result in successful products or services, our businesses could be adversely affected |
| Damage to our facilities or declining real estate values could impact our operations or financial condition |
| We own, lease and manage real estate as part of our business |
| The performance of our services also depends upon facilities that house central computer operations or operating centers or in which we process information, images, bills or statements |
| Declining property values in the markets in which we own investment properties may adversely affect our financial condition |
| Significant damage to any of our operating facilities could interrupt the operations at those facilities and interfere with our ability to serve customers |
| We may be unable to attract and retain capable technical personnel for our processing businesses or quality executives to manage the complex structure of our business |
| Our success depends on recruiting and retaining adept management and personnel with expertise in software and systems development and the types of computer hardware and software we utilize |
| Losing key personnel or not hiring qualified personnel could have a material adverse effect on our operations |
| Companies in our industry compete fiercely for qualified management and technical personnel |
| We cannot guarantee that we will be able to adequately compete for or keep qualified personnel |
| Lack of qualified management could increase the risk of unfavorable business strategies, especially in a complex business like ours with multiple segments and operating entities |
| Our businesses are subject to substantial competition |
| We are subject to intense competition from other established service providers in all industries we serve |
| Competitors may offer more appealing pricing structures |
| Some of our clients have developed or are 28 ______________________________________________________________________ developing the in-house capacity to perform the transaction processing, recordkeeping, and output services they have paid us to perform |
| Some of our competitors and clients have greater financial and human resources and access to capital than we do |
| Our mutual fund transfer agency competition includes brokerage firms that perform sub-accounting services for customers who purchase or sell shares of our clients’ mutual funds |
| A brokerage firm typically maintains an “omnibus” account with us that represents the aggregate number of shares of a mutual fund owned by the brokerage firm’s customers |
| The omnibus account structure results in fewer mutual fund shareowner accounts on our systems, which adversely affects our revenues |
| Our failure to successfully compete in any of our operating segments could have a material adverse effect on our financial results |
| Competition could also affect the revenue mix of services we provide, resulting in decreased revenues in lines of business with higher profit margins |
| We and companies in which we own a significant interest are subject to government regulation |
| Any regulatory violations could adversely affect our business |
| A number of our businesses are subject to US or foreign regulatory oversight, as well as recordkeeping and reporting obligations |
| Any violation of those obligations or related laws or regulations could expose us or those businesses to costly fines or sanctions or damage our reputation which could adversely affect our business or financial performance |
| Our clients are subject to government regulation which could affect our business |
| Our clients are subject to extensive government regulation, including investment adviser, broker/dealer and financial and healthcare privacy regulations |
| Our clients’ violations of applicable laws and regulations could diminish their business or financial condition and thus their demand for our products and services |
| Demand could also decrease if we do not continue to offer products and services that help our clients comply with regulations |
| We operate internationally and are thus exposed to foreign political, economic and other conditions that could adversely affect our revenues from foreign operations |
| Consolidated revenues from our subsidiaries in Canada, Europe and elsewhere outside the US are an important element of our revenues |
| Inherent risks in our international business activities could decrease our international sales and have a material adverse effect on our overall financial condition, results of operations and cash flow |
| These risks include potentially unfavorable foreign economic conditions, political conditions or national priorities, foreign government regulation, potential expropriation of assets by foreign governments, and the failure to bridge cultural differences |
| We may also have difficulty repatriating profits or be adversely affected by exchange rate fluctuations in our international business |
| Various events may cause our financial results to fluctuate from quarter to quarter or year to year |
| The nature of these events might inhibit our ability to anticipate and act in advance to counter them |
| We cannot always control when and whether events occur that could cause varying financial results |
| Unfavorable results may occur that we did not anticipate or take advance action to address |
| The various reasons our quarterly and annual results may fluctuate include unanticipated economic conditions and costs for starting up significant client operations, for hiring staff, and for developing products |
| Our results may also vary as a result of pricing pressures, increased cost of supplies, timing of license fees, the evolving and unpredictable markets in which our products and services are sold, changes in accounting principles, and competitors’ new products or services |
| Our revenues and profit margins could decrease if clients cancel contracts, fail to renew contracts, or use our services at less than anticipated rates |
