DST SYSTEMS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) The discussions set forth in this Annual Report on Form 10-K contain statements concerning potential future events. Such forward-looking statements are based upon assumptions by the Company's management, as of the date of this Annual Report, including assumptions about risks and uncertainties faced by the Company. In addition, management may make forward-looking statements orally or in other writings, including, but not limited to, in press releases, in the annual report and in the Company's other filings with the Securities and Exchange Commission. Forward-looking statements include, but are not limited to, (i) all statements, other than statements of historical fact, that address activities, events or developments that we expect or anticipate will or may occur in the future or that depend on future events, or (ii) statements about our future business plans and strategy and other statements that describe the Company's outlook, objectives, plans, intentions or goals, and any discussion of future operating or financial performance. Whenever used, words such as "may," "will," "would," "should," "potential,", "strategy," "anticipates," "estimates," "expects," "project," "predict," "intends," "plans," "believes," "targets" and other terms of similar meaning are intended to identify such forward-looking statements. Forward-looking statements are uncertain and to some extent unpredictable, and involve known and unknown risks, uncertainties, and other important factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such forward-looking statements. If any of management's assumptions prove incorrect or should unanticipated circumstances arise, the Company's actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in Item 1A, "Risk Factors" of this Form 10-K. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statements concerning the Company.

The Company undertakes no obligation to update any forward-looking statements in this Annual Report on Form 10-K to reflect new information, future events or developments, or otherwise.

Introduction DST Systems, Inc. (the "Company" or "DST") provides sophisticated information processing solutions and services. In addition to technology products and services, DST also provides integrated print and electronic statement and billing solutions. DST's data centers provide technology infrastructure support for asset management, insurance and healthcare companies around the globe. These business units are reported as two operating segments, Financial Services and Customer Communications (formerly known as the Output Solutions Segment). In addition, investments in the Company's real estate subsidiaries and affiliates, equity securities, private equity investments and certain financial interests have been aggregated into the Investments and Other Segment.

The Company's Financial Services Segment provides a variety of solutions principally to the asset management, brokerage, retirement, insurance and healthcare industries. The Company has developed a number of proprietary systems that are integrated into its solutions including the following: º • º Shareowner recordkeeping and distribution support systems for United States ("U.S.") and international mutual fund companies, broker/dealers and financial advisors, º • º Investment management systems offered to U.S. and international investment managers and fund accountants, º • º Defined-contribution participant recordkeeping system for the U.S.

retirement plan market, º • º Medical and pharmacy claims administration processing systems and services offered to providers of healthcare plans, third party administrators, medical practice groups and pharmacy benefit managers, and 42-------------------------------------------------------------------------------- Table of Contents º • º Business process management and customer contact system offered to a broad variety of industries.

The Financial Services Segment's revenues are derived primarily from remote or full service transfer agency or third party administration product offerings that utilize the Company's proprietary software applications being processed at the Company's data centers. The Financial Services Segment's revenues are generally based on the number of accounts/members/participants or transactions processed. The Company's mutual fund revenues are dependent upon the number of accounts or transactions processed. ALPS derives revenue from asset servicing and asset distribution activities, which are generally based on a percentage of assets for which services are provided. The Financial Services Segment's healthcare administration processing revenues are generally earned on a per-member, per month basis for BPO services and ASP agreements. Argus derives revenue from pharmacy claims processing services and from investment earnings related to client balances maintained by Argus. The Company also derives revenues from transfer agency asset balances invested and investment earnings related to customer cash balances maintained in Company investment accounts. The Company also licenses its business process management ("BPM") software, healthcare administration processing systems software, certain investment management and, outside the U.S., certain mutual fund shareowner accounting systems. Revenues for licensed software products are primarily comprised of: (i) license fees; (ii) consulting and development revenues based primarily on time and materials billings; and (iii) annual maintenance fees. The license fee component of these revenues is not significant. The Company provides data processing services to certain clients who utilize the Company's AWD products.

Revenues are primarily based upon data center capacity utilized, which is significantly influenced by the volume of transactions or the number of users.

The Financial Services Segment records investment income (dividends, interest and net gains (losses) on investment securities) within Other income, net. The Financial Services Segment derives part of its income from its pro rata share in the earnings (losses) of certain unconsolidated affiliates, including BFDS, IFDS U.K. and IFDS L.P.

The Company's Customer Communications Segment helps businesses deploy customer communications while improving operational performance across critical business functions such as sales, marketing, customer service, technology, finance, operations, and compliance. By delivering information in the desired combination of print, digital and archival formats, the Segment helps its clients deliver better customer experiences at each point of interaction. The Segment's product offering combines data insights and analysis with business decision-making tools and multi-channel execution and delivery designed to help businesses acquire, grow, retain, and win back customers.

The Customer Communications' revenues are derived from presentation and delivery (either printed or digital) and archival of customer documents, and are based generally on the number of images processed and the range of customization and personalization options chosen by the client. Formatting and custom programming revenues are based on time and materials billings or on the number of images produced.

The Investments and Other Segment is comprised of the Company's real estate subsidiaries and joint ventures, investments in equity securities, private equity investments and other financial interests. The assets held by the Investments and Other Segment are primarily passive in nature.

The Investments and Other Segment's revenues are derived from rental income from Company owned and third party real estate leases. Rental income from Company owned real estate is recorded as revenue when earned, which is based on lease terms, but is eliminated in consolidation for the portion that relates to real estate leased to the Company's other consolidated subsidiaries. The Investments and Other Segment records investment income (dividends, interest and net gains (losses) on investment securities) within Other income, net. The Investments and Other Segment derives part of its income from it pro rata share in the earnings (losses) of certain unconsolidated affiliates.

43-------------------------------------------------------------------------------- Table of Contents Significant Events Asset Monetizations During the year ended December 31, 2012, DST had $485.4 million of pre-tax proceeds, consisting of $396.8 million from the sale of investments, $75.0 million in distributions from private equity funds and other investments and $13.6 million from the sale of real estate assets. After tax proceeds from these transactions were primarily used to reduce debt and to repurchase shares of DST common stock.

In addition, the Company's joint venture, IFDS Canada, sold its interest in a Canadian real estate partnership which owned the building IFDS Canada and other tenants occupy. IFDS Canada received proceeds of approximately $53.2 million, resulting in equity in earnings of $14.8 million for DST's portion of the gain on the sale.

Dividends During 2012, DST paid two semi-annual cash dividends totaling $0.80 per share on its common stock. The Board of Directors of DST has made the decision to increase its dividend frequency from a semi-annual basis to a quarterly basis beginning in the first quarter of 2013. Future cash dividends will depend upon financial condition, earnings and other factors deemed relevant by DST's Board of Directors. On January 30, 2013, the Board of Directors of DST declared a quarterly cash dividend of $0.30 per share on its common stock payable on March 15, 2013 to shareholders of record as of February 19, 2013.

Share Repurchase Plan During 2012, the Company spent $73.7 million to repurchase 1,250,000 shares of DST common stock in accordance with its existing share repurchase plan. On January 30, 2013, the Board of Directors of DST authorized a $250 million share repurchase plan, which replaces the Company's existing share repurchase plan, under which DST had 715,700 shares remaining as of that date. The plan, as amended, allows, but does not require, the repurchase of common stock in open market and private transactions.

Goodwill Impairment Decreased demand resulting from current economic conditions in the U.K. economy has negatively impacted production volumes and operating revenues for DST's print / mail business. Accordingly, during the fourth quarter of 2012, DST adjusted its future outlook and related strategy with respect to the Customer Communications U.K. operations which resulted in a reduction in future expected cash flows. As a result, the Company recorded a non-cash goodwill impairment charge of $60.8 million in its Customer Communications United Kingdom reporting unit in 2012.

Acquisitions During 2011, the Company paid $365.4 million, net of cash acquired, for the following business acquisitions: ALPS Holdings, Inc. ("ALPS"), Newkirk Products, Inc. ("Newkirk"), Lateral Group Limited ("Lateral"), Intellisource Healthcare Solutions ("Intellisource"), Finix Business Strategies, LLC, Finix Converge, LLC and Subserveo, Inc. The acquisition of ALPS for $251.9 million on October 31, 2011 represented the largest acquisition in 2011. ALPS is a provider of asset servicing and asset gathering solutions to open-end mutual funds, closed-end funds, exchange-traded funds and alternative investment funds.

On July 30, 2010, DST, through its wholly-owned U.K. subsidiary, Output U.K., acquired dsicmm Group Limited ("dsicmm") for $3.7 million in cash and the issuance of Output U.K. stock. After completion of the transaction, DST owned approximately 70.5% of Output U.K. and the remaining 44-------------------------------------------------------------------------------- Table of Contents 29.5% was owned by a group of the former stockholders of dsicmm. DST has consolidated the financial results of the combined Output U.K. business from the closing date and reflected the 29.5% owned by former stockholders of dsicmm as a non-controlling interest. In January 2012, DST acquired the remaining shares of Output U.K. for approximately $17.7 million, making Output U.K. a wholly-owned subsidiary.

Debt activities In 2012, the Company amended its revolving credit facility to enable the Company to use proceeds from asset dispositions to repurchase shares or pay dividends.

Additionally, in 2012, the Company renewed its accounts receivable securitization program resulting in a new maturity date of May 16, 2013.

During 2011, the Company amended its revolving syndicated bank facility. The amendment extended the maturity date to July 1, 2015 and lowered the interest rate spreads and facility fees to reflect then-current market conditions. In addition, the aggregate commitments under the facility were increased from $600 million to $630 million. The Company also entered into a $125 million unsecured term loan credit facility in 2011 to partially fund the acquisition of ALPS.

Off-Balance Sheet Arrangements An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company.

The Company believes that its guarantee arrangements will not have a material current or future effect on its financial condition, changes in financial condition, revenues or expenses, capital expenditures, capital resources, liquidity or results of operations. These arrangements are described in Note 15 to the consolidated financial statements included in Item 8 of this report.

In January 2009, the Company entered an interest rate swap with a bank to fix the interest rate on its syndicated real estate credit agreement at approximately 4.49% (includes 1.75% applicable margin rate) beginning January 2010. This interest rate swap qualifies as a derivative instrument.

The Company's interest rate swap is a cash flow hedge of future interest payments under the Company's real estate credit agreement and uses a pay-fixed, receive-variable, forward starting interest rate swap. The Company's risk management objective and strategy for undertaking this hedge is to eliminate the variability of interest cash flows related to the Company's floating-rate real estate credit agreement. Changes in the cash flows of the interest rate swap are expected to offset the changes in cash flows attributable to fluctuations in the one-month LIBOR benchmark interest rate. The derivative instrument is a receive-variable, pay 2.74% fixed, forward starting interest rate swap with an effective date of January 4, 2010 and a maturity date of September 16, 2013.

Effectiveness of the hedge relationship is assessed on a quarterly basis both prospectively and retrospectively using the "cumulative dollar offset" method, in which the cumulative changes in the value of the hedging instrument are directly compared with the cumulative change in the fair value or cash flows of the hedged item. A dollar offset ratio of between 0.80 and 1.25 is required in order to qualify for hedge accounting treatment. At inception of the hedge, the cumulative dollar offset ratio is 1.00 since the terms of the perfect hypothetical swap match those of the actual swap. The derivative accounting guidance indicates that hedge effectiveness occurs only if the cumulative gain or loss on the derivative hedging instrument exceeds the cumulative change in the expected future cash flows of the hedged transaction. At December 31, 2012, the fair value of the Company's pay-fixed, receive-variable, forward starting interest 45 -------------------------------------------------------------------------------- Table of Contents rate swap was a liability of $2.3 million, which is included in other non-current liabilities in the Consolidated Balance Sheet. The Company determined there was no ineffectiveness during the years ended December 31, 2012 and 2011, which resulted in the changes in fair value of this swap being recorded in other comprehensive income.

Accounting and reporting guidance for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value, and that the changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction.

In addition, the Company has $90.1 million of convertible senior debentures outstanding at December 31, 2012. The debentures are convertible under specified circumstances into shares of the Company's common stock.

New Authoritative Accounting Guidance Comprehensive Income On January 1, 2012, DST adopted an accounting standard that modifies the presentation of comprehensive income in the financial statements. The standard requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company elected the latter presentation option upon adopting this accounting standard. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The adoption of this guidance did not have a significant effect on the consolidated financial statements.

Testing Goodwill for Impairment On January 1, 2012, DST adopted an accounting standard related to testing for goodwill impairment. The guidance permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The adoption of this guidance did not have a significant effect on the consolidated financial statements.

Fair Value Measurement and Disclosure On January 1, 2012, DST adopted an accounting standard related to fair value measurements and disclosure requirements. The guidance is intended to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The adoption of this guidance did not have a significant effect on the consolidated financial statements.

Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition, results of operations and cash flows are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other 46-------------------------------------------------------------------------------- Table of Contents assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: revenue recognition; software capitalization and amortization; depreciation of fixed assets; valuation of long-lived and intangible assets and goodwill; accounting for investments; and accounting for income taxes.

Use of estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Revenue recognition The Company recognizes revenue when it is realized or realizable and it is earned. The majority of the Company's revenues are computer processing and services revenues and are recognized upon completion of the services provided.

Software license fees, maintenance fees and other ancillary fees are recognized as services are provided or delivered and all customer obligations have been met. The Company generally does not have customer obligations that extend beyond one year. Revenue from equipment sales is recognized as equipment is shipped.

Revenue from operating leases is recognized monthly as the rent accrues. Billing for services in advance of performance is recorded as deferred revenue.

Allowances for billing adjustments and doubtful account expense are estimated as revenues are recognized and are recorded as reductions in revenues, and the annual amounts are immaterial to the Company's consolidated financial statements.

The Company recognizes revenue when the following criteria are met: 1) persuasive evidence of an arrangement exists; 2) delivery has occurred or services have been rendered; 3) the sales price is fixed or determinable; and 4) collectability is reasonably assured. If there is a customer acceptance provision in a contract or if there is uncertainty about customer acceptance, the associated revenue is deferred until the Company has evidence of customer acceptance.

Revenue arrangements with multiple deliverables are evaluated to determine if the deliverables (items) can be divided into more than one unit of accounting.

An item can generally be considered a separate unit of accounting if all of the following criteria are met: 1) the delivered item(s) has value to the customer on a standalone basis; 2) there is objective and reliable evidence of the fair value of the undelivered item(s); and 3) if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the Company. Once separate units of accounting are determined, the arrangement consideration should be allocated at the inception of the arrangement to all deliverables using the relative selling price method.

Relative selling price is obtained from sources such as vendor-specific objective evidence ("VSOE"), which is based on the separate selling price for that or a similar item or from third-party evidence ("TPE") such as how competitors have priced similar items. If such evidence is unavailable, the Company uses its best estimate of the selling price ("BESP"), which includes various internal factors such as our pricing strategy and market factors. It is not common for the Company to use TPE and BESP as VSOE can be established for the majority of DST's client arrangements.

47-------------------------------------------------------------------------------- Table of Contents Software license revenues are recognized at the time the contract is signed, the software is delivered and no future software obligations exist. Deferral of software license revenue results from delayed payment provisions, disproportionate discounts between the license and other services or the inability to unbundle certain services.

The Company recognizes revenues for maintenance services ratably over the contract term, after collectability has been reasonably assured.

The Company derives over 90% of its revenues as a result of providing processing and services under contracts. The majority of the amount is billed on a monthly basis generally with thirty-day collection terms. Revenues are recognized for monthly processing and services upon performance of the services. In the event a portion of the Company's revenues are due 12 months or more from the invoice date, the Company accounts for the revenue as not being fixed and determinable.

In these cases, the revenue is recognized as it becomes due.

The Company's standard business practice is to bill monthly for development, consulting and training services on a time and materials basis. In some cases the Company bills a fixed fee for development and consulting services. For fixed fee arrangements, the Company recognizes revenue on a "proportionate performance" basis.

The Company derives less than 10% of its revenues from licensing products. The Company licenses its asset management products and its AWD (BPM) product generally to non-mutual fund customers and international customers, its healthcare administration processing software solutions to domestic customers and its customer billing software solution products to international and domestic customers. Perpetual software license revenues are recognized at the time the contract is signed, the software is delivered and no future software obligations exist. Deferral of software license revenue billed results from delayed payment provisions, disproportionate discounts between the license and other services or the inability to unbundle certain services. Term software license revenues are recognized ratably over the term of the license agreement.

The Company has entered into various agreements with related parties, principally unconsolidated affiliates, to utilize the Company's data processing facilities and computer software systems. The Company believes that the terms of its contracts with related parties are fair to the Company and are no less favorable than those obtained from unaffiliated parties.

The Company assesses collection based on a variety of factors, including past collection history with the customer and the credit-worthiness of the customer.

The Company generally does not request collateral from its customers. If it is determined that collection of revenues is not reasonably assured, revenue is deferred and is recognized at the time it becomes reasonably assured, which is generally upon receipt of cash. Allowances for billing adjustments are determined as revenues are recognized and are recorded as reductions in revenues. Doubtful account expense for the Company is immaterial.

Software capitalization and amortization The Company makes substantial investments in software to enhance the functionality and facilitate the delivery of its processing and services as well as its sale of licensed products. Purchased software is recorded at cost and is amortized on a straight-line basis over the estimated economic lives of three to five years. The Company also develops a large portion of its software internally. The Company is required to capitalize software development costs under the authoritative accounting guidance related to accounting for the costs of computer software developed or obtained for internal use, which requires capitalization of certain development costs after the design has been approved and management is committed to funding the project. The authoritative accounting guidance related to accounting for the costs of computer software to be sold, leased or otherwise marketed applies to software that will be sold or delivered to third parties and requires capitalization of research and development costs after 48 -------------------------------------------------------------------------------- Table of Contents technological feasibility has been established and management is committed to funding the project. The capitalized software development costs are generally amortized on a straight-line basis, based on an estimated economic life, which is dependent on the nature of the project. The Company has assigned lives of three to five years for capitalized software development.

Significant management judgment is required in determining what projects and costs associated with software development will be capitalized and in assigning estimated economic lives to the completed projects. Management specifically analyzes software development projects and analyzes the percentage of completion as compared to the initial plan and subsequent forecasts, milestones achieved and the commitment to continue funding the projects. Significant changes in any of these items may result in discontinuing capitalization of development costs, as well as immediately expensing previously capitalized costs. The Company reviews, on a quarterly basis, its capitalized software for possible impairment.