| Client contract terminations or non-renewals or under-utilization of our services could decrease our revenues and profit margins |
| We derive revenue by selling products and services under long-term contracts |
| We cannot unilaterally extend the terms of these contracts when they expire |
| Some of these 29 ______________________________________________________________________ contracts contain “termination for convenience” clauses, which enable clients to cancel the agreements by providing written notice to us |
| Any failure to extend these contracts or obtain new contracts, or any early termination of these contracts by customers, could adversely affect our business |
| Claims against us, including claims for the lost market value of securities and class action claims, could cause significant liability and damage our reputation and business prospects |
| We may be subject to damage claims, including class-action claims, for delays in transaction processing; for calculation errors, errors resulting in disclosure of confidential information, or other processing or operational errors; or for mismanagement of claims or other processes |
| Because of the nature of the financial and healthcare transactions we process, damages claimed may significantly exceed the fees we receive for performing the service at issue |
| Litigation can include class action claims based, among other theories, upon various regulatory requirements and consumer protection and privacy laws that class action plaintiffs may attempt to use to assert private rights of action |
| Any of these claims and related settlements or judgments could affect our profitability, damage our reputation, decrease demand for our services, or cause us to make costly operating changes |
| We are substantially dependent on our intellectual property rights, and a claim for infringement or a requirement to indemnify a client for infringement could adversely affect us |
| We have made substantial investments in software and other intellectual property on which our business is highly dependent |
| Any loss of our intellectual property rights, or any significant claim of infringement or indemnity for violation of the intellectual property rights of others, could have a material adverse effect on our financial condition, results of operations and cash flow |
| We rely on patent, trade secret and copyright laws, nondisclosure agreements, and other contractual and internal security measures to protect our proprietary technology |
| We cannot guarantee these measures will be effective |
| Our products and services rely on technology developed by others, including open source software, and we have no control over possible infringement of someone else’s intellectual property rights by the provider of this technology |
| The owner of the rights could seek damages from us rather than or in addition to the persons who provide the technology to us |
| We could be subject at any time to intellectual property infringement claims that are costly to evaluate and defend |
| Our clients may also face infringement claims, allege that the claims relate to our products and services, and seek indemnification from us |
| Failure to protect the confidential information of our clients could hurt our business |
| We often maintain trade secrets and proprietary information, including sensitive financial and personal health information of our clients’ customers, electronically |
| A material breach of our security systems and procedures could lead to significant claims for liability, cause our customers to reconsider using our services and products, damage our reputation, or otherwise have a material adverse effect on us |
| We maintain systems and procedures to protect against unauthorized access to electronic information and computer viruses, but we cannot guarantee these systems and procedures will always protect us |
| Rapid advances in technology prevent us from anticipating all potential security threats, and the limits of technology and skills or the prohibitive cost of the most advanced security solutions might prevent us from addressing these threats |
| We do not control certain businesses in which we have significant ownership |
| We invest in joint ventures and other unconsolidated affiliates as part of our business strategy, and part of our net income is derived from our pro rata share of the earnings of those businesses |
| Despite owning significant equity interests in those companies and having directors on their boards, we do not control their operations, strategies or financial decisions |
| The other owners may have economic, business or legal interests or goals that are inconsistent with our goals or the goals of the businesses we co-own |
| Our pro rata share of any losses due to unfavorable performance of those companies could impact our financial statements |
| 30 ______________________________________________________________________ We own interests in companies under agreements with others that may inhibit our ability to sell our interests or may require us to increase our investment |
| These arrangements may also require that we purchase the other owners’ interests to prevent someone else from acquiring them |
| The businesses or other owners may press us to increase our investment in or make contributions to the businesses at an inopportune time |
| The financial results of our reinsurance subsidiary could be adversely affected if actual loss experience exceeds estimated loss experience |
| Our subsidiary, Vermont Western Assurance, Inc, which we refer to as Vermont Western, reinsures a portion of the risk in connection with replacing lost stock certificates for registered shareholders of unrelated companies |
| Vermont Western utilizes underwriting procedures and actuarial advisors to assume risk and establish reserves against loss |
| Vermont Western does not control clients’ loss experience |