Depreciation of fixed assets The Company's approach on personal property, specifically data processing, printing and inserting equipment, is to own the property as opposed to leasing it where practicable. The Company believes this approach provides it better flexibility for disposing or redeploying the asset as it nears the completion of its economic life. The Company depreciates data processing equipment using accelerated depreciation methods over the following lives: (1) non-mainframe equipment-three years; (2) mainframe central processing unit-four years; and (3) mainframe direct access storage devices and tape devices-five years. The Company depreciates furniture and fixtures over estimated useful lives, principally three to five years, using accelerated depreciation methods. The Company depreciates large printing and inserting equipment used by the Customer Communications Segment over a five to seven year life using accelerated depreciation methods. The Company depreciates leasehold improvements using the straight-line method over the lesser of the term of the lease or life of the improvements. Management judgment is required in assigning economic lives to fixed assets. Management specifically analyzes fixed asset additions, remaining net book values and gain/loss upon disposition of fixed assets to determine the appropriateness of assigned economic lives. Significant changes in any of these items may result in changes in the economic life assigned and the resulting depreciation expense.

Valuation of long-lived and intangible assets and goodwill The Company and its unconsolidated affiliates do not amortize goodwill and intangible assets that have indefinite useful lives. The Company assesses the impairment of goodwill at least annually (as of October 1) and assesses identifiable intangibles, long-lived assets and related assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors that are considered important which could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of the Company's use of the acquired assets or the strategy for the overall business; and significant negative industry or economic trends. When it is determined that the carrying value of intangibles, long-lived assets and related goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company assesses actual impairment based on gross cash flows.

The Company's assessment of goodwill for impairment includes comparing the fair value to the net book value of our reporting units. The Company estimates fair value using a combination of discounted cash flow models and market approaches.

If the fair value of a reporting unit exceeds its net book value, goodwill is not impaired and no further testing is necessary. If the net book value of a reporting unit exceeds its fair value, the Company performs a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, the Company determines the implied fair value of goodwill in the same manner as if the affected reporting unit were being acquired in a 49-------------------------------------------------------------------------------- Table of Contents business combination. Specifically, the Company allocates the fair value of the affected reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on our balance sheet, we record an impairment charge for the difference.

The Company's impairment tests indicated during 2012 that there were no impairments, except for the goodwill held at the Customer Communications U.K.

reporting unit. The Company's evaluation includes multiple assumptions that may change over time. If future undiscounted cash flows at the Customer Communications U.K. reporting unit become less than those projected, further impairment charges may become necessary.

At December 31, 2012, the Company had $1,113.1 million of long-lived and intangible assets and goodwill on its Consolidated Balance Sheet. After the $60.8 million goodwill impairment of the Customer Communications U.K. reporting unit, remaining goodwill and net intangible assets in the Customer Communications U.K. reporting unit at December 31, 2012 are $7.6 million and $27.6 million, respectively.

Accounting for investments The Company has three significant types of investments that require accounting judgment: 1) investments in available-for-sale securities, the largest of which is its investment in State Street; 2) investments in unconsolidated affiliates, which is comprised principally of BFDS, IFDS U.K., IFDS L.P. and certain real estate joint ventures; and 3) investments in private equity funds and other investments accounted for under the cost method.

The Company accounts for investments in corporations, for which it owns less than 20% and does not have significant influence, in accordance with authoritative guidance related to accounting for certain investments in debt and equity securities, which requires the Company to designate its investments as trading or available-for-sale. At December 31, 2012, the Company had approximately $611.5 million of available-for-sale securities.

Available-for-sale securities are reported at fair value with unrealized gains and losses excluded from earnings and recorded net of deferred taxes directly to stockholders' equity as accumulated other comprehensive income. At December 31, 2012, the Company's available-for-sale securities had gross unrealized holding gains of $412.4 million, gross unrealized holding losses of $1.9 million and unrealized gains from foreign currency exchange rates of $0.1 million.

The impact of a 10% change in fair value of the Company's available-for-sale investments would be approximately $37.9 million to comprehensive income. The Company records an investment impairment charge for an investment with a gross unrealized holding loss resulting from a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future, which could have a material effect on the Company's financial position.

The equity method of accounting is used for investments in corporations in which the Company or its subsidiaries have at least a 20% voting interest and significant influence but does not control, and for all investments in partnerships and similar interests which the Company has at least 5% ownership and does not control. The Company classifies these investments as unconsolidated affiliates. Under the equity method, the Company recognizes income or losses from its pro-rata share of these unconsolidated affiliates' net income or loss, which changes the carrying value of the investment of the unconsolidated affiliate. In certain cases, pro-rata losses are recognized only to the extent of the Company's investment and advances to the unconsolidated affiliate.

50-------------------------------------------------------------------------------- Table of Contents Partnership and similar investment interests (including investments in private equity funds where the Company is a limited partner) in which the Company has at least a 5% ownership are accounted for on an equity method basis based on the Company's pro-rata ownership; the cost method of accounting is used for these investments when the Company has a de-minimus ownership percentage and no ability to exercise significant influence. The Company's cost method investments are held at the lower of cost or market.

Accounting for income taxes The Company accounts for income taxes in accordance with authoritative accounting guidance. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns.

Judgment is required in addressing the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof).

In addition, the Company is subject to the continuous examination of its income tax returns by the Internal Revenue Service and other tax authorities. A change in the assessment of the outcomes of such matters could materially impact the consolidated financial statements. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax regulations. In accordance with authoritative accounting guidance related to accounting for uncertainty in income taxes, the Company recognizes liabilities for anticipated tax audit issues based on its estimate of whether, and the extent to which, additional taxes may be required. If the Company ultimately determines that payment of these amounts is unnecessary, then it reverses the liability and recognizes a tax benefit during the period in which it determines that the liability is no longer necessary. The Company also recognizes tax benefits to the extent that it is more likely than not that its positions will be sustained if challenged by the taxing authorities. To the extent the Company prevails in matters for which liabilities have been established, or is required to pay amounts in excess of its liabilities, the Company's effective tax rate in a given period may be materially affected. An unfavorable tax settlement would require cash payments and may result in an increase in the Company's effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in its effective tax rate in the year of resolution.

The Company reports interest and penalties related to uncertain income tax positions as income taxes.

51-------------------------------------------------------------------------------- Table of Contents Results of Operations The following table summarizes the Company's operating results (millions, except per share amounts): Year Ended December 31, 2012 2011 2010 Revenues Operating revenues Financial Services $ 1,244.0 $ 1,138.4 $ 1,156.7 Customer Communications 650.0 609.8 564.1 Investments and Other 58.9 56.3 57.8 Elimination Adjustments (60.5 ) (60.5 ) (65.0 ) 1,892.4 1,744.0 1,713.6 % change from prior year 8.5 % 1.8 % 7.4 % Out-of-pocket reimbursements Financial Services 54.8 42.1 44.6 Customer Communications 636.7 607.0 575.8 Investments and Other 0.3 1.6 0.4 Elimination Adjustments (7.6 ) (6.0 ) (5.9 ) 684.2 644.7 614.9 % change from prior year 6.1 % 4.8 % (1.2 )% Total revenues $ 2,576.6 $ 2,388.7 $ 2,328.5 % change from prior year 7.9 % 2.6 % 5.0 % Income from operations Financial Services $ 209.1 $ 237.9 $ 273.6 Customer Communications (35.6 ) 21.2 78.8 Investments and Other (8.3 ) 8.9 0.1 Elimination Adjustments (7.9 ) (7.9 ) (7.9 ) 157.3 260.1 344.6 Interest expense (43.5 ) (46.5 ) (46.1 ) Other income, net 373.5 38.7 141.7 Equity in earnings of unconsolidated affiliates 32.2 21.7 36.4 Income before income taxes and non-controlling interest 519.5 274.0 476.6 Income taxes 195.5 95.8 159.1 Net income 324.0 178.2 317.5 Net loss attributable to non-controlling interest 4.9 1.0 Net income attributable to DST Systems, Inc. $ 324.0 $ 183.1 $ 318.5 Basic earnings per share $ 7.22 $ 4.01 $ 6.78 Diluted earnings per share $ 7.08 $ 3.95 $ 6.73 Non-GAAP diluted earnings per share $ 3.98 $ 4.09 $ 4.43 Cash dividends per share of common stock $ 0.80 $ 0.70 $ 0.60 Consolidated revenues Consolidated total revenues (including Out-of-Pocket ("OOP") reimbursements) increased $187.9 million or 7.9% during the year ended December 31, 2012 as compared December 31, 2011 and 52-------------------------------------------------------------------------------- Table of Contents increased $60.2 million or 2.6% during the year ended December 31, 2011 as compared to December 31, 2010. Consolidated operating revenues increased $148.4 million or 8.5% in 2012 as compared to 2011 and increased $30.4 million or 1.8% in 2011 as compared to 2010.

Financial Services Segment operating revenue increased $105.6 million during 2012, of which, $81.8 million is attributable to the inclusion of a full year of ALPS operations in 2012 versus two months in 2011. The remaining increase in Financial Services revenue from 2011 to 2012 is primarily from increased DST Healthcare revenues as a result of higher pharmacy claims processed and a full year of operations from businesses acquired during 2011. These operating revenue increases were partially offset by lower operating revenues for mutual fund processing resulting from lower registered accounts serviced. The $40.2 million increase in Customer Communications Segment operating revenue in 2012 is the result of a full year of operations from the 2011 acquisitions of Lateral in the U.K. (acquired on August 2, 2011) and Newkirk (acquired on May 2, 2011) in North America, as well as new client volumes in North America, offset by decreased demand and lower revenues per package in the U.K.

Consolidated operating revenues increased during 2011 as compared to 2010 as a result of an increase in Customer Communications Segment revenues of $45.7 million, which was partially offset by an $18.3 million decrease in Financial Services Segment revenues. In 2011, the Company received a $3.5 million contract termination payment from a subaccounting client. In 2010, the Company received a contract termination payment of $10.4 million from a subaccounting broker/dealer client ($9.1 million in the Financial Services Segment and $1.3 million in Customer Communications Segment). In addition, a Customer Communications telecommunications client, representing approximately 6.6% of 2009 annual Customer Communications operating revenues, terminated its contract and internalized bill production processing in April 2010, which resulted in a contract termination payment to the Company of approximately $63.0 million.

Excluding the contract termination payments mentioned above from 2011 and 2010, consolidated operating revenues for 2011 increased $100.3 million or 6.1% as compared to 2010. On this basis, Customer Communications operating revenues increased $110.0 million or 22.0% and Financial Services operating revenues decreased $12.7 million or 1.1% during 2011 as compared to 2010. The increase in Customer Communications is attributable to operating revenues from the acquisitions of Lateral on August 5, 2011, Newkirk on May 2, 2011 and a full year of operating revenues from dsicmm Group, which was acquired on July 30, 2010, partially offset by the loss of revenues from the telecommunications and subaccounting clients that terminated their processing contracts in mid-2010.

The decrease in Financial Services results is from lower mutual fund shareowner processing revenues and lower DST Health Solutions processing revenues, partially offset by operating revenues from the acquisitions of ALPS on October 31, 2011, which contributed $14.6 million of revenues, revenues from other 2011 Financial Services business acquisitions (Intellisource, Subserveo, Finix and Converge) and higher DST Global Solutions operating revenues.

Consolidated OOP reimbursements increased $39.5 million or 6.1% in 2012 as compared to 2011 and increased $29.8 million or 4.8% in 2011 as compared to 2010. The net increase in consolidated OOP reimbursements in 2012 in the Customer Communications Segment of $29.7 million is attributable to higher volumes from new clients and a full year of volumes from Lateral and Newkirk.

The net increase in consolidated OOP reimbursements in 2012 in the Financial Services Segment of $12.7 million is from the inclusion of a full year of ALPS operations. The net increase in consolidated OOP reimbursements in 2011 was primarily from a $31.2 million increase in the Customer Communications Segment associated with the acquisitions of dsicmm, Lateral and Newkirk.

53-------------------------------------------------------------------------------- Table of Contents Income from operations Consolidated income from operations decreased $102.8 million or 39.5% to $157.3 million during the year ended December 31, 2012 as compared to 2011 and decreased $84.5 million or 24.5% to $260.1 million during the year ended December 31, 2011 as compared to 2010. The $102.8 million decrease in consolidated income from operations in 2012 is the result of declines of $28.8 million in the Financial Services Segment, $56.8 million in the Customer Communications Segment and $17.2 million in the Investments and Other Segment.

The $84.5 million decrease in consolidated income from operations in 2011 is primarily attributable to declines of $35.7 million in Financial Services and $57.6 million in Customer Communications, both as compared to 2010.

U.S. income from operations decreased $44.1 million or 16.1% as compared to 2011 and decreased $69.7 million or 20.3% in 2011 as compared to 2010. International income from operations decreased $58.7 million in 2012 as compared to 2011 and increased $14.8 million in 2011 as compared to 2010.

The following items negatively affected consolidated income from operations in 2012: non-cash goodwill impairment charge of $60.8 million in the Customer Communications Segment, $11.0 million of leased facility abandonment costs (of which $9.2 million were in the Customer Communications Segment and the remainder in the Investments and Other Segment) and net losses of $7.1 million on real estate assets (mostly from impairments recorded in the Investments and Other Segments), $11.0 million of costs associated with a charitable donation of appreciated marketable securities by the Investments and Other Segment, increased employee termination costs of $10.9 million (mostly in the Financial Services Segment) and $9.1 million of costs associated with the discontinuation of the insurance processing solution for the insurance market. Additionally, $7.3 million of restructuring costs were incurred in 2011 to amend a sales / marketing agreement from an acquired business, which did not recur in 2012.

DST tests goodwill for impairment on an annual basis as of October 1 and at other times if a significant change in circumstances indicates it is more likely than not that the fair value of these assets has been reduced. The valuation of goodwill requires assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples and discount rates. The decreased demand resulting from current economic conditions in the U.K. economy has negatively impacted production volumes and operating revenues in the U.K. Previously anticipated new clients and U.K. economic events resulted in expected improvements in long-term U.K. revenue projections through the third quarter of 2012. The anticipated revenue from these events did not ultimately materialize. Additionally, during the fourth quarter of 2012, the expectations for the U.K. economic recovery were delayed beyond previous estimates. As a result, during the fourth quarter of 2012, DST adjusted its future outlook and related strategy with respect to the Customer Communications U.K. operations which resulted in a reduction in future expected cash flows. Based upon these revised future cash flow projections, the goodwill impairment test indicated that the Customer Communications U.K. reporting unit's carrying value exceeded its estimated fair value. Accordingly, the Company recorded a non-cash goodwill impairment charge of $60.8 million in the Customer Communications Segment during 2012. No tax benefit was recognized for this impairment charge. Remaining goodwill and net intangible assets in the Customer Communications U.K. reporting unit at December 31, 2012 are $7.6 million and $27.6 million, respectively.

The fair value of the Company's reporting unit, from a market participant's perspective, was estimated utilizing a cash flow projection derived from the Company's long-range strategic plan. The assumptions, inputs and judgments used in performing the valuation analysis are inherently subjective and reflect estimates based on known facts and circumstances at the time the valuation is performed. The estimates and assumptions utilized for the impairment analysis of the Customer Communications U.K. reporting unit primarily include, but are not limited to, the discount rate of 15% derived from the weighted average cost of capital, long-term estimated growth rate in cash flows of 2% which was based on the long-term projected rate of inflation, and capital expenditures forecasts.

To corroborate the 54 -------------------------------------------------------------------------------- Table of Contents results of the income approach described above, the fair value of the Customer Communications U.K. reporting unit was also estimated using the guideline company method, a variation of the market approach. Additionally, in connection with the calculation of the goodwill impairment charge, the fair value of all the assets and liabilities on the reporting unit's balance sheet was determined.

In order to estimate the fair value of the reporting unit's intangible assets, the Company utilized a combination of the excess earnings model for existing customer relationships and the relief from royalty method for trade names and technology. The more significant estimates in determining the value of customer relationships included customer retention rates, growth of existing customers and gross margin. The use of different assumptions, inputs and judgments, or changes in circumstances, could materially affect the results of the valuation.

As described in the consolidated revenues section above, the Company received client contract termination payments in both 2011 and 2010 resulting from clients early terminating their processing agreements. The favorable increase to income from operations, net of operating costs incurred in connection with the contract termination, was $2.0 million in 2011 (Financial Services Segment) and $67.2 million in 2010 ($7.5 million in Financial Services and $59.7 million in Customer Communications). In addition, the Company incurred employee termination expenses during 2011 and 2010 to restructure and reduce its workforce, which reduced income from operations. Costs associated with these employee termination actions in 2011 were $6.4 million ($1.3 million in Financial Services and $5.1 million in Customer Communications) and $20.9 million in 2010 ($14.3 million in Financial Services and $6.6 million in Customer Communications). In 2011, the Financial Services Segment incurred $7.3 million of costs to amend and restructure a sales / marketing agreement of an acquired business, which decreased income from operations. In 2011, the Company incurred business development expenses such as legal, accounting, investment banking and other professional fees to complete the 2011 business acquisitions of $3.3 million ($3.1 million in Financial Services and $0.2 million in Customer Communications), which reduced income from operations. The Financial Services Segment incurred $1.8 million of business advisory expenses in 2011, which decreased income from operations, associated with the DST Board of Directors retaining advisors to assist the Board with its ongoing review of DST's business plan, assets and investment portfolio. In 2011, the Company recorded a $3.5 million loss accrual associated with a regulatory inquiry regarding the processing of certain pharmacy claims during 2006 to 2009, which decreased income from operations. In 2010, the Investments and Other Segment incurred $10.2 million of costs associated with a charitable donation of appreciated marketable securities, which decreased income from operations.

Interest expense Interest expense was $43.5 million, $46.5 million and $46.1 million during the years ended December 31, 2012, 2011 and 2010, respectively. Interest expense decreased during 2012 as compared to 2011 primarily from lower weighted average debt balances outstanding, partially offset by a full year of interest expense on debt related to 2011 acquisitions. Interest expense increased during 2011 as compared to 2010 from a full year of interest expense on debt assumed in the acquisition of dsicmm on July 30, 2010, a new $125.0 million term loan facility used to complete the ALPS acquisition on October 31, 2011, higher weighted average interest rates from the Company's privately placed senior notes issued in August 2010 that were used to repurchase senior convertible debentures and higher debt amounts outstanding at Output U.K. associated with the issuance of new debt in 2011 and debt assumed in the Lateral acquisition, partially offset by lower weighted average amounts outstanding in the U.S. and lower interest rates on the Company's revolving credit agreements and accounts receivable securitization program, which were amended in April 2011 and May 2011, respectively.

55-------------------------------------------------------------------------------- Table of Contents Other income, net The components of other income (expense) are as follows (in millions): Year Ended December 31, 2012 2011 2010 Net realized gains from the disposition of available-for-sale securities $ 148.1 $ 21.8 $ 67.0 Other than temporary impairments / unrealized losses on available-for-sale securities (2.4 ) (3.8 ) (1.3 ) Net gains (losses) on private equity funds and other investments 9.3 (0.8 ) 5.1 Net gains (losses) on extinguishment of senior convertible debentures (1.2 ) (6.4 ) Gain on sale of private company investment 138.7 Private company investment dividend 48.4 54.7 Dividend income 18.2 16.5 10.1 Interest income 4.1 4.2 5.6 Miscellaneous items 9.1 2.0 6.9 Other income, net $ 373.5 $ 38.7 $ 141.7 Included in the $148.1 million of net realized gains from the disposition of available for sale securities during 2012 are gains of $53.6 million from the sale of approximately 15.0 million shares of Computershare Ltd., $38.0 million from the sale of 0.8 million shares and disposition of 0.2 million shares through a charitable contribution of State Street Corporation and $31.3 million from the sale of 1.9 million shares of Euronet Worldwide. Included in the $67.0 million of net realized gains during 2010 is a $42.5 million gain from the disposition of approximately 7.3 million shares of Computershare Ltd and $24.5 million of net realized gains from the disposition of other securities.

The Company recorded investment impairment charges for available-for-sale securities with gross unrealized holding losses resulting from a decline in value that is other than temporary of $2.4 million, $3.8 million and $1.3 million for the years ended December 31, 2012, 2011 and 2010, respectively.

The Company recorded a net gain on private equity funds and other investments of $9.3 million and $5.1 million during the years ended December 31, 2012 and 2010, respectively, and recorded a net loss of $0.8 million during the year ended December 31, 2011. During 2012, the Company received distributions from certain of its private equity fund investments resulting in realized gains. The Company recorded $8.3 million, $1.7 million and $1.7 million of net impairments on private equity funds and other investments related to adverse market conditions and poor performance of the underlying investments during the years ended December 31, 2012, 2011 and 2010, respectively. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's current carrying value, thereby possibly requiring an impairment charge in the future, which could have a material effect on the Company's financial position.

The Company recorded $1.2 million and $6.4 million in net losses on the repurchase and extinguishment of senior convertible debentures during the years ended December 31, 2011 and 2010, respectively.

56-------------------------------------------------------------------------------- Table of Contents The Company recorded a gain of $138.7 million on the sale of a portion of its shares in a privately-held company investment during the year ended December 31, 2012. The Company also received cash dividends of $48.4 million and $54.7 million from a private company investment during the years ended December 31, 2012 and 2010, respectively. The gross amount of the cash dividends for the year ended December 31, 2010 was $57.7 million, but approximately $3.0 million of the dividend was applied to the Company's cost basis investment.

The Company receives dividend income from certain investments held. Dividends from State Street common stock were $9.6 million, $7.4 million and $0.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. State Street Corporation quarterly dividend per common share was $0.01 per share in 2010, and then increased to $0.18 per share in 2011, and had a further increase to $0.24 in 2012.

Interest income was $4.1 million, $4.2 million and $5.6 million during the years ended December 31, 2012, 2011 and 2010, respectively. The decrease in interest income in 2012 and 2011, as compared to 2010 is attributable to lower amounts of cash and short-term investments and lower weighted-average interest rates on invested amounts.

Miscellaneous items include unrealized gains and losses on marketable securities designated as trading securities, foreign currency gains and losses, amortization of deferred non-operating gains and other non-operating items.

Miscellaneous items had income of $9.1 million, $2.0 million and $6.9 million during the years ended December 31, 2012, 2011 and 2010, respectively. The increase in Miscellaneous items during 2012 as compared to 2011 is primarily from unrealized appreciation on trading securities (the effect of which is offset by an increase in costs and expenses within the Financial Services Segment) and higher unrealized foreign currency exchange gains in 2012. The decrease in Miscellaneous items from 2010 to 2011 is primarily attributable to decreases in unrealized appreciation on marketable securities designated as trading (the effect of which is offset in Financial Services Segment as a decrease in costs and expenses), foreign currency exchange losses and a reduction in other non-operating gains.

Equity in earnings (losses) of unconsolidated affiliates Equity in earnings (losses) of unconsolidated affiliates, net of income taxes provided by the unconsolidated affiliates is as follows (in millions): Year Ended December 31, 2012 2011 2010 Boston Financial Data Services, Inc. $ 10.2 $ 9.9 $ 14.8 International Financial Data Services, U.K. 3.0 12.0 15.9 International Financial Data Services, L.P. 18.9 3.7 6.2 Other unconsolidated affiliates 0.1 (3.9) (0.5 ) Total $ 32.2 $ 21.7 $ 36.4 For the year ended December 31, 2012, DST's equity in earnings of unconsolidated affiliates increased $10.5 million as compared to 2011, primarily attributable to higher earnings of IFDS, L.P., partially offset by lower earnings of IFDS U.K. For the year ended December 31, 2011, DST's equity in earnings of unconsolidated affiliates decreased $14.7 million as compared to 2010, primarily attributable to lower earnings of BFDS, IFDS, U.K., IFDS, L.P. and other unconsolidated affiliates.

DST's equity in earnings of BFDS increased $0.3 million during the year ended December 31, 2012 as compared to 2011. Decreases in BFDS operating revenues during 2012 as compared to 2011 from lower accounts serviced were more than offset by lower operating expenses. DST's equity in earnings of BFDS decreased $4.9 million during the year ended December 31, 2011 as compared to 2010. The 57-------------------------------------------------------------------------------- Table of Contents decrease in BFDS earnings during 2011 resulted primarily from lower revenues associated with reduced levels of accounts serviced resulting from subaccounting conversions and from employee termination expenses, which together reduced DST's equity in earnings of BFDS by approximately $2.6 million. The reduction in the BFDS workforce occurred in September 2011 and represented approximately 8% of the total BFDS workforce. Average daily balances invested by BFDS were $1,054.8 million, $1,113.9 million and $997.3 million during the years ended December 31, 2012, 2011 and 2010, respectively. The average interest rates earned on the balances declined from 0.18% in 2010 to 0.10% in 2011 and increased to 0.14% in 2012, however these rates were not sufficient to cover banking and transaction fees. The aggregate effect of these fluctuations resulted in a minimal impact in interest earnings by BFDS during the years ended December 31, 2012, 2011 and 2010.

DST's equity in earnings of IFDS U.K. decreased $9.0 million during the year ended December 31, 2012, as compared to 2011, is attributable to costs for new product development initiatives and client conversion activities, partially offset by revenues from new clients. DST's equity in earnings of IFDS U.K.

decreased $3.9 million during the year ended December 31, 2011, as compared to 2010, from higher client conversion costs, higher costs associated with new business development initiatives, and the release of an income tax valuation allowance that increased 2010 earnings, partially offset by higher processing revenues from increased account volumes. Accounts serviced by IFDS U.K. were 9.4 million at December 31, 2012, an increase of 1.3 million accounts or 16.0% from December 31, 2011, is attributable to new client conversions. IFDS U.K. is in the process of converting new shareowner processing clients with approximately 0.2 million accounts which are expected to convert by March 31, 2013 and is also in the process of converting new life and pension clients with 0.1 million policies to their new policy system, which are expected to convert by June 30, 2013. New product development and client conversion costs are expected to continue to negatively impact IFDS U.K. earnings. Accounts serviced by IFDS U.K.

were 8.1 million at December 31, 2011, an increase of 1.0 million accounts or 14.1% from December 31, 2010.

DST's equity in earnings of IFDS L.P. (which includes IFDS Canada, Ireland, and Luxembourg) increased $15.2 million during the year ended December 31, 2012, as compared to 2011, was primarily attributable to IFDS Canada's gain on the sale of its interest in a Canadian real estate partnership which owned the building IFDS Canada and other tenants occupy. DST's equity in earnings of IFDS, L.P.

associated with this gain was approximately $14.8 million during 2012. DST's equity in earnings of IFDS L.P. decreased $2.5 million during the year ended December 31, 2011, as compared to 2010, is attributable to reduced earnings at IFDS Ireland associated with increased investments in Percana Ltd., IFDS Ireland's insurance processing subsidiary and a decrease in IFDS Canada earnings attributable to new business development initiatives and higher client conversion related costs. Accounts serviced by IFDS Canada were 11.3 million at December 31, 2012, an increase of 1.2 million accounts or 12% from December 31, 2011. The increase in accounts is attributable to a new client conversion of 1.2 million accounts in fourth quarter 2012. Accounts serviced by IFDS Canada were 10.1 million at December 31, 2011, an increase of 0.6 million accounts or 5.6% from December 31, 2010.

DST's equity in earnings of other unconsolidated affiliates was a gain of $0.1 million during the year ended December 31, 2012, an increase of $4.0 million as compared to 2011, primarily from improved performance at DST's real estate and other affiliates during the year ended December 31, 2012. Equity in earnings of other unconsolidated affiliates was a loss of $3.9 million during the year ended December 31, 2011, a decrease of $3.4 million as compared to 2010, attributable to unfavorable market conditions in 2010 for the Company's broker/dealer investment.

Income taxes The Company's effective tax rate was 37.6%, 35.0% and 33.4% for the years ended December 31, 2012, 2011and 2010, respectively. The Company's income tax rate for 2012 includes benefits from the favorable IRS resolution of certain research and experimentation credits and domestic manufacturing 58-------------------------------------------------------------------------------- Table of Contents deduction of $18.3 million and the charitable contribution of appreciated securities of approximately $5 million, partially offset by lower tax credits (foreign tax credits and rehabilitation credits), higher domestic income and increased losses in international subsidiaries for which no current tax benefits exists. The Company's income tax rate for 2011 included benefits from federal rehabilitation and solar panel tax credits, partially offset by increased tax resulting from repatriation of certain international earnings. The Company's income tax rate for 2010 included a benefit from a dividend received deduction on approximately 50% of a $57.7 million cash dividend received from a private equity investment and the release of $2.3 million of international valuation allowances against certain international deferred tax assets, which resulted from the acquisition of dsicmm Group Limited.

The tax rates in each of the three years ended December 31, 2012 were affected by tax benefits relating to certain international operations and recognition of state tax benefits associated with income apportionment rules.

Excluding the effect of discrete period items, the Company expects its tax rate to be approximately 35% in 2013. The 2013 tax rate can be affected as a result of variances among the estimates and amounts of 2013 sources of taxable income (e.g., domestic consolidated, joint venture and/or international), the realization of tax credits (e.g., historic rehabilitation, research and experimentation and state incentive), adjustments which may arise from the resolution of tax matters under review and the Company's assessment of its liability for uncertain tax positions.

YEAR TO YEAR BUSINESS SEGMENT COMPARISONS FINANCIAL SERVICES SEGMENT Revenues Financial Services Segment total revenues of $1,298.8 million reflect an increase of $118.3 million or 10.0% in 2012 as compared to 2011. Financial Services Segment operating revenues of $1,244.0 million reflect an increase of $105.6 million or 9.3% in 2012 as compared to 2011. Financial Services Segment OOP reimbursement revenues for the year ended December 31, 2012 were $54.8 million, an increase of $12.7 million as compared to 2011. U.S. Financial Services operating revenues increased $90.5 million or 9.0% to $1,098.0 million in 2012 as compared to 2011. International Financial Services operating revenues increased $15.1 million or 11.5% to $146.0 million in 2012 as compared to 2011.

The increase in operating revenues during the year ended December 31, 2012 is primarily attributable to a full year of ALPS in 2012 as compared to two months in 2011. Increases in operating revenues from healthcare processing, brokerage and DST Global Solutions during 2012 were offset by lower operating revenues for mutual fund registered shareowner account servicing. The U.S. operating revenue and OOP reimbursement revenues increased primarily from the acquisition of ALPS.

In 2011, Financial Services Segment total revenues of $1,180.5 million decreased $20.8 million or 1.7% as compared to 2010. Financial Services Segment operating revenues of $1,138.4 million decreased $18.3 million or 1.6% in 2011 as compared to 2010. U.S. Financial Services operating revenues decreased $31.6 million or 3.0% to $1,007.5 million in 2011 as compared to 2010. International Financial Services operating revenues increased $13.3 million or 11.3% to $130.9 million in 2011 as compared to 2010.

As mentioned in the consolidated revenues section above, DST received client contract termination payments of approximately $3.5 million in 2011 and $9.1 million in 2010 from two clients that terminated their subaccounting processing agreements early. Excluding these client contract termination payments, Financial Services operating revenues for 2011 decreased $12.7 million or 1.1% as compared to 2010. On this basis, the decrease in Financial Services operating revenues in 2011 is attributable to lower mutual fund shareowner account processing revenues and lower DST Health Solutions revenues, which were partially offset by $14.6 million of operating revenues from ALPS subsequent to its 59 -------------------------------------------------------------------------------- Table of Contents acquisition on October 31, 2011, increased operating revenues from Intellisource, Subserveo, Finix and Converge after their acquisition in 2011, increased distribution support services, increased subaccounting revenues and changes in foreign currency rates which increased operating revenues by approximately $9.6 million.

The decrease in 2011 mutual fund shareowner processing revenues resulted from lower levels of registered accounts serviced, primarily related to subaccounting conversions to non-DST platforms, and the July 2011 loss of a full-service client with 1.1 million registered accounts. Distribution support revenues were higher in 2011 as compared to 2010 from higher volumes.

The following table summarizes changes in registered accounts and subaccounts serviced, (in millions): Year Ended Year Ended Year Ended December 31, December 31, December 31, 2012 2011 2010 Registered Accounts Beginning balance 85.1 99.4 109.9 New client conversions 0.5 0.8 1.7 Subaccounting conversions to DST platforms (2.8 ) (1.0 ) (4.6 ) Subaccounting conversions to non-DST platforms (6.3 ) (13.4 ) (7.7 ) Conversions to non-DST platforms (0.9 ) (1.5 ) Organic growth 0.1 0.8 0.1 Ending balance 75.7 85.1 99.4 Subaccounts Beginning balance 14.6 14.3 11.2 New client conversions 0.1 Conversions from non-DST registered platforms 0.3 0.8 2.8 Conversions from DST's registered accounts 2.8 1.0 4.6 Conversions to non-DST platforms (6.1 ) (3.3 ) (5.0 ) Organic growth 0.7 1.8 0.7 Ending balance 12.4 14.6 14.3 Total 88.1 99.7 113.7 Total shareowner accounts serviced at December 31, 2012 decreased 11.6 million accounts or 11.6% as compared to December 31, 2011. Total shareowner accounts serviced at December 31, 2011 decreased 14.0 million accounts or 12.3% as compared to December 31, 2010.

Registered accounts serviced at December 31, 2012 decreased 9.4 million accounts or 11.0% from December 31, 2011. The decrease in registered accounts is from accounts converting to subaccounting platforms and to non-DST platforms.

Registered accounts serviced at December 31, 2011 decreased 14.3 million accounts or 14.4% from December 31, 2010.

Tax-advantaged accounts were 41.4 million at December 31, 2012, a decrease of 1.3 million accounts or 3.0% as compared to December 31, 2011. The decrease in tax-advantaged accounts during 2012 is primarily attributable to the loss of a client affiliated with a competitor of the Company to its in-house platform, certain open accounts held for subsequent investment being purged from the system and organic declines. Tax-advantaged accounts were 42.7 million at December 31, 2011, a decrease of 1.6 million accounts or 3.6% as compared to December 31, 2010. The decrease in tax-advantaged accounts 60-------------------------------------------------------------------------------- Table of Contents during 2011 is primarily attributable to a full-service client loss, certain open accounts held for subsequent investment being purged from the system and organic declines. Tax-advantaged accounts represent 54.7% of total registered accounts serviced at December 31, 2012 as compared to 50.2% at December 31, 2011.

DST signed a new mutual fund registered account client in January 2013 which is expected to add approximately 0.1 million new accounts in the first quarter 2013. For 2013, DST currently projects total conversions of registered accounts to subaccounts will approximate 5-6 million, of which approximately 30% will convert to DST's subaccounting platform. Projections of registered accounts converting to subaccounts are based on information obtained from DST's clients and are subject to change.

DST Brokerage operating revenues from subaccount processing increased during 2012 as compared to 2011. Subaccounts serviced at December 31, 2012 decreased 2.2 million accounts or 15.1% from December 31, 2011. Subaccounts serviced at December 31, 2011 increased 0.3 million accounts or 2.1% from December 31, 2010.

Revenues from subaccounting services are generally based on the number of subaccounts serviced and, as a result of the level of services provided directly by the broker/dealer, the per account revenue is less than what DST derives from its traditional mutual fund shareowner processing services because fewer of TA2000's features are required. The Company expects that two new subaccounting clients with approximately 5.4 million new subaccounts, based on current levels, are expected to be converted to DST's platform in the first quarter of 2013. As previously announced, a subaccounting client affiliated with a competitor of the Company converted 6.1 million subaccounts from DST's platform to its in-house platform during 2012.

The actual number of accounts estimated to convert to and from various DST platforms, as well as the timing of those events, is dependent upon a number of factors. Actual results could differ from the Company's estimates.

For the year ended December 31, 2012, ALPS contributed approximately $99.2 million of operating revenue, an increase of $84.6 million from 2011 as a result of higher assets under distribution and administration and the inclusion of a full year of financial results in 2012 versus two months of 2011. The following table summarizes ALPS operating statistics (in billions): December 31, 2012 2011 Assets Under Active Distribution $ 61.7 $ 51.9 Assets Under Administration 101.9 93.6 Assets Under Management 8.3 4.9 DST Retirement Solutions operating revenues during 2012 increased as compared to 2011 primarily from new clients. The following table summarizes changes in defined contribution participants serviced (in millions): Year Ended Year Ended Year Ended December 31, December 31, December 31, Defined Contribution Participants 2012 2011 2010 Beginning balance 4.6 4.5 4.2 New client conversions 0.3 0.5 Organic growth (decline) (0.1 ) 0.1 (0.2 ) Ending balance 4.8 4.6 4.5 Defined contribution ("DC") participants were 4.8 million at December 31, 2012, an increase of 0.2 million participants or 4.3% from December 31, 2011, attributable to new client conversions. DC participants were 4.6 million at December 31, 2011, an increase of 0.1 million participants or 2.2% 61-------------------------------------------------------------------------------- Table of Contents from December 31, 2010 attributable to new participants. The Company expects that new client commitments that will convert approximately 1.0 million new participants to DST's platform, of which 0.4 million are expected to convert in first quarter 2013.