| Vermont Western could inaccurately assess risk at any time and actual loss experience could exceed estimates |
| Vermont Western’s results, if unfavorable, could have a material adverse effect on our financial condition, operating results or cash flow |
| We hold equity investments in companies that operate in various industries, and the value of those investments could decrease |
| We hold significant investments in available-for-sale equity securities of other companies that are subject to fluctuations in market prices |
| A significant decline in the value of our equity investments could have a material adverse effect on our financial condition or results of operations |
| We may not always be able to resell those investments at higher prices than we paid for them or than the value of the consideration used to acquire them |
| Various plans, agreements, laws and organizational documents may make more difficult or prevent a change in control |
| Provisions in our Certificate of Incorporation, Bylaws, certain plans and agreements, and the law could make it more difficult for a party to make a tender offer for our shares or complete a takeover which is not approved by our Board of Directors |
| The provisions include: · super-majority stockholder approval required for certain actions · staggered terms for directors · specific procedures for stockholders to nominate new directors · cumulative voting in election of directors · the Board’s authority to issue and set the terms of preferred stock · a stockholders’ rights plan giving stockholders’ rights to purchase preferred stock if certain changes in our ownership occur · various rights of debenture holders, joint venture co-owners, lenders and certain customers and executives in the event of a change in control · public reporting of ownership and of changes in ownership by stockholders with at least a 5prca interest in us · legal restrictions on business combinations with certain stockholders 31 ______________________________________________________________________ Because of contractual commitments, a change in control could affect our operating results and weaken our management retention and incentive tools |
| A change in control of the Company would trigger various rights and obligations in service agreements with our customers, in agreements governing our joint ventures, and in incentive award and employment agreements with our management |
| A change in control could also allow some clients to terminate their agreements with us or to obtain rights to use our processing software |
| We are parties to joint venture agreements that allow other co-owners to buy our equity interests if we undergo a change in control |
| A change in control or a termination of employment without cause after a change in control could accelerate certain restricted stock and other awards we have granted to our management employees |
| This award vesting may decrease an employee’s incentive to continue employment with us |
| Certain executive officers have agreements with us that require us to continue to employ them for three years after a change in control or to pay certain amounts if we do not continue their employment |
| The executives might not be incented to achieve results for the new owners of our business, and the cost of keeping the executives on the payroll might deter potential new owners from acquiring us or hinder new owners from hiring replacement management |
| Our equity incentive and stockholders’ rights plans could have a dilutive effect on our common stock |
| Our directors, officers and certain managers have received restricted stock and options to purchase our common stock as part of their compensation |
| These equity grants could have a dilutive effect on our common stock |
| A change of control would trigger the right of stockholders under our stockholders’ rights plan to purchase 1/1000th shares of our preferred stock for each share of our common stock, which could be dilutive in value to common stockholders who do not exercise those rights |
| Conversion of our debentures could have a dilutive effect on our common stock or affect our liquidity |
| In August 2003, we issued dlra840 million aggregate principal amount of convertible senior debentures |
| Issuing common stock to settle conversions could be dilutive to the price of our common stock, and settlement of conversions for cash could affect our financial condition, operating results and cash flow |
| The debentures are convertible into shares of common stock under specified circumstances, which we refer to as Conversion Triggers |
| We cannot accurately predict when certain Conversion Triggers outside of our control may occur |
| To satisfy a conversion notice subsequent to a Conversion Trigger, we must deliver our common stock unless we properly notify the holder that we will settle with cash or a combination of cash and shares of common stock |
| How we settle a conversion notice will depend on liquidity, financial needs, or other circumstances existing at the time of a Conversion Trigger |
| We own a minority interest in Asurion, and risks in Asurion’s business could affect our financial results |
| We own approximately 35prca in Asurion Corporation, which provides services related to communications devices and/or the communications industry |
| Asurion’s business depends on timely and cost-effectively developing and adapting services to meet client demands for the latest communications technology |
| It also depends on Asurion’s relationships with insurance companies that provide coverage for the products and services of Asurion’s clients and on Asurion’s assessment of risk and loss experience |
| Asurion must comply with various insurance regulations |
| Failure to satisfy client demands, termination of business relationships with insurance companies, inaccurate assessment of risk prior to assuming loss, or sanctions for regulatory violations could adversely affect Asurion’s business and the value of our investment in Asurion |