DST HealthCare operating revenues increased by 11% during 2012 as compared to 2011 primarily from higher pharmacy claims processed. DST HealthCare operating revenues during 2011 as compared to 2010 decreased from lower volumes of claims processing and lower professional services. Pharmacy claims paid by Argus were 400.8 million for the year ended December 31, 2012, an increase of 38.8 million claims paid or 10.7% as compared to the year ended December 31, 2011. The increase in pharmacy claims paid is associated with new clients, higher volumes processed from existing clients, and increased Medicare and Medicaid members.

Pharmacy claims paid by Argus were 362.0 million for the year ended December 31, 2011, a decrease of 18.4 million claims paid or 4.8% as compared to the year ended December 31, 2010. Covered lives using DST Health Solutions' medical claim processing platforms were 23.3 million at December 31, 2012, an increase of 0.7 million lives or 3.1% as compared to December 31, 2011. The increase in covered lives is principally from organic growth within the existing customer base driven by increased Medicaid third party administration processing. DST HealthCare also signed two new full service clients during the fourth quarter, which are expected to increase covered lives processed by approximately 0.1 million in the first quarter 2013. Covered lives decreased 0.3 million or 1.3% during 2011 as compared to 2010.

DST's business process and document management revenues, including revenues associated with AWD, increased during 2012 as compared to 2011 primarily from higher software license revenue. Total active AWD workstations were 207,600, 204,300 and 198,300 at December 31, 2012, 2011 and 2010, respectively.

DST Global Solutions and BlueDoor operating revenues increased during 2012 as compared to 2011. The increase in operating revenues is attributable to increased licenses and support. Increased revenues of DST Global Solutions during 2011 as compared to 2010 primarily reflects the effect of foreign currency exchange rates of $9.6 million, and higher professional services and software license, maintenance and support revenue.

Operating revenues from lost instrument bond surety premiums recorded by Vermont Western Assurance, DST's captive insurance company, increased slightly in 2012 as compared to 2011 attributable to new client volumes. Vermont Western Assurance has an agreement to continue providing lost instrument surety bond coverage to Computershare through 2017.

Financial Services Segment software license fee revenues are derived principally from AWD (business process management-BPM), DST Global Solutions (investment management) and DST Health Solutions (medical claims processing). Operating revenues include approximately $48.9 million of software license fee revenues for the year ended December 31, 2012, an increase of $5.0 million as compared to 2011 from higher software licenses sold at DST Global Solutions. Operating revenues include approximately $43.4 million of software license fee revenues for the year ended December 31, 2011, a decrease of $2.5 million as compared to 2010. The 2011 decrease is primarily due to lower investment management and AWD software licenses. While license revenues are not a significant percentage of DST's total operations, they can significantly impact earnings in the period in which they are recognized. Revenues and operating results from individual license sales depend heavily on the timing, size and nature of the contract.

Costs and expenses Financial Services Segment costs and expenses (including OOP costs) for the year ended December 31, 2012 were $997.7 million, an increase of $131.6 million as compared to 2011. Costs and expenses in the Financial Services Segment are primarily comprised of compensation and benefit costs, but also include technology related expenditures and reimbursable operating expenses.

Reimbursable operating expenses 62-------------------------------------------------------------------------------- Table of Contents included in costs and expenses were $54.8 million in 2012, an increase of $12.7 million as compared to 2011. Excluding reimbursable operating expenses, costs and expenses were $942.9 million for 2012, an increase of $118.9 million as compared to 2011. On this basis, the increase in costs and expenses during 2012 is primarily from the inclusion of a full year of ALPS and other 2011 business acquisitions, increased employee compensation and benefit costs, incremental new product development costs at DST Brokerage and DST Retirement, increased employee termination expenses and higher deferred compensation plan costs (the effect of which is offset as unrealized gains on trading securities in other income), partially offset by the 2011 restructuring costs to amend a sales / marketing agreement of an acquired business which did not recur in 2012.

Financial Services Segment costs and expenses (including OOP costs) for the year ended December 31, 2011 were $866.1 million, an increase of $17.8 million as compared to 2010. Reimbursable operating expenses included in costs and expenses were $42.1 million for the year ended December 31, 2011, a decrease of $2.5 million as compared to 2010. Excluding reimbursable operating expenses in 2011 and 2010, employee termination costs in 2011 and 2010, restructuring costs to amend a sales / marketing agreement of an acquired business in 2011, the loss accrual in 2011, business development and advisory expenses in 2011, each as described in the consolidated income from operations section above, and operating costs of $1.5 million related to the 2011 contract termination payment and $1.6 million related to the 2010 contract termination payment, mentioned above, costs and expenses increased $17.7 million or 2.2% during 2011 to $805.5 million. On this basis, the increase in costs and expenses is attributable to foreign currency exchange effects between the U.S. Dollar and other currencies which increased costs by approximately $9.8 million, start-up costs from DST Insurance Solutions, increased investments in DST Retirement Solutions and DST Brokerage Solutions (including Subserveo, Finix and Converge) and operating costs related to 2011 business acquisitions and new service offerings, partially offset by lower deferred compensation costs of $3.8 million (the effect of which is offset in other non-operating income) and lower employee healthcare and retirement benefit costs.

ALPS may enter into arrangements with broker-dealers or other third parties to sell or market closed-end fund shares. Depending on the arrangement, ALPS may earn distribution fees for marketing and selling the underlying fund shares.

Conversely, ALPS may incur distribution expenses, including structuring fees, finders' fees and referral fees paid to unaffiliated broker-dealers or introducing parties for marketing and selling underlying fund shares of a closed-end fund sponsored by ALPS. While distribution revenues and expenses are not significant percentages of DST's operating revenues or costs and expenses, they can significantly impact operations and earnings in the period in which they are recognized.

Depreciation and amortization Financial Services Segment depreciation and amortization costs for the year ended December 31, 2012 were $92.0 million, an increase of $15.5 million or 20.3% as compared to 2011. The increase in 2012 is primarily the result of $8.0 million of higher amortization expense from intangible assets resulting from a full year of amortization during 2012 from the businesses acquired in 2011 and $5.8 million of asset impairment charges associated with ceasing the development of an insurance processing solution, partially offset by lower intangible asset amortization from DST Health Solutions as certain assets became fully amortized during 2011.

Financial Services Segment depreciation and amortization costs for the year ended December 31, 2011 were $76.5 million, a decrease of $2.9 million or 3.7% as compared to 2010. The decrease in depreciation and amortization is attributable to lower intangible amortization from certain assets becoming fully depreciated/amortized, partially offset by depreciation from new asset additions and intangible asset amortization expense associated with ALPS and other 2011 Financial Services Segment acquisitions of $2.8 million.

63-------------------------------------------------------------------------------- Table of Contents Income from operations Financial Services Segment income from operations for 2012 was $209.1 million, a decrease of $28.8 million or 12.1% as compared to 2011. The decrease in Financial Services income from operations is from lower contributions from mutual fund shareowner account processing, higher costs associated with new business initiatives (retirement and brokerage), higher employee termination costs, increased intangible asset amortization expense from 2011 acquisitions, higher employee compensation plan costs associated with higher earnings in 2012, partially offset by contributions from the inclusion of ALPS and increased earnings from DST Healthcare.

Financial Services Segment income from operations for 2011 was $237.9 million, a decrease of $35.7 million or 13.0% as compared to 2010. Excluding the income from operations impact of the client contract termination payments and employee termination expenses in 2011 and 2010, the business development and advisory expenses, the loss accrual and restructuring expenses to amend a sales / marketing agreement of an acquired business in 2011, each as described above, income from operations decreased $27.5 million or 9.8% to $252.9 million for 2011 as compared to 2010. On this basis, the decrease in Financial Services income from operations is attributable to lower mutual fund servicing revenues and higher costs associated with new business initiatives, partially offset by lower deferred compensation costs of $3.8 million (the effect of which is offset as unrealized appreciation on trading securities in other income, net).

CUSTOMER COMMUNICATIONS SEGMENT (FORMERLY OUTPUT SOLUTIONS SEGMENT)Revenues The following tables present the financial results and operating statistics of the Customer Communications Segment (in millions): Year Ended December 31, 2012 2011 2010 Operating Operating Operating Operating Operating Operating Revenue Income (Loss) Revenue Income (Loss) Revenue Income (Loss) North America $ 455.2 $ 43.5 $ 430.3 $ 37.8 $ 490.2 $ 84.1 U.K. 194.8 (79.1 ) 179.5 (16.6 ) 73.9 (5.3 ) Customer Communications Segment $ 650.0 $ (35.6 ) $ 609.8 $ 21.2 $ 564.1 $ 78.8 Year Ended December 31, 2012 2011 2010 Images Produced North America 9,444.4 9,042.8 10,243.9 U.K.* 2,163.1 2,029.5 857.5 11,607.5 11,072.3 11,101.4 Packages Mailed North America 2,185.4 1,999.5 2,102.9 U.K.* 752.4 733.5 149.6 2,937.8 2,733.0 2,252.5 -------------------------------------------------------------------------------- º * º Excludes volumes for dsicmm in 2010.

64 -------------------------------------------------------------------------------- Table of Contents Customer Communications Segment total revenues were $1,286.7 million and $1,216.8 million for the years ended December 31, 2012 and 2011, respectively.

Operating revenues increased $40.2 million or 6.6% to $650.0 million for the year ended December 31, 2012 as compared to 2011. The increase is attributable to the acquisitions of Lateral in August 2011 and Newkirk in May 2011 as well as new clients in the North America, partially offset by lower revenue per package in the U.K.

Customer Communications Segment total revenues were $1,216.8 million and $1,139.9 million for the years ended December 31, 2011 and 2010, respectively.

Operating revenues increased $45.7 million or 8.1% to $609.8 million for the year ended December 31, 2011 as compared to 2010. As mentioned in the consolidated revenues section above, Customer Communications received a significant client contract termination payment in 2010. Excluding this client contract termination payment, Customer Communications operating revenues for 2011 increased $110.0 million or 22.0% to $609.8 million, as compared to 2010.

On this basis, the increase is attributable to operating revenues from the acquisitions of Lateral Group on August 5, 2011, Newkirk Products on May 2, 2011 and a full year of operating revenues from dsicmm Group which was acquired on July 30, 2010, partially offset by the loss of revenues from the telecommunications and subaccounting clients that terminated their processing contracts in mid-2010.

Customer Communications' North America operating revenues increased $24.9 million or 5.8% to $455.2 million for the year ended December 31, 2012 as compared to 2011. The increase is primarily attributable to revenues from new clients and a full year of revenues from Newkirk in 2012 as compared to eight months in 2011, partially offset by lower volumes from existing clients.

Excluding the contract termination payments in 2010 mentioned above, Customer Communications' North America operating revenues increased $4.4 million or 1.0% to $430.3 million for the year ended December 31, 2011 as compared to 2010. On this basis, the increase in operating revenues was primarily attributable to the acquisition of Newkirk, higher fulfillment services revenues, higher postal processing service revenues, new clients and foreign currency exchange effects in Canada which increased operating revenues by approximately $1.9 million, partially offset by lower revenues from client losses and lower volumes from existing clients.

Packages mailed during 2012 from North America were 2.2 billion, an increase of 185.9 million from 2011. North America images produced increased 0.4 billion or 4.4% to 9.4 billion for the year ended December 31, 2012 as compared to 2011.

The increase in images and packages during 2012 was attributable to Newkirk and new client volumes. North America images produced decreased 1.2 billion or 11.7% to 9.0 billion for the year ended December 31, 2011 as compared to 2010. The decline in images produced was attributable to the previously mentioned loss of a telecommunications client in April 2010 and from lower images from existing clients, partially offset by images from new clients and the Newkirk acquisition in May 2011.

In 2012, Customer Communications' U.K. operating revenues increased $15.3 million as a result of a full year of operations from the Lateral acquisition, partially offset by lower revenues per package. U.K. images produced during the year ended December 31, 2012 were 2.2 billion, an increase of 6.6% as compared to 2011. U.K. items mailed during the year ended December 31, 2012 were 752.4 million, an increase of 2.6% as compared to 2011.

Customer Communications' U.K. operating revenues increased $105.6 million for the year ended December 31, 2011 as compared to 2010 from the Lateral Group acquisition on August 5, 2011 and from a full year of operating revenues from the dsicmm Group acquisition on July 30, 2010.

Customer Communications Segment OOP reimbursements revenue increased $29.7 million or 4.9% in 2012 as compared to 2011 and increased $31.2 million or 5.4% in 2011 as compared to 2010. The net increase in 2012 was primarily attributable to higher volumes from new clients and volumes from the Lateral and Newkirk acquisitions. The net increase in 2011 was primarily from the acquisitions of Lateral and Newkirk and a full year of dsicmm.

65-------------------------------------------------------------------------------- Table of Contents Costs and expenses Customer Communications Segment costs and expenses (including OOP costs) for the year ended December 31, 2012 increased $66.0 million or 5.7% to $1,214.9 million as compared to 2011. Costs and expenses in the Customer Communications Segment are primarily comprised of reimbursable operating expenses (primarily postage and freight), compensation and benefits costs, material costs (principally paper and ink) and other operating costs. Reimbursable operating expenses included in costs and expenses were $636.7 million during 2012, an increase of $29.7 million or 4.9% as compared to 2011. Excluding reimbursable operating expenses, Segment costs and expenses increased $36.3 million during 2012. On this basis, Customer Communications' U.K. costs and expenses increased $15.8 million due to costs and expenses from a full year of Lateral in 2012, $8.5 million of lease abandonment charges associated with vacating certain leased facilities, and higher material costs associated with higher operating revenues. Customer Communications' North America costs and expenses increased $20.5 million during 2012 as compared to 2011 primarily from higher material costs resulting from higher volumes of operating revenues, higher compensation costs, and higher costs from a full year of Newkirk.

Customer Communications Segment costs and expenses (including OOP costs) for the year ended December 31, 2011 increased $135.6 million or 13.4% to $1,148.9 million as compared to 2010. Reimbursable operating expenses included in costs and expenses were $607.0 million during 2011, an increase of $31.2 million or 5.4% as compared to 2010. Excluding reimbursable operating expenses in 2011 and 2010, employee termination and business development expenses described in the consolidated income from operations section above and costs of $1.5 million related to the contract termination payments mentioned above, costs and expenses increased $107.2 million or 25.0% during 2011 to $536.6 million. On this basis, Customer Communications' U.K. costs and expenses increased $107.1 million due to costs and expenses from the acquisition of Lateral on August 5, 2011, a full year of costs and expenses from the acquisition of dsicmm on July 30, 2010 and costs associated with integrating the U.K. businesses. On this basis, Customer Communications' North America costs and expenses increased $0.1 million primarily from the Newkirk acquisition on May 2, 2011 and a fulfillment business acquired on September 30, 2010, which were partially offset by reductions in staffing levels, lower material costs from lower volumes produced, lower employee healthcare benefit costs and improvements in operating efficiencies.

Depreciation and amortization (including goodwill impairment) Customer Communications Segment depreciation and amortization was $107.4 million, $46.7 million and $47.8 million for the years ended December 31, 2012, 2011 and 2010, respectively. Depreciation and amortization in 2012 includes a goodwill impairment of the Customer Communications U.K. reporting unit in the amount of $60.8 million. Excluding this goodwill impairment, depreciation and amortization decreased $0.1 million in 2012 as compared to 2011. On this basis, North America decreased $2.0 million in 2012 as compared to 2011, primarily from lower levels of capital expenditures, partially offset by higher intangible asset amortization from the Newkirk acquisition. On this basis, the U.K. depreciation and amortization increased $1.9 million in 2012 as compared to 2011, attributable to the higher intangible asset amortization from the Lateral acquisition.

Depreciation decreased $1.1 million or 2.3% to $46.7 million in 2011 as compared to 2010. North America decreased $9.8 million in 2011 as compared to 2010.

Excluding the asset impairment charge of $3.1 million associated with the client contract termination in 2010, North America depreciation and amortization decreased $6.7 million. On this basis, the decrease is attributable to lower levels of capital expenditures, partially offset by an increase of approximately $0.6 million of intangible asset amortization expense principally associated with the Newkirk acquisition. U.K. depreciation and amortization increased $8.7 million in 2011 as compared to 2010, attributable to the acquisition of 66-------------------------------------------------------------------------------- Table of Contents Lateral and a full year of dsicmm, and an increase of $1.3 million of intangible asset amortization expense principally associated with these acquisitions.

Income from operations Customer Communications Segment loss from operations was $35.6 million for the year ended December 31, 2012, a decrease of $56.8 million compared to 2011.

Customer Communications North America income from operations increased $5.7 million and the operating loss from Customer Communications U.K. increased $62.5 million. The increase in Customer Communications North America is from higher operating revenues. The decrease in Customer Communications U.K. is primarily attributable to the $60.8 million goodwill impairment charge and employee termination and lease abandonment costs, partially offset by higher revenues.

Customer Communications Segment income from operations was $21.2 million for the year ended December 31, 2011, a decrease of $57.6 million compared to 2010.

Excluding the income from operations impact of the client contract termination payments, employee termination expenses and business development expenses in 2011 and 2010 described above, income from operations increased $0.8 million or 3.1% to $26.5 million as compared to 2010. On this basis, North America income from operations increased $11.1 million in 2011 compared to 2010, attributable to improvements in operating efficiencies, lower staffing levels and lower employee healthcare benefit costs. U.K. income from operations decreased $10.3 million in 2011compared to 2010, attributable to lower than expected revenues, consolidation of facilities and reductions in the workforce to achieve synergies and efficiency.

In January 2012, DST acquired the remaining outstanding shares of Output U.K.

from the non-controlling shareholders for $17.7 million, resulting in Output U.K. becoming a wholly-owned subsidiary. The Company believes having Output U.K.

as a wholly-owned subsidiary will enable the Company to achieve its goals for Output U.K.

Use of EBITDA The Company defines Operating EBITDA as earnings from operations before interest expense, income taxes, depreciation and amortization. This supplemental non-GAAP liquidity measure is provided in addition to, but not as a substitute for, cash flow from operations. As a measure of liquidity, the Company believes Operating EBITDA is useful as an indicator of its ability to generate cash flow. Operating EBITDA, as calculated by the Company, may not be consistent with the computation of EBITDA by other companies. The Company believes a useful measure of the Customer Communications Solutions and Investments and Other Segment's contribution to DST's results is to focus on cash flow and DST's management believes Operating EBITDA is useful for this purpose. A reconciliation of Customer Communications Solutions and Investments and Other Segment income from operations to Operating EBITDA is included in the pages that follow. The non-GAAP adjustments to this reconciliation are used to calculate Adjusted Operating EBITDA and are described in the "Use of Non-GAAP Financial Information" included in Management's Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-K.

67-------------------------------------------------------------------------------- Table of Contents The following table presents Operating EBITDA of the Customer Communications Segment (in millions): Year Ended December 31, 2012 2011 2010 Operating Operating Operating EBITDA EBITDA EBITDA North America $ 74.1 $ 70.4 $ 126.4 U.K. (2.3 ) (2.5 ) 0.2 Customer Communications Segment $ 71.8 $ 67.9 $ 126.6 For the years ended December 31, 2012, 2011 and 2010, Customer Communications Operating EBITDA was $71.8 million, $67.9 million and $126.6 million, respectively. Excluding the EBITDA impact of the client contract termination payments, leased facility abandonment charges, employee termination expenses and business development costs, Adjusted Operating EBITDA for 2012 was $83.4 million, an increase of $10.2 million or 13.9% compared to 2011, attributable to higher Operating EBITDA in North America from higher operating revenues associated with new clients. The increase in Operating EBITDA for Customer Communications U.K. is due to lower operating expenses resulting from lower facility costs and lower headcount in 2012.

Excluding the EBITDA impact of the client contract termination payments, employee termination expenses and business development costs, Adjusted Operating EBITDA for 2011 increased $2.8 million or 4.0% as compared to 2010, attributable to lower operating expenses in North America, partially offset by decreased Operating EBITDA from the U.K. operations.

The reconciliation of the Customer Communications Segment income from operations to EBITDA as used by management is set forth in the table below (in millions): Year Ended December 31, 2012 2011 2010 Customer Communications Segment income from operations $ (35.6 ) $ 21.2 $ 78.8 Depreciation and amortization (including goodwill impairment) 107.4 46.7 47.8 Operating EBITDA, before Non-GAAP items 71.8 67.9 126.6 Contract termination payment, net of expenses (62.8 ) Employee termination expenses 8.5 5.1 6.6 Business development expenses 3.1 0.2 Adjusted Operating EBITDA, after Non-GAAP items $ 83.4 $ 73.2 $ 70.4 Comprised of: North America $ 74.6 74.7 70.2 U.K. 8.8 (1.5 ) 0.2 $ 83.4 $ 73.2 $ 70.4 68 -------------------------------------------------------------------------------- Table of Contents INVESTMENTS AND OTHER SEGMENT Revenues Investments and Other Segment total revenues, including out-of-pocket reimbursements, were $59.2 million, $57.9 million and $58.2 million during the years ended December 31, 2012, 2011 and 2010, respectively. Revenues are primarily derived from real estate activities. The majority of the real estate revenues are derived from the lease of facilities to the Company's other business segments. Operating revenues (excluding out-of-pocket reimbursements) were $58.9 million, $56.3 million and $57.8 million during the years ended December 31, 2012, 2011 and 2010. The increase in operating revenues during 2012 as compared to 2011 is attributable to higher third party rental activities. The decrease in operating revenues during 2011 as compared to 2010 is attributable to lower rental activities.

Costs and expenses Occupancy costs are generally the largest costs included in costs and expenses in the Investments and Other Segment however during 2012 and 2010 charitable contributions of State Street securities were made in the amount of $11.0 million and $10.2 million, respectively. Investments and Other Segment costs and expenses increased $9.9 million in 2012 as compared to 2011 and decreased $9.3 million in 2011 as compared to 2010. Excluding the 2012 and 2010 charitable donations, costs and expenses were $36.9 million, $38.0 million and $37.1 million during the years ended December 31, 2012, 2011 and 2010. On this basis, costs and expenses decreased $1.1 million in 2012 as compared to 2011 primarily attributable to lower occupancy costs partially offset by $1.8 million of leased facility abandonment charges in 2012. On the same basis, costs and expenses increased $0.9 million in 2011 as compared to 2010, mostly attributable to the $0.6 million of costs incurred in 2011 related to vacating a leased office building.

Depreciation and amortization Investments and Other Segment depreciation and amortization was $19.6 million, $11.0 million and $10.8 million during the years ended December 31, 2012, 2011 and 2010, respectively. Depreciation and amortization increased $8.6 million during 2012 as compared to 2011 primarily due to real estate impairments of $9.0 million recorded in 2012. Depreciation and amortization increased $0.2 million during 2011 as compared to 2010.

Income from operations Investments and Other Segment had a loss from operations of $8.3 million in 2012 and income from operations of $8.9 million and $0.1 million during the years ended December 31, 2012, 2011 and 2010, respectively. Income from operations decreased $17.2 million in during 2012 as compared to 2011, primarily from the charitable contribution of marketable securities, real estate impairment charges and a lease abandonment charge, partially offset by higher operating revenues.

Excluding the 2010 charitable contribution mentioned above, income from operations decreased $1.4 million during 2011 as compared to 2010, primarily from the 2011 charge for vacating a leased office building and lower rental revenues.

Review of DST's U.S. Real Estate Holdings DST's U.S. real estate holdings produced $21.1 million, $18.9 million and $19.0 million of Adjusted Operating EBITDA (defined as operating income plus depreciation and amortization and other non-GAAP adjustments) during the years ended December 31, 2012, 2011 and 2010, respectively.

69-------------------------------------------------------------------------------- Table of Contents The reconciliation of the Investments and Other Segment income from operations to Operating EBITDA as used by management is set forth in the table below (in millions): Year Ended December 31, 2012 2011 2010 Reported GAAP income (loss) from operations $ (8.3 ) $ 8.9 $ 0.1 Adjusted to remove: GAAP income (loss) from non U.S. real estate operations (12.1 ) (1.0 ) (10.0 ) U.S. Real Estate Operations GAAP income from operations 3.8 9.9 10.1 Adjusted to remove: Depreciation and amortization 17.4 9.0 8.9 Operating EBITDA, before non-GAAP items $ 21.2 $ 18.9 $ 19.0 Adjusted to remove: Gain on sale of real estate (1.9 ) Leased facility abandonment costs 1.8 Adjusted operating EBITDA, after non-GAAP items $ 21.1 $ 18.9 $ 19.0 Use of Non-GAAP Financial Information In addition to reporting operating income, pretax income, net income, net income attributable to DST Systems, Inc. ("DST Earnings") and earnings per share on a GAAP basis, DST has also made certain non-GAAP adjustments which are described below in the section titled "Description of Non-GAAP Adjustments" and are reconciled to the corresponding GAAP measures in the attached financial schedules titled "Reconciliation of Reported Results to Income Adjusted for Certain Non-GAAP Items" below. In making these non-GAAP adjustments, the Company takes into account the impact of items that are not necessarily ongoing in nature, that do not have a high level of predictability associated with them or that are non-operational in nature. Generally, these items include net gains on dispositions of business units, net gains (losses) associated with securities and other investments, restructuring and impairment costs and other similar items. Management believes the exclusion of these items provides a useful basis for evaluating underlying business unit performance, but should not be considered in isolation and is not in accordance with, or a substitute for, evaluating business unit performance utilizing GAAP financial information.

Management uses non-GAAP measures in its budgeting and forecasting processes and to further analyze its financial trends and "operational run-rate," as well as making financial comparisons to prior periods presented on a similar basis. The Company believes that providing such adjusted results allows investors and other users of DST's financial statements to better understand DST's comparative operating performance for the periods presented.

DST's management uses each of these non-GAAP financial measures in its own evaluation of the Company's performance, particularly when comparing performance to past periods. DST's non-GAAP measures may differ from similar measures by other companies, even if similar terms are used to identify such measures.

Although DST's management believes non-GAAP measures are useful in evaluating the performance of its business, DST acknowledges that items excluded from such measures may have a material impact on the Company's income from operations, pretax income, net income, net income attributable to DST Systems, Inc. and earnings per share calculated in accordance with GAAP. Therefore, management typically uses Non-GAAP measures in conjunction with GAAP results. These factors should be considered when evaluating DST's results.

70-------------------------------------------------------------------------------- Table of Contents Description of Non-GAAP Adjustments The following items, which occurred during the year ended December 31, 2012, have been treated as Non-GAAP adjustments: º • º Business advisory expenses associated with an action by the DST Board of Directors retain independent advisors to assist the Board with its ongoing review of DST's business plan, assets and investment portfolio, included in costs and expenses, in the amount of $1.6 million. The income tax benefit associated with these expenses was approximately $0.6 million.

º • º Employee termination expenses of $17.3 million associated with reductions in workforce in the Financial Services ($14.2 million) and Customer Communications Segment (3.1 million), which were included in costs and expenses. The income tax benefit associated with these costs was approximately $4.2 million.

º • º Loss accrual of $1.9 million recorded on a dispute related to a 2001 international software development agreement in the Financial Services Segment, which were included in costs and expenses. There was no income tax benefit associated with this charge.

º • º Leased facility abandonment costs of $11.0 million associated with vacating certain leased facilities in the U.K. that were used by the Customer Communications Segment ($9.2 million) and vacating an office building in California used by the Investments and Other Segment ($1.8 million). The $9.2 million of Customer Communications Segment costs have been included in both costs and expense ($8.5 million) and depreciation expense of ($0.7 million). The $1.8 million of Investments and Other costs have been included in costs and expenses.

The aggregate income tax benefit associated with these costs was approximately $0.8 million.

º • º Goodwill impairment of $60.8 million, included in depreciation and amortization in the Customer Communications Segment, associated with a reduction in the estimated fair value of the Customer Communications U.K. reporting unit. There was no income tax benefit associated with this charge.

º • º Net loss on real estate assets of $7.1 million in the Investments and Other Segment. The Company recorded impairments on real estate assets not currently used in the Company's operations of $9.0 million, which were included in depreciation expense in the Investments and Other Segment. The charge was comprised of impairments in the U.S. of $8.4 million and internationally of $0.6 million. Partially offsetting these impairments charges were net gains on sale of U.S. real estate of $1.9 million which was included as a reduction of costs and expenses. The income tax benefit associated with these net losses was approximately $2.8 million.

º • º Pretax costs associated with ceasing the development of a processing solution for the insurance market, in the amount of $8.3 million. The costs were comprised of asset impairment charges of $5.8 million, which were included in depreciation and amortization expense, employee termination expenses of $1.9 million and other operating costs of $1.4 million, which were both included in costs and expenses. These costs were partially offset by the recognition of previously deferred IFDS L.P. software license revenues of $0.8 million (DST's share), included in equity in earnings of unconsolidated affiliates, related to the 2011 sale of its Percana software license to DST. The aggregate income tax benefit associated with these net costs is $3.2 million.

º • º Expenses and net gain related to a charitable contribution of marketable securities. The charitable contribution expense of $11.0 million, recorded by the Investments and Other Segment, was offset by a book gain of $8.9 million from the disposition of securities, which was included in Other income (expense), net, and resulted in a net pretax expense of $2.2 million. The aggregate income tax benefit associated with this charitable contribution was approximately $5.0 million.

71 -------------------------------------------------------------------------------- Table of Contents º • º Net gain on securities and other investments in the amount of $333.2 million, included in other income, is comprised of cash dividends of $48.4 million and realized gain on sale of private company investment of $138.7 million received in May 2012 and net gains on the disposition of securities and other investments of $146.1 million. The $146.1 million of net gains on securities and other investments was comprised of net realized gains from sales of available-for-sale securities of $139.2 million and net gains on private equity funds and other investments of $9.3 million, partially offset by other than temporary impairments on available-for-sale securities of $2.4 million. The aggregate income tax expense associated with the private company dividend and net gain on securities and other investments was approximately $125.2 million.

º • º Net gain from unconsolidated affiliates of $11.1 million, included in equity in earnings of unconsolidated affiliates, is comprised of a $14.8 million gain from the disposition of a Canadian real estate partnership with IFDS Canada and a gain of $0.4 million from the receipt of a cash distribution from a previously impaired investment, which was partially offset by impairments of other unconsolidated affiliates of $4.1 million related to real estate and other assets.

The aggregate income tax expense associated with this net gain was approximately $1.9 million.

º • º Income tax benefits of approximately $18.3 million, resulting from the resolution of research and experimentation credits ($16.0 million) and domestic manufacturing deduction credits under Internal Revenue Code 199 ($2.3 million).

The following items, which occurred during the year ended December 31, 2011, have been treated as Non-GAAP adjustments: º • º Contract termination payment, net of certain costs, resulting from the termination of a Financial Services subaccounting client, in the amount of $2.0 million. The net contract termination gain was comprised of operating revenues of $3.5 million, partially offset by certain costs of $1.5 million that were included in cost and expenses.

The aggregate income tax expense associated with this net contract termination gain was approximately $0.8 million.

º • º Employee termination expenses of $6.4 million associated with reductions in workforce in the Financial Services Segment ($1.3 million) and the Customer Communications Segment ($5.1 million), which were included in costs and expenses. The aggregate income tax benefit associated with these costs was approximately $2.4 million.

$1.0 million of the costs of Customer Communications Segment were incurred by Output U.K., a consolidated but not wholly-owned subsidiary of DST. Accordingly, a portion of this cost ($0.2 million) was attributable to the non-controlling interest.

º • º Business development expenses (legal, accounting, investment banking and other professional fees) associated with business acquisitions, included in costs and expenses, in the amount of $3.3 million ($3.1 million in Financial Services and $0.2 million in Customer Communications). The income tax benefit associated with these expenses was approximately $1.4 million.

º • º Business advisory expenses associated with an action by the DST Board of Directors to retain advisors to assist the Board with its ongoing review of DST's business plan, assets and investment portfolio, included in costs and expenses, in the amount of $1.8 million. The income tax benefit associated with these expenses was approximately $0.7 million. The Company expects these services to continue for the next several quarters.

º • º Restructuring cost associated with amending sales / marketing agreements of an acquired business, included in costs and expenses, in the amount of $7.3 million. The income tax benefit associated with this expense was approximately $2.9 million.

72 -------------------------------------------------------------------------------- Table of Contents º • º Loss accrual recorded for a regulatory inquiry regarding the processing of certain pharmacy claims during the period 2006 to 2009, included in costs and expenses, in the amount of $3.5 million. There was no income tax benefit attributed to this loss accrual.

º • º Other net gain, in the amount of $17.2 million, associated with gains (losses) related to securities and other investments, which were included in other income, net. The income tax expense associated with this net gain was approximately $6.7 million. The $17.2 million of net gain on securities and other investments for the year ended December 31, 2011 was comprised of net realized gains from sales of available-for-sale securities of $21.8 million, partially offset by net losses on private equity funds and other investments of $0.8 million and other than temporary impairments on available-for-sale securities of $3.8 million.

º • º Net loss, in the amount of $1.2 million, associated with the repurchase of senior convertible debentures, which was included in other income, net. The income tax benefit associated with this net loss was approximately $0.4 million.

º • º Employee termination expenses at an unconsolidated affiliate, BFDS, associated with a reduction in workforce, included in equity in earnings of unconsolidated affiliates in the amount of $2.6 million.

The income tax benefit associated with these expenses was approximately $0.3 million.

º • º Impairment of unconsolidated affiliate, in the amount of $0.7 million, included in equity in earnings of unconsolidated affiliates. The income tax benefit associated with this expense was approximately $0.2 million.

The following items, which occurred during the year ended December 31, 2010, have been treated as Non-GAAP adjustments: º • º Contract termination payment net of certain other costs resulting from the termination of a Financial Services subaccounting client, in the amount of $7.5 million. The net contract termination gain was comprised of operating revenues of $9.1 million, partially offset by certain other costs of $1.6 million that were included in Costs and expenses. The aggregate income tax expense associated with this net contract termination gain was approximately $2.9 million.

º • º Contract termination payment, net of termination benefit expenses and asset impairment charges resulting from the termination of a Customer Communications telecommunications client, in the amount of $59.7 million. The net contract termination gain was comprised of operating revenues of $64.3 million, partially offset by termination benefit expenses of $1.5 million that were included in Costs and expenses and asset impairment charges of $3.1 million which are included in Depreciation and amortization expense. The aggregate income tax expense associated with this net contract termination gain was approximately $23.3 million.

º • º Termination benefit expenses of $20.9 million associated with reductions in workforce in the Financial Services Segment ($14.3 million) and the Customer Communications Segment ($6.6 million), which were included in Costs and expenses. The aggregate income tax benefit associated with these costs was approximately $8.2 million.

º • º The Company recorded expenses and net gains related to the disposition of securities and other investments in 2010. Expenses were associated with a charitable donation of marketable securities in the amount of $10.2 million by the Investments and Other Segment, which was included in costs and expenses. The Company recorded $70.8 million of net gains on securities and other investments, which were included in other income, net, for 2010 was comprised of net realized gains from dispositions of available-for-sale securities of $67.0 million and net gains on private equity funds and other investments of $5.1 million, partially offset by other than 73 -------------------------------------------------------------------------------- Table of Contents temporary impairments on available-for-sale securities of $1.3 million. The aggregate income tax expense associated with the expenses and net gains was approximately $19.7 million.

º • º Cash dividends from a private equity investment of $54.7 million, which was included in Other income, net. The gross amount of the dividends were $57.7 million, but approximately $3.0 million of the dividend was applied to the Company's cost basis investment. The income tax expense associated with these dividends were approximately $12.6 million.

º • º Net loss, in the amount of $6.4 million, associated with the repurchase and extinguishment of senior convertible debentures, which was included in Other income, net. The income tax benefit associated with this net loss was approximately $2.4 million.

º • º An income tax benefit of approximately $2.3 million related to the release of a valuation allowance previously established on deferred income tax assets of DST Output Limited (U.K.) resulting from the acquisition of dsicmm Group. Output U.K. was the beneficiary of this income tax benefit, and accordingly DST's share of the benefit was 70.5% or $1.6 million. The remaining portion of the income tax benefit (29.5% or $0.7 million) was attributed to the non-controlling interest.

74 -------------------------------------------------------------------------------- Table of Contents DST SYSTEMS, INC.

RECONCILIATION OF REPORTED RESULTS TO INCOME ADJUSTED FOR CERTAIN NON-GAAP ITEMS Year Ended December 31, (in millions, except per share amounts) 2012 Operating Pretax Net DST Diluted Income Income Income Earnings* EPS Reported GAAP income $ 157.3 $ 519.5 $ 324.0 $ 324.0 $ 7.08 Adjusted to remove: Included in operating income: Business advisory expenses-Financial Services 1.6 1.6 1.0 1.0 0.02 Employee termination expenses-Financial Services 14.2 14.2 10.6 10.6 0.23 Employee termination expenses-Customer Communications 3.1 3.1 2.5 2.5 0.06 Loss accrual-Financial Services 1.9 1.9 1.9 1.9 0.04 Leased facility abandonment costs-Customer Communications 9.2 9.2 9.1 9.1 0.20 Leased facility abandonment costs-Investments & Other 1.8 1.8 1.1 1.1 0.02 Impairment of goodwill-Customer Communications 60.8 60.8 60.8 60.8 1.33 Net loss on real estate assets-Investments & Other 7.1 7.1 4.3 4.3 0.09 Included in operating income and non-operating income: Asset impairment, employee termination and other expenses from insurance processing business-Financial Services 9.1 8.3 5.1 5.1 0.11 Charitable contribution of securities-Investments & Other 11.0 2.1 (2.9 ) (2.9 ) (0.06 ) Included in non-operating income: Net gain on securities and other investments (333.2 ) (208.0 ) (208.0 ) (4.54 ) Net gain from unconsolidated affiliates (11.1 ) (9.2 ) (9.2 ) (0.20 ) Income tax refund claims (18.3 ) (18.3 ) (0.40 ) Adjusted Non-GAAP income $ 277.1 $ 285.3 $ 182.0 $ 182.0 $ 3.98 75 -------------------------------------------------------------------------------- Table of Contents 2011 Operating Pretax Net DST Diluted Income Income Income Earnings* EPS Reported GAAP income $ 260.1 $ 274.0 $ 178.2 $ 183.1 $ 3.95 Adjusted to remove: Included in operating income: Contract termination payment, net-Financial Services (2.0 ) (2.0 ) (1.2 ) (1.2 ) (0.03 ) Employee termination expenses-Financial Services 1.3 1.3 0.8 0.8 0.02 Employee termination expenses-Customer Communications 5.1 5.1 3.2 3.0 0.06 Business development expenses-Financial Services 3.1 3.1 1.8 1.8 0.04 Business development expenses-Customer Communications 0.2 0.2 0.1 0.1 Business advisory expenses-Financial Services 1.8 1.8 1.1 1.1 0.02 Restructuring cost to amend sales / marketing agreements-Financial Services 7.3 7.3 4.4 4.4 0.10 Loss accrual-Financial Services 3.5 3.5 3.5 3.5 0.08 Included in non-operating income: Net gain on securities and other investments (17.2 ) (10.5 ) (10.5 ) (0.23 ) Net loss on repurchase of convertible debentures 1.2 0.8 0.8 0.02 Employee termination expenses at unconsolidated affiliate 2.6 2.3 2.3 0.05 Impairment of unconsolidated affiliate 0.7 0.5 0.5 0.01 Adjusted Non-GAAP income $ 280.4 $ 281.6 $ 185.0 $ 189.7 $ 4.09 -------------------------------------------------------------------------------- º Note: º See the Description of Non-GAAP Adjustments section for a description of each of the above adjustments and see the Use of Non-GAAP Financial Information section for management's reasons for providing non-GAAP financial information.

º * º DST Earnings has been defined as "Net income attributable to DST Systems, Inc." (taking into account the net loss attributable to non-controlling interest).

76 -------------------------------------------------------------------------------- Table of Contents 2010 Operating Pretax Net DST Diluted Income Income Income Earnings* EPS Reported GAAP income $ 344.6 $ 476.6 $ 317.5 $ 318.5 $ 6.73 Adjusted to remove: Included in non-operating income: Contract termination payment, net-Financial Services (7.5 ) (7.5 ) (4.6 ) (4.6 ) (0.10 ) Contract termination payment, net-Customer Communications (59.7 ) (59.7 ) (36.4 ) (36.4 ) (0.77 ) Employee termination expenses-Financial Services 14.3 14.3 8.7 8.7 0.18 Employee termination expenses-Customer Communications 6.6 6.6 4.0 4.0 0.09 Included in operating income and non-operating income: Net gain on the disposition of securities and other investments 10.2 (60.6 ) (40.9 ) (40.9 ) (0.87 ) Included in non-operating income: Dividend from a private equity investment (54.7 ) (42.1 ) (42.1 ) (0.89 ) Net loss on repurchase of convertible debentures 6.4 4.0 4.0 0.09 Release of international income tax valuation allowance (2.3 ) (1.6 ) (0.03 ) Adjusted Non-GAAP income $ 308.5 $ 321.4 $ 207.9 $ 209.6 $ 4.43 -------------------------------------------------------------------------------- º Note: º See the Description of Non-GAAP Adjustments section for a description of each of the above adjustments and see the Use of Non-GAAP Financial Information section for management's reasons for providing non-GAAP financial information.

º * º DST Earnings has been defined as "Net income attributable to DST Systems, Inc." (after non-controlling interest).

77 -------------------------------------------------------------------------------- Table of Contents Management's Analysis of Non-GAAP Results for 2012, 2011 and 2010 Taking into account the non-GAAP items described in the above tables, adjusted non-GAAP diluted earnings per share was $3.98, $4.09 and $4.43 during the years ended December 31, 2012, 2011 and 2010, respectively. Management's discussion of the Company's "Results of Operations" and "Year to Year Business Segment Comparisons" in the sections above are applicable for these changes in non-GAAP diluted earnings per share, when adjusting for the non-GAAP items in the reconciliation tables above. In addition, non-GAAP diluted earnings per share is impacted by changes in average diluted shares outstanding which were 45.8 million, 46.3 million and 47.3 million during the years ended December 31, 2012, 2011 and 2010, respectively. The decrease in non-GAAP diluted earnings per share for the year ended December 31, 2012 as compared to 2011, is attributable to decreased Financial Services Segment income from operations, higher costs associated with new business initiatives, decreased mutual fund registered accounts and from decreased equity in earnings of unconsolidated affiliates resulting from higher new product development and new client conversion expenses. The decrease in non-GAAP diluted earnings per share for the year ended December 31, 2011 as compared to 2010 is attributable to the decreased Financial Services Segment income from operations resulting from decreased operating revenues.

LIQUIDITY AND CAPITAL RESOURCES Sources and Uses of Cash The Company's primary source of liquidity has historically been cash provided by operations. In addition, the Company has used returns on the sale of investments to fund other investment and financing activities. During the year ended December 31, 2012, the Company has received significant proceeds from the sale of investments, including $138.7 million from the sale of a portion of the Company's shares in a private company investment, $127.4 million from the sale of the Company's remaining shares in Computershare Ltd., $41.0 million from the sale of the Company's interest in Euronet Worldwide, and $35.7 million from the sale of a portion of the Company's shares in State Street. Principal uses of cash are operations, reinvestment in the Company's proprietary technologies, capital expenditures, investment purchases, business acquisitions, payments on debt, stock repurchases and dividend payments. Information on the Company's consolidated cash flows for the years ended December 31, 2012 and 2011 is presented in the Statement of Cash Flows, categorized by operating activities, investing activities, and financing activities.

Operating Activities Operations Cash flows provided by operating activities were $216.0 million, $404.3 million and $354.7 million for the years ended December 31, 2012, 2011 and 2010, respectively. The Company had $88.3 million, $40.9 million and $139.8 million of cash and cash equivalents at December 31, 2012, 2011 and 2010, respectively. The $188.3 million net decrease in operating cash flows during 2012 as compared to 2011 is primarily attributable to income taxes paid on investment gains, utilization of a BFDS prepayment for 2012 services received in 2011 and prepayment for a multi-year software license agreement for DST's data centers.

These decreases are partially offset by after tax proceeds from the private company dividend. During the year ended December 31, 2012, the Company has received significant proceeds from the sale of investments. The proceeds from these investment sales are included in investing activities, but the income taxes paid on these investment gains are required to be treated as an 78-------------------------------------------------------------------------------- Table of Contents operating cash outflow. The table below presents operating cash flows, as adjusted for these items (in millions): Year Ended December 31, 2012 2011 2010 Operating Cash Flows, as reported $ 216.0 $ 404.3 $ 354.7 Adjustments: Taxes paid on security gains 78.9 6.0 24.0 Dividends on private company investment, net (30.5 ) (34.5 ) Deferred revenue from BFDS 40.0 (40.0 ) Prepayment for software services 35.0 Operating Cash Flows, as adjusted $ 339.4 $ 370.3 $ 344.2 The significant working capital changes during 2012 as compared to 2011 include deferred revenues and gains, accounts payable and accrued liabilities, other assets and accounts receivable, partially offset by income taxes payable.

Deferred revenues and gains decreased $33.7 million during 2012, as compared to an increase in deferred revenues of $38.3 million during 2011, a net decrease in working capital of $72.0 million, mostly attributable to the receipt of $40 million from BFDS in 2011 as a partial prepayment of processing services provided by DST in 2012. Accounts payable and accrued liabilities decreased by approximately $14.5 million during the year ended December 31, 2012 as compared to an increase of $28.0 million during year ended December 31, 2011, a net decrease in working capital of $42.5 million. During the year ended December 31, 2012, the Company made a prepayment for software services that will be used over multiple years. The prepayment resulted in an increase in other assets of approximately $24.3 million during 2012, but caused a $36.8 million decrease in working capital. Accounts receivable increased $34.1 million during the year ended December 31, 2012, as compared to a decrease of $11.0 million during 2011, a net decrease in working capital of $45.1 million. These working capital decreases were partially offset by increases in income taxes payable during the year ended December 31, 2012 as compared to the 2011, attributable to the timing of tax payments on 2012 investment sales.

Operating cash flows during 2012 resulted principally from net income of $324.0 million, changes in working capital described above and adjustments for non-cash items included in the determination of net income including depreciation and amortization expense (including goodwill impairment) of $216.4 million, amortization of share-based compensation of $25.5 million and equity in earnings of unconsolidated affiliates of $32.2 million.

Operating cash flows increased by $49.6 million during 2011 as compared to 2010, however, cash flows provided by operating activities during 2010 include a cash flow use of $125.0 million related to an increase in accounts receivable associated with the Company's January 1, 2010 adoption of new authoritative accounting guidance related to the transfer of financial assets. After January 1, 2010, the periodic transfers of undivided interests in accounts receivable no longer qualify for sale accounting treatment in accordance with the new accounting guidance and are accounted for as secured borrowings. At December 31, 2010, the outstanding amount of undivided interests in the receivables held by the conduit was $125.0 million, unchanged from December 31, 2009. During 2010, the Company's accounts receivable increased by $125.0 million resulting in a cash outflow being reported in the operating section of the cash flow statement and the current portion of debt associated with the accounts receivable securitization program increased by $125.0 million resulting in a cash inflow being reported in the financing section of the statement of cash flows. Cash flows after January 1, 2010 associated with the accounts receivable securitization program are presented as financing activities.

Absent the increase in accounts receivable in 2010 associated with the adoption of the new accounting guidance described above, operating cash flows decreased $75.4 million to $404.3 million during 2011 as 79-------------------------------------------------------------------------------- Table of Contents compared to 2010. On this basis, the decrease in operating cash flows during 2011 is attributable to lower earnings in 2011, partially offset by an increase in deferred revenue of $38.3 million, mostly attributable to the receipt of $40.0 million from BFDS in 2011 as a partial prepayment of processing services to be provided by DST in 2012. Contributing to the decrease in net income for 2011 were the absence of significant contract termination payments received in 2010 of approximately $73.4 million ($64.3 million in Customer Communications and $9.1 million in Financial Services) and $57.7 million of cash dividends received in 2010 from a private equity investment.

Operating cash flows of $354.7 million in 2010 resulted principally from net income of $317.5 million adjusted for non-cash items included in the determination of net income, including depreciation and amortization expense of $135.4 million and equity in earnings of unconsolidated affiliates of $36.4 million. Significant working capital related adjustments to net income, excluding the $125.0 million increase in accounts receivable related to the adoption of the new accounting guidance, include increases in accrued compensation and benefit liabilities of $27.0 million and decreases in accounts receivable of $11.7 million, partially offset by decreases in accounts payable and accrued liabilities of $4.5 million. Absent the increase in accounts receivable associated with the adoption of the new accounting guidance described above, operating cash flows increased by $117.3 million to $479.7 million during 2010 compared to 2009. On this basis, the increase in operating cash flows during 2010 is attributable to higher earnings in 2010 and decreases in working capital. Contributing to the increase in net income for 2010 were contract termination payments and the private equity investment dividend mentioned above.

Software Development and Maintenance The Company's software development and maintenance efforts are focused on introducing new products and services as well as enhancing its existing products and services. The following table summarizes software development and maintenance and enhancements to the Company's proprietary systems and software products, which include capitalized software development capital expenditures (in millions): Year Ended December 31, 2012 2011 2010 Software development, maintenance and enhancements $ 159.6 $ 162.6 $ 162.1 Capitalized software development costs $ 30.9 $ 31.4 $ 27.8 Investing Activities Cash flows provided by investing activities were $177.7 million for the year ended December 31, 2012 as compared to cash flows used by investing activities of $345.0 million and $292.0 million for the years ended December 31, 2011 and 2010, respectively. The $522.7 million increase in investing activities during 2012 as compared to 2011 is attributable to cash inflows for net investment activities (proceeds from sale net of investments in securities) of $381.3 million as compared to cash outflows of $49.4 million in 2011, the absence of acquisitions of businesses of $365.4 million in 2012, which is partially offset by lower cash flows in 2012 from restricted cash to satisfy client fund obligations of $277.7 million and higher capital expenditures of $14.4 million.

The $53.0 million increase in investing activities during 2011 as compared to 2010 is attributable to higher cash outflows for acquisitions of businesses in 2011 of $365.4 million as compared to $7.8 million in 2010, an increase of $357.6 million, and higher cash outflows for net investment securities activities as investment purchases exceeded proceeds received from investment sales by $49.4 million during 2011 as compared to $8.7 million in 2010.

Partially offsetting these investing outflows was a net decrease in restricted cash held to satisfy client fund obligations which resulted in an investing cash 80-------------------------------------------------------------------------------- Table of Contents inflow of $150.8 million in 2011, as compared to a decrease in restricted cash held for client fund obligations which resulted in an investing cash outflow of $194.3 million in 2010.

Capital Expenditures The following table summarizes capital expenditures by segment (in millions): Year Ended December 31, 2012 2011 2010 Financial Services Segment $ 59.8 $ 51.1 $ 57.9 Output Solutions Segment 34.0 23.6 24.1 Investments and Other Segment 4.2 8.9 10.9 $ 98.0 $ 83.6 $ 92.9 Capitalized costs of software developed for internal use and systems to be sold or licensed to third parties totaled $31.2 million, $31.4 million and $27.8 million in 2012, 2011 and 2010, respectively. In addition, during 2012, 2011 and 2010, the Company purchased approximately $8.9 million, $9.1 million and $3.8 million, respectively, of electronic data processing equipment with promissory notes. Capital expenditures using promissory notes are treated as non-cash transactions and are not included in the annual capital expenditure amounts above. Future capital expenditures are expected to be funded primarily by cash flows from operating activities, the Company's equipment credit facility, or draws from bank lines of credit, as required.

Investments and Other Segment capital expenditures are primarily buildings and building improvements. Future capital expenditures are expected to be funded primarily by cash flows from operating activities, secured term notes or draws from bank lines of credit, as required.

Investments The Company purchased $302.5 million, $423.5 million and $292.8 million of investments in securities in 2012, 2011 and 2010, respectively. The Company made advances to unconsolidated affiliates of $0.5 million in 2011, and received proceeds from unconsolidated affiliates of $1.1 million and $6.7 million during the years ended December 31, 2012, and 2010, respectively. During 2012, 2011 and 2010, the Company received $683.8 million, $374.1 million and $284.1 million, respectively, from the sale/maturities of investments. Included in the $683.8 million of proceeds from sale/maturities of investments is $138.7 million from pre-tax proceeds associated with the privately-held investment described above and from the sale of Computershare, Euronet Worldwide and State Street stock.

Funds Held on Behalf of Clients Funds held on behalf of clients amount is comprised of funds held on behalf of transfer agency clients and funds held on behalf of pharmacy processing clients.

The $126.9 million investing cash flow increase during 2012 is primarily attributable to higher Argus client funds held. The $150.8 million outflow in funds held on behalf of clients during 2011 is mostly attributable to lower Argus client funds held.

Business Acquisitions During 2011, the Company paid $365.4 million, net of cash acquired, for the following business acquisitions: ALPS, Newkirk, Lateral Group, Finix, Converge, Intellisource and Subserveo. The acquisition of ALPS on October 31, 2011 represented the largest acquisition payment in 2011, $251.9 million, which was funded from proceeds from a $125 million term loan facility and from existing credit facilities.

81 -------------------------------------------------------------------------------- Table of Contents During 2010, the Company acquired dsicmm Group Limited ("dsicmm") for $3.7 million in cash and the issuance of Output U.K. stock. The Company also acquired a small fulfillment company, Capital Fulfillment Group, that is part of the Customer Communications Segment.

Financing Activities Cash flows used in financing activities totaled $346.3 million, $158.2 million and $29.1 million during the years ended December 31, 2012, 2011 and 2010, respectively. The increase in net cash flows used in financing activities during 2012 as compared to 2011 is primarily attributable to higher repayments of revolving credit facilities of $361.6 million, partially offset by lower net cash outflows in 2012 on client fund obligations of $268.0 million, lower repurchases of common stock of $70.2 million and lower repurchases of convertible debentures of $12.5 million. During the year ended December 31, 2012, cash outflows were from net repayments under the revolving credit facilities of $361.6 million primarily from proceeds received from the sale of a privately-held investment and dividend and the sale of Computershare Ltd. , Euronet Worldwide and State Street Corporation stock, share repurchase activities of $104.5 million, payment of cash dividends of $36.0 million and the purchase of the remaining non-controlling interest in DST Output U.K. of $17.7 million, which were partially offset by proceeds received from the issuance of common stock of $61.9 million.

The increase in cash flows used in financing activities during 2011 is attributable to a decrease in client fund obligations which resulted in a cash outflow of $141.8 million as compared to an increase in client fund obligations in 2010 which resulted in a cash inflow of $198.4 million. Proceeds of $125.0 million from the term loan facility used to partially fund the ALPS acquisition and from stock option exercises of $64.8 million were more than offset by common stock repurchased and dividends paid.

Common Stock Issuances and Repurchases The Company received proceeds of $61.9 million, $64.8 million and $16.1 million from the issuance of common stock from the exercise of employee stock options during the years ended December 31, 2012, 2011 and 2010, respectively.

On January 30, 2013, The Board of Directors authorized a $250.0 million share repurchase plan, which replaces the Company's existing share repurchase plan, under which DST had 715,700 shares outstanding as of that date. The plan, as amended, allows, but does not require the repurchase of common stock in open market and private transactions. The Company may enter into one or more plans with its brokers or banks for pre-authorized purchases within defined limits pursuant to Rule 10b5-1 to affect all or a portion of such share repurchases.

Under the previous share repurchase plans, the Company expended $73.7 million for approximately 1.3 million shares, $135.4 million for approximately 3.0 million shares and $116.6 million for approximately 2.9 million shares during the years ended December 31, 2012, 2011, and 2010, respectively.

Dividends In 2012, 2011 and 2010, DST paid cash dividends at $0.80 per common share, $0.70 per common share, and $0.60 per common share, respectively. The aggregate amount of the cash dividends paid in 2011 and 2010 was $31.6 million and $28.2 million, respectively. The total 2012 dividend was $37.6 million, of which $36.0 million was paid in cash. The remaining amount of the 2012 dividend represents dividend equivalent share of restricted stock units in lieu of the cash dividend.

On January 30, 2013, the Board of Directors of DST declared a quarterly cash dividend of $0.30 per share on its common stock, payable on March 15, 2013, to shareholders of record at the close of business on February 19, 2013.

82-------------------------------------------------------------------------------- Table of Contents Client Funds Obligations Client funds obligations represent the Company's contractual obligations to remit funds to satisfy client pharmacy claim obligations and are recorded on the balance sheet when incurred, generally after a claim has been processed by the Company. In addition, client funds obligations include transfer agency client balances invested overnight. Client funds obligations represent liabilities that will be repaid within one year of the balance sheet date. The Company had $442.7 million, $315.2 million and $474.7 million of client funds obligations at December 31, 2012, 2011 and 2010, respectively.

Debt Activity The Company has used the following primary sources of financing: its syndicated line of credit facility; convertible debentures; subsidiary line of credit facilities; secured promissory notes; term loan credit facilities, loans from unconsolidated affiliates; accounts receivable securitization program; privately placed senior notes and secured borrowings. The Company has also utilized bridge loans as necessary to augment the above sources of debt financing. The Company had $1,011.6 million, $1,380.3 million and $1,209.4 million of debt outstanding at December 31, 2012, 2011 and 2010, respectively, a decrease of $368.7 million during 2012 and an increase of $170.9 million during 2011. The 2011 increase in debt is attributable to the 2011 business acquisitions, partially offset by cash flows from operations. Excluding the $125.0 million increase in debt from the adoption of new authoritative accounting guidance requiring proceeds from accounts receivable securitization transactions to be reflected as debt, which increased debt by $125.0 million from December 31, 2009, total debt decreased $137.5 million in 2010. On this basis, the decrease in debt is attributable to repurchases of $498.5 million of senior convertible debentures, which were financed in part by the issuance of $370.0 million of unsecured senior notes.

The Company is obligated under notes and other indebtedness as follows (in millions): December 31, 2012 2011 Accounts receivable securitization program $ 135.0 $ 135.0 Secured promissory notes 14.5 16.6 Equipment credit facilities 12.0 10.0 Real estate credit agreement 101.7 105.2 Term loan credit facility 125.0 125.0 Series C convertible senior debentures 90.1 86.5 Revolving credit facilities 31.1 328.3 Senior notes 370.0 370.0 Related party credit agreements 114.9 156.7 Other indebtedness 17.3 47.0 1,011.6 1,380.3 Less current portion of debt 519.4 320.8 Long-term debt $ 492.2 $ 1,059.5 Accounts receivable securitization program DST securitizes certain of its domestic accounts receivable through an accounts receivable securitization program with a third-party bank. The maximum amount that can be outstanding under this program is $150 million. On May 17, 2012, the Company renewed its accounts receivable securitization program. The facility will expire by its terms on May 16, 2013.

83-------------------------------------------------------------------------------- Table of Contents Under the terms of the accounts receivable securitization program, (a) DST periodically acquires accounts receivable originated by certain of its domestic subsidiaries, including, but not limited to, DST Output, DST Health Solutions, DST Technologies and Argus Health Systems (the "Subsidiary Originators"), (b) DST transfers receivables originated by DST and receivables acquired from the Subsidiary Originators, on a periodic basis, to a wholly-owned bankruptcy remote special purpose subsidiary of DST (the "SPE"), and (c) the SPE then sells undivided interests in the receivables to the bank. DST retains servicing responsibility over the receivables. The program contains customary restrictive covenants as well as customary events of default.

DST has continuing involvement with the transferred assets because it maintains servicing responsibilities for the accounts receivable assets included in the accounts receivable securitization program. Accounts receivable assets transferred from DST and certain of its domestic subsidiaries to its wholly-owned, bankruptcy remote special purpose subsidiary contain restrictions because they are not available to satisfy the creditors of any other person, including DST or any of its subsidiaries or affiliates. Further, neither DST nor the SPE guarantees collectability of the receivables or the creditworthiness of obligors. The SPE retains an interest in the receivables in excess of the amount transferred to the conduit, and such receivables will continue to be recognized on the Consolidated Balance Sheet. The carrying value of the retained interest approximates its estimated fair value at the balance sheet date. The Company believes increases in the level of assumed interest rates and/or credit losses compared to assumptions in effect at the balance sheet date by 10% or 20% would not materially affect the fair value of the retained interest at the reporting date.

At both December 31, 2012 and 2011, the outstanding amount of undivided interests in the receivables held by the bank was $135.0 million. During the year ended December 31, 2010, the Company's accounts receivable increased by $125.0 million (resulting in a cash outflow being reported in the operating section of the Consolidated Statement of Cash Flows) and the current portion of debt associated with the accounts receivable securitization program increased by $125.0 million (resulting in a cash inflow being reported in the financing section of the Consolidated Statement of Cash Flows). During the years ended December 31, 2012, 2011, and 2010 total proceeds from the accounts receivable securitization program were approximately $917.4 million, $924.1 million and $915.4 million and total repayments were approximately $917.4 million, $914.1 million and $915.4 million, respectively, which comprise the net cash flow in the financing section of the Consolidated Statement of Cash Flows.

Aggregate transfers of undivided interests in the receivables from the SPE to the bank were $1,665.7 million and $1,720.2 million for the years ended December 31, 2012 and 2011, respectively. The impact on net income stemming from these transfers was not material. Costs associated with the accounts receivable securitization program are included in interest expense on the Consolidated Statement of Income. The program costs applicable to the outstanding amount of undivided interests in the receivables are generally based on the LIBOR rate plus an applicable margin.

Secured promissory notes The secured promissory notes represent loans for real estate and equipment purchases. The outstanding amount at December 31, 2012 under the real estate notes and equipment notes was $13.8 million and $0.7 million, respectively.

Included in the real estate notes payable as of December 31, 2012 is a $9.3 million real estate mortgage entered into by Output U.K. in July 2011, which is secured by real estate in Bristol U.K. The loan, denominated in British Pounds, requires quarterly principal payments and matures in July 2018. At December 31, 2012 and 2011, the outstanding balances under this note payable were $7.9 million and $8.3 million, respectively. The remaining real estate borrowings are due in installments with the balance due at the end of the term. Interest rates on the real estate and equipment borrowings are generally fixed. Fixed rates range from 4.5% to 6.0%. The loans are secured by real property and assets owned by the Company.

84 -------------------------------------------------------------------------------- Table of Contents Equipment credit facilities The Company has a $50.0 million unsecured credit facility with a vendor.

Proceeds from loans made under the credit facility can be used to make purchases of the vendor's eligible equipment, software or services. The draw period under this credit facility expired on June 30, 2010. The maturity date for each loan drawn under this facility is the earlier of approximately three years from the initial draw or August 1, 2013. The outstanding amounts under this credit facility at December 31, 2012 and 2011 were $0.4 million and $1.8 million, respectively.

On June 30, 2010, the Company entered into a new $50.0 million unsecured credit facility with the same vendor. Proceeds from loans made under the new equipment credit facility can be used to make purchases of the vendor's eligible equipment, software or services. The draw period under this new equipment credit facility expired on December 31, 2012. The maturity date for each loan under this credit facility is the earlier of i) the last day of the thirty first (31st) calendar month following the loan date or ii) June 30, 2015. Interest rates applicable to the loans under this credit facility are generally based on the LIBOR rate plus an applicable margin. The applicable margin is based on a grid schedule that adjusts borrowing costs up or down based upon the Company's consolidated leverage ratio. The outstanding amounts at December 31, 2012 and 2011 under the new equipment credit facility were $11.6 million and $8.2 million, respectively.

Real estate credit agreement and interest rate swap Certain subsidiaries of DST entered into a real estate credit agreement with a syndicate of lenders. The credit agreement provides for a five-year, non-revolving credit facility in an aggregate principal amount of up to $120.0 million. Upon closing of the facility in September 2008, $115.0 million was advanced to DST. The credit facility is secured by, among other things, the real estate and properties owned by these DST subsidiaries as well as an assignment of the related leases, rents and other benefits of these assets. The interest rate applicable to the credit agreement is a floating rate tied to either offshore LIBOR rate plus an applicable margin rate of 1.75% or the prime rate (as defined in the credit agreement), as elected by DST. Principal and interest payments are due on the first of each month beginning in November 2008, and are based on a 20-year amortization schedule. Subject to provisions in the credit agreement, DST may voluntarily prepay the loan in whole or in part without premium or penalty, though amounts repaid may not be reborrowed. Concurrent with the lease, sale or other transfer of any of the collateralized properties, DST must prepay an amount equal to 125% of the allocated amount of such property as set forth in the credit agreement. The credit agreement contains customary restrictive covenants, as well as certain customary events of default. Among other provisions, the credit agreement requires certain interest coverage ratios to be maintained. If any event of default occurs and is continuing, all amounts payable under the credit agreement may be declared immediately due and payable.

The balance of the loan is due on September 16, 2013, the maturity date for the credit facility.

In January 2009, the Company entered an interest rate swap with a bank to fix the interest rate on its syndicated real estate credit agreement at approximately 4.49% (includes 1.75% applicable margin rate) beginning January 2010. This interest rate swap qualifies as a derivative instrument.

The Company's interest rate swap is a cash flow hedge of future interest payments under the Company's real estate credit agreement and uses a pay-fixed, receive-variable, forward starting interest rate swap. The Company's risk management objective and strategy for undertaking this hedge is to eliminate the variability of interest cash flows related to the Company's floating-rate real estate credit agreement. Changes in the cash flows of the interest rate swap are expected to offset the changes in cash flows attributable to fluctuations in the one-month LIBOR benchmark interest rate. The derivative instrument is a receive variable, pay 2.74% fixed, forward starting interest rate swap with an effective date of January 4, 2010 and a maturity date of September 16, 2013. Effectiveness of the hedge 85 -------------------------------------------------------------------------------- Table of Contents relationship is assessed on a quarterly basis both prospectively and retrospectively using the "cumulative dollar offset" method, in which the cumulative changes in the value of the hedging instrument are directly compared with the cumulative change in the fair value or cash flows of the hedged item. A dollar offset ratio of between 0.80 and 1.25 is required in order to qualify for hedge accounting treatment. At inception of the hedge, the cumulative dollar offset ratio is 1.00 since the terms of the perfect hypothetical swap match those of the actual swap. The derivative accounting guidance indicates that hedge effectiveness occurs only if the cumulative gain or loss on the derivative hedging instrument exceeds the cumulative change in the expected future cash flows of the hedged transaction. At December 31, 2012 and 2011, the fair value of the Company's pay-fixed, receive-variable, forward starting interest rate swap was a liability of $2.3 million and $4.3 million, respectively, which is included in other liabilities in the Consolidated Balance Sheet. The Company determined there was no ineffectiveness during the years ended December 31, 2012 and 2011, which resulted in the changes in fair value of this swap being recorded in other comprehensive income.

Term Loan Credit Facility On October 28, 2011, the Company entered into a $125.0 million unsecured term loan credit facility with a bank to partially fund the acquisition of ALPS which was completed on October 31, 2011. The interest rates applicable to loans under the credit facility are generally based on LIBOR or prime rates plus applicable margins as defined in the facility. The maturity date is the earlier of October 28, 2013 and the springing maturity date, as defined, which could cause the maturity date to become September 13, 2013 if the Company's real estate credit agreement is not repaid or refinanced. The facility contains customary restrictive covenants, as well as customary events of default. Based on the terms of the credit facility, the Company may be required to prepay the loan if certain events occur. Amounts prepaid may not be reborrowed.

Convertible senior debentures During 2009, DST exchanged its outstanding Series A convertible senior debentures for $257.0 million in aggregate principal of new 4.125% Series C convertible senior debentures due 2023. At December 31, 2010, the Company had $94.1 million Series C senior convertible debentures outstanding. During 2011, the Company repurchased $11.4 million of the Series C debentures and recorded a net loss of $1.2 million on these transactions. At December 31, 2012 and 2011, the Company had $90.1 million and $86.5 million of Series C senior convertible debentures outstanding, respectively.

The Series C debentures required regular cash interest on the original principal amount of each debenture at a rate of 4.125% per year, payable semi-annually in arrears on February 15 until August 15, 2010. Beginning August 15, 2010, the Company does not pay regular cash interest on the Series C debentures prior to maturity. Instead, the original principal amount of the Series C debentures will increase daily at a rate of 4.125% per year to approximately $1,700, which is the full accreted principal amount payable at maturity for each $1,000 original principal amount of the debentures. The Company will pay contingent interest during any six-month interest period commencing with the period from August 20, 2010 to February 14, 2011, and thereafter from February 15 to August 14 or August 15 to February 14, for which the average trading price of the Series C debentures for the applicable five trading-day reference period equals or exceeds 120% of the accreted principal amount of the Series C debentures.

Beginning August 15, 2013, the Company may redeem for cash all or part of the Series C debentures at any time (upon not less than 30 nor more than 60 days' notice before the redemption date) at a redemption price equal to the accreted principal amount of the Series C debentures to be redeemed or purchased plus any accrued and unpaid cash interest, including contingent interest and liquidated damages, if any, to the redemption date. Debenture holders may require the Company to purchase the Series C debentures on August 15, 2014, 2015 and 2020 at a purchase price equal to the accreted 86-------------------------------------------------------------------------------- Table of Contents principal amount of the Series C debentures to be purchased plus any accrued and unpaid cash interest, including contingent interest and liquidated damages, if any, to such purchase date. For purchases of Series C debentures on August 15, 2014, the Company will pay the purchase price in cash. For purchases of Series C debentures on August 15, 2015 and 2020 and upon any fundamental change, the Company can pay the purchase price at its option in cash, common stock or any combination of cash and common stock.

The Series C debentures are convertible under specified circumstances into shares of the Company's common stock at an initial conversion rate of 20.3732 shares per $1,000 principal amount of debentures (which is equal to an initial conversion price of $49.08), subject to adjustment in certain events. The Series C debentures include a make-whole interest provision which may increase the conversion rate upon certain fundamental changes, as described in the Series C indenture, prior to August 15, 2013. The conversion rights for the Series C debentures include: 1) during any calendar quarter if the last reported sale price of DST's common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last day of the previous calendar quarter, is greater than or equal to 120% of the applicable conversion price; 2) subject to certain exceptions, during the five day business period after any five consecutive trading day period in which the trading price per $1,000 original principal amount for each day of that period was less than 95% of the product of the last reported sales price of DST's common stock and the conversion rate on each such day; 3) if the debentures have been called for redemption; and 4) upon the occurrence of a specified corporate transaction as described in the indenture agreement. Upon conversion, the Company will have the right to deliver, in lieu of shares of its common stock, cash or a combination of cash and shares of common stock. The Series C debentures if converted into common stock upon the occurrence of certain events would lead to the issuance of common stock and have a potentially dilutive effect on the Company's stock. The Company intends to settle any conversions of the Series C debentures with cash for the accreted principal and accrued and unpaid interest and issue common stock for any conversion value amount over the principal and accrued and unpaid interest amounts. Holders of the Series C debentures did not have the right to convert these debentures at December 31, 2012 and 2011.

Revolving credit facilities On April 16, 2010, the Company entered into a new syndicated line of credit facility to replace its syndicated revolving line of credit facility that matured on July 1, 2010. The new credit agreement, as amended, provides for a revolving unsecured credit facility in an aggregate principal amount of up to $630 million. The interest rates applicable to loans under the new credit agreement are generally based on LIBOR, Federal Funds or prime rates plus applicable margins as defined in the agreement. The revolving credit facility contains grid schedules that adjust borrowing costs up or down based upon the Company's consolidated leverage ratio. The grid schedules may result in fluctuations in borrowing costs ranging from 1.10% to 2.10% over LIBOR and 0.10% to 1.10% over base rate as defined. Additionally, an annual facility fee of 0.15% to 0.40% is required on this revolving syndicated line of credit. The credit agreement contains customary restrictive covenants, as well as certain customary events of default. Among other provisions, the credit agreement limits consolidated indebtedness, liens, investments, subsidiary indebtedness, asset dispositions and restricted payments (including stock repurchases and cash dividends), and requires certain leverage and interest coverage ratios to be maintained. If any event of default occurs and is continuing, all amounts payable under the credit agreement may be declared immediately due and payable.

The maturity date for the new credit facility is July 1, 2015. On April 16, 2010, the date of the refinancing transaction, the administrative agent transferred $443.4 million of the outstanding balance under the old (June 2005) credit facility to the new credit facility. Amounts borrowed on this syndicated revolving credit facility were $1.1 million and $328.3 million at December 31, 2012 and 2011, respectively.

One of the Company's subsidiaries has available an unsecured line of credit agreement that provides for unsecured revolving borrowings up to $50 million that matures on September 30, 2013. Borrowings 87-------------------------------------------------------------------------------- Table of Contents under the facility are available at rates based on LIBOR rates plus the applicable margin of 1.4%. Commitment fees of 0.25% per annum based on the unused portions are payable quarterly. Among other provisions, the agreement requires the subsidiary to maintain certain interest coverage ratios and tangible net worth levels. In the event of non-compliance, an event of default may occur, which could result in the loan becoming immediately due and payable.

Amounts borrowed on this line of credit were $30.0 million at December 31, 2012.

There were no amounts outstanding at December 31, 2011.

One of the Company's subsidiaries maintains a margin credit facility with a regulated broker/dealer. There were no borrowings under this facility at December 31, 2012 and 2011. This facility is collateralized by the underlying marketable securities. One of the Company's foreign subsidiaries has a revolving credit facility in the amount of $5.0 million denominated in Canadian Dollars, at variable rates of interest based on the Bank's base rate plus 0.25% per annum. There were no amounts outstanding at December 31, 2012 and 2011. The Company has an unsecured revolving line of credit for $10.0 million that is payable immediately upon demand by the lender. Borrowings on the line of credit are available at variable rates of interest based on LIBOR plus an applicable margin. Interest is payable monthly. No amounts were drawn on this facility during 2012 and 2011. One of the Company's foreign subsidiaries has an overdraft credit facility that provides for borrowings of up to $8.1 million, denominated in British Pounds, at variable rates of interest based on the Bank's base rate plus 1.5% per annum. The overdraft credit facility is subject to renewal on November 14, 2013. There were no amounts outstanding at December 31, 2012 and 2011.

Senior notes On August 9, 2010, the Company issued $370.0 million of aggregate principal of privately placed senior notes (collectively, the "Senior Notes"). The Senior Notes are comprised of $40 million of 4.19% Series A Senior Notes due August 9, 2015, $105 million of 4.86% Series B Senior Notes due August 9, 2017, $65 million of 5.06% Series C Senior Notes due August 9, 2018 and $160 million of 5.42% Series D Senior Notes due August 9, 2020.

The Senior Notes are unsecured senior obligations of the Company and were issued pursuant to a note purchase agreement dated August 9, 2010 (the "Agreement").

Interest on the Senior Notes is payable semi-annually on February 9 and August 9 of each year, commencing February 9, 2011. The Company may prepay the Senior Notes at any time, in an amount not less than 10% of the aggregate principal amount of the Senior Notes then outstanding, at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a "make-whole" prepayment premium. The Company may be required to prepay all or a portion of the Senior Notes upon the occurrence of any "Change in Control", as defined in the Agreement.

Pursuant to the Agreement, any subsidiary of the Company that is required to become a party to or otherwise guarantee the syndicated line of credit facility or other indebtedness in excess of $100.0 million, will be required to guarantee the Company's obligations under the Senior Notes. The Agreement contains customary restrictive covenants, as well as certain customary events of default, including cross-default provisions. Among other provisions, the Agreement limits the ability of the Company to incur or create liens, sell assets, issue priority indebtedness and change lines of business. The agreement also requires certain leverage and interest coverage ratios to be maintained.

Related party credit agreements On October 27, 2010, the Company amended and restated its related party promissory note with Boston Financial Data Services, Inc. The agreement provides for unsecured revolving borrowings by the Company of up to $140 million and matures on July 1, 2013. From time to time, BFDS may, subject to a ten day notice period, demand a prepayment of the loan by the Company in an amount not to exceed $25 million in each instance. The interest rate applicable to the loan is based on LIBOR plus 88 -------------------------------------------------------------------------------- Table of Contents an applicable margin correlating to the applicable margin under the Company's $630 million syndicated line of credit facility. The loan agreement incorporates by reference and requires the Company to comply with the affirmative and negative covenants contained in the Company's $630 million syndicated line of credit facility. The amount outstanding under this loan agreement was $107.0 million and $140.0 million at December 31, 2012 and 2011, respectively. For the years ended December 31, 2012, 2011 and 2010, the Company recorded interest expense related to this loan of $2.5 million, $2.7 million and $2.0 million, respectively.

In 2011, DST's Output U.K. subsidiary entered into a loan agreement denominated in British Pounds with International Financial Data Services Limited ("IFDS U.K."). The agreement provides for unsecured revolving borrowings by Output U.K.

and matures on December 31, 2015. IFDS U.K. may demand a prepayment of the loan by Output U.K. at any time upon completion of a notice period. The interest rate applicable to the loan is based on the base rate of the Bank of England plus an applicable margin of 3.0% and is payable monthly. There were no amounts outstanding under this loan at December 31, 2012 and there was $6.2 million outstanding at December 31, 2011.

As mentioned above, DST acquired certain intangible assets in 2011 from BFDS in exchange for an installment loan that is payable over five years and matures in September 2016. The amounts outstanding at December 31, 2012 and 2011 were $7.9 million and $10.5 million, respectively.

Other indebtedness Other indebtedness is mostly comprised of debt obligations assumed by the Company in connection with prior business acquisitions, including the acquisition of dsicmm Group Limited in 2010 and Lateral Group Limited in 2011.

The dsicmm credit agreement was repaid during 2012.

Other indebtedness also included a borrowing arrangement denominated in British Pounds between Output U.K. and a bank that was secured by accounts receivable of Output U.K. The amount outstanding under this arrangement at December 31, 2011 was $21.0 million. This arrangement was repaid in 2012. During the years ended December 31, 2012 and 2011, proceeds received from this loan were $143.0 million and $234.5 million, and total repayments were $164.3 million and $238.9 million, respectively, which have been included in net payments on revolving credit facilities in the Consolidated Statement of Cash Flows.

The primary debt obligations assumed from business combinations prior to 2010 are payable in monthly installments. Interest rates are fixed and approximate 5.6%. The maturity date of this indebtedness is October 2016.

Contractual Obligations and Commercial Commitments The following table sets forth the Company's contractual obligations and commercial commitments (in millions): Payment Due by Period Less than More than Total 1 Year 2 - 3 Years 4 - 5 Years 5 Years Debt obligations $ 1,011.6 $ 519.4 $ 150.0 $ 113.2 $ 229.0 Operating lease obligations 148.5 30.6 44.4 33.1 40.4 Software license agreements 154.2 53.7 54.0 46.5 Income tax uncertainties 76.4 76.4 Private equity fund capital commitments 12.4 9.3 3.1 Other 22.1 8.8 12.0 0.5 0.8 $ 1,425.2 $ 621.8 $ 339.9 $ 193.3 $ 270.2 89 -------------------------------------------------------------------------------- Table of Contents Interest obligations on the Company's secured promissory notes, convertible senior debentures, revolving credit facilities and senior notes are not included in the table above. Related to the secured promissory notes (both mortgage and equipment purchase related), interest rates are both fixed and variable. Fixed rates range from 4.5% to 6.0%. The Series C convertible senior debentures accrete at a rate of 4.125% per annum and have interest payments contingent on the trading price of the debenture. The interest rates applicable to loans under the new credit agreement are generally based on LIBOR, Federal Funds or prime rates plus applicable margins as defined in the agreement. The revolving credit facility contains grid schedules that adjust borrowing costs up or down based upon the Company's consolidated leverage ratio. The grid schedules may result in fluctuations in borrowing costs ranging from 1.10% to 2.10% over LIBOR and 0.10% to 1.10% over base rate as defined. Additionally, an annual facility fee of 0.15% to 0.40% is required on this revolving syndicated line of credit. The Senior Notes are comprised of $40 million of 4.19% Series A Senior Notes, $105 million of 4.86% Series B Senior Notes, $65 million of 5.06% Series C Senior Notes and $160 million of 5.42% Series D Senior Notes.

In addition to the financial instruments listed above, the program fees incurred on proceeds from the sale of receivables under the Company's accounts receivable securitization program are determined based on variable interest rates associated with LIBOR.

The Company is a limited partner in various private equity funds. At December 31, 2012 and 2011, the carrying value of these investments was approximately $231.4 million and $221.5 million, respectively. The Company has future capital commitments related to these private equity fund investments in the amount of $12.4 million. Although the exact timing of these investment contributions is uncertain, the Company has estimated the potential timing of these contributions in the table above based on information provided by the investment advisors.

The Company has income tax uncertainties in the amount of $76.4 million at December 31, 2012. These obligations are classified as non-current on the Company's Consolidated Balance Sheet as resolution of these matters is expected to take more than a year. The Company estimates that these matters may take more than one year to resolve as reflected on the table above, however, the ultimate timing of resolution is uncertain.

Company's Assessment of Short-term and Long-term Liquidity The Company believes that its existing cash balances and other current assets, together with cash provided by operating activities and, as necessary, the Company's revolving credit facilities, will suffice to meet the Company's operating and debt service requirements and other current liabilities for at least the next 12 months. Further, the Company believes that its short-term liquidity may be increased by monetizing available-for-sale securities owned by its domestic subsidiaries (which were $611.5 million at December 31, 2012) and other assets, and that its longer term liquidity and capital requirements will also be met through cash provided by operating activities, bank credit facilities and available-for-sale securities and other investments. In addition, at December 31, 2012, the Company had approximately $689.5 million of availability under its domestic revolving credit facilities. The following credit facilities with outstanding amounts as of December 31, 2012 are scheduled to mature in 2013: revolving line of credit with BFDS, in the amount of $107.0 million will mature on July 1, 2013; syndicated real estate credit agreement in the amount of $101.7 million will mature on September 16, 2013 and the term loan credit facility in the amount of $125.0 million will mature on October 28, 2013.

In addition, beginning August 15, 2013, the Company may redeem for cash all or part of the Series C senior convertible debentures, in the amount of $90.1 million as of December 31, 2012. The Company is continuing to evaluate its option to redeem. The Company intends to utilize funds from operations, investing activities and the existing syndicated line of credit to repay the related party revolving credit facility with BFDS, the syndicated real estate credit agreement and the term loan credit facility at maturity. The Company plans to renew the $150.0 million accounts receivable securities program in May 2013.

90 -------------------------------------------------------------------------------- Table of Contents Unconsolidated affiliates The Company has formed operating joint ventures to enter into or expand its presence in target markets. To further penetrate the mutual fund market, in 1974 the Company formed BFDS, a 50% owned joint venture with State Street, a leading mutual fund custodian. The Company's international mutual fund/unit trust shareowner processing businesses (IFDS U.K., IFDS L.P., IFDS Canada, IFDS Luxembourg and IFDS Ireland) are also owned 50% by the Company and 50% by State Street. The Company also utilizes real estate joint ventures as a means of capturing potential appreciation and economic development tax incentives of leased properties. Two of the largest of these real estate joint ventures were formed in 1988 and 2004. The Company receives revenues for processing services and products provided to the operating joint ventures. The Company pays lease payments to certain real estate joint ventures. The Company has entered into various agreements with unconsolidated affiliates to utilize the Company's data processing facilities and computer software systems. The Company believes that the terms of its contracts with unconsolidated affiliates are fair to the Company and are no less favorable to the Company than those obtained from unaffiliated parties. The Company recognizes, on an equity basis, income and losses from its pro-rata share of these companies' net income or loss.

The following table summarizes amounts and transactions with the Company's related party unconsolidated affiliates (in millions): Year Ended December 31, 2012 2011 2010 DST's operating revenues from unconsolidated affiliates $ 153.4 $ 162.0 $ 169.0 Amounts paid by DST to unconsolidated affiliates for products, services and leases $ 21.5 $ 11.2 $ 7.2 Amounts advanced (amounts received) by DST to (from) unconsolidated affiliates $ (5.5 ) $ (6.3 ) $ (2.6 ) Net proceeds received by DST from unconsolidated affiliates $ 6.4 $ 16.1 $ 3.8 December 31, 2012 2011Amounts receivable to DST from advances to unconsolidated affiliates $ 11.4 $ 12.2 Trade accounts receivable to DST from unconsolidated affiliates 17.1 17.0 Amounts receivable to DST from unconsolidated affiliates $ 28.5 $ 29.2 Amounts payable by DST to unconsolidated affiliates* $ 2.2 $ 5.3 Deferred revenue by DST from unconsolidated affiliates** $ $ 40.0 -------------------------------------------------------------------------------- º * º Excludes amounts owed under or activity related to the BFDS promissory note and IFDS, U.K. promissory note.

º ** º In December 2011, BFDS prepaid a portion of its 2012 DST processing services, in the amount of $40.0 million, in exchange for a discount on 2012 services.

91 -------------------------------------------------------------------------------- Table of Contents In 2011, the Company acquired certain customer relationship assets (full-service client processing contracts) from BFDS for approximately $11.2 million that will be paid, on an installment basis, over five years. The Company initially recorded an intangible asset of $11.2 million, which will be amortized over an estimated life of approximately five years, and a payable to BFDS, which has been classified as debt. During 2011, the Company licensed software from Percana Limited, a subsidiary of International Financial Data Services Ireland.

The Company has entered into an agreement to guarantee 50% of the obligations of a 50% owned joint venture as a tenant under a real estate lease for an office building. The initial term of the lease is 10 years and 7 months, commencing March 1, 2007 and expiring September 30, 2017, with two five-year options to extend. The base rent for the initial term is $4.8 million per year, plus all operating expenses for the building.

The Company entered into an agreement to guarantee up to $3.0 million plus any enforcement costs related to a $32.0 million mortgage loan to a 50% owned real estate joint venture. The $32.0 million loan matures on June 30, 2013. At December 31, 2012 and 2011, total borrowings on the loan were $29.1 million and $30.5 million, respectively and the Company's guarantee totaled $1.5 million for both December 31, 2012 and 2011.

The Company's 50% owned joint ventures are generally governed by shareholder or partnership agreements. The agreements generally entitle the Company to elect one-half of the directors to the board in the case of corporations and to have 50% voting/managing interest in the case of partnerships. The agreements generally provide that the Company or the other party, if it desires to terminate the agreement, may establish a price payable in cash, or a promise to pay cash, for all of the other's ownership in the joint venture and submit a binding offer, in writing, to the other party to sell to the other party all of its ownership interests in the joint venture or to purchase all ownership interests owned by the other party at such offering price. The party receiving the offer generally has a specified period of time to either accept the offer to sell its interest, or to elect to purchase the offering party's interest, in either case at the established offering price. The Company cannot estimate the potential aggregate offering price that it could be required to receive for its interest in the case of a sale, or to pay for the other party's interest in the case of a purchase; however, the amount could be material.

Guarantees In addition to the guarantees entered into as mentioned above, the Company has also guaranteed certain obligations of certain joint ventures under service agreements entered into by the joint ventures and their customers. The amount of such obligations is not stated in the agreements. Depending on the negotiated terms of the guaranty and/or the underlying service agreement, the Company's liability under the guaranty may be subject to time and materiality limitations, monetary caps and other conditions and defenses.

In certain instances in which the Company licenses proprietary systems to customers, the Company gives certain warranties and infringement indemnities to the licensee, the terms of which vary depending on the negotiated terms of each respective license agreement, but which generally warrant that such systems will perform in accordance with their specifications. The amount of such obligations is not stated in the license agreements. The Company's liability for breach of such warranties may be subject to time and materiality limitations, monetary caps and other conditions and defenses.

From time to time, the Company enters into agreements with unaffiliated parties containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective agreement. The amount of such obligations is not stated in the agreements. The Company's liability under such indemnification provisions may be subject to time and materiality limitations, monetary caps and other conditions and defenses.

92-------------------------------------------------------------------------------- Table of Contents The Company has entered into purchase and service agreements with its vendors, and consulting agreements with providers of consulting services to the Company, pursuant to which the Company has agreed to indemnify certain of such vendors and consultants, respectively, against third party claims arising from the Company's use of the vendor's product or the services of the vendor or consultant.

In connection with the acquisition or disposition of subsidiaries, operating units and business assets by the Company, the Company has entered into agreements containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective agreement, but which are generally described as follows: (i) in connection with acquisitions made by the Company, the Company has agreed to indemnify the seller against third party claims made against the seller relating to the subject subsidiary, operating unit or asset and arising after the closing of the transaction, and (ii) in connection with dispositions made by the Company, the Company has agreed to indemnify the buyer against damages incurred by the buyer due to the buyer's reliance on representations and warranties relating to the subject subsidiary, operating unit or business assets in the disposition agreement if such representations or warranties were untrue when made, or due to any breach of the representations, warranties, agreements or covenants contained in the agreement.

The Company has entered into agreements with certain third parties, including banks and escrow agents that provide software escrow, fiduciary and other services to the Company or to its benefit plans or customers. Under such agreements, the Company has agreed to indemnify such service providers for third party claims relating to the carrying out of their respective duties under such agreements.

The Company has entered into agreements with lenders providing financing to the Company pursuant to which the Company agrees to indemnify such lenders for third party claims arising from or relating to such financings. In connection with real estate mortgage financing, the Company has entered into environmental indemnity agreements in which the Company has agreed to indemnify the lenders for any damage sustained by the lenders relating to any environmental contamination on the subject properties.

In connection with the acquisition or disposition of real estate by the Company, the Company has entered into real estate contracts containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective contract, but which are generally described as follows: (i) in connection with acquisitions by the Company, the Company has agreed to indemnify the seller against third party claims made against the seller arising from the Company's on-site inspections, tests and investigations of the subject property made by the Company as part of its due diligence and against third party claims relating to the operations on the subject property after the closing of the transaction, and (ii) in connection with dispositions by the Company, the Company has agreed to indemnify the buyer for damages incurred by the buyer due to the buyer's reliance on representations and warranties relating to the subject property made by the Company in the real estate contract if such representations or warranties were untrue when made and against third party claims relating to operations on the subject property prior to the closing of the transaction.

In connection with the leasing of real estate by the Company, as landlord and as tenant, the Company has entered into occupancy leases containing indemnification provisions, the terms of which vary depending on the negotiated terms of each respective lease, but which are generally described as follows: (i) in connection with leases in which the Company is the tenant, the Company has agreed to indemnify the landlord against third party claims relating to the Company's occupancy of the subject property, including claims arising from loss of life, bodily injury and/or damage to property thereon, and (ii) in connection with leases in which the Company is the landlord, the Company has agreed to indemnify the tenant against third party claims to the extent occasioned wholly or in part by any negligent act or omission of the Company or arising from loss of life, bodily injury and/or damage to property in or upon any of the common areas or other areas under the Company's control.

93-------------------------------------------------------------------------------- Table of Contents At December 31, 2012 and 2011, the Company had not accrued any liability on the aforementioned guarantees or indemnifications as they relate to future performance criteria or indirect guarantees of indebtedness of others in accordance with accounting and reporting guidance on guarantees, including indirect guarantees of indebtedness of others.

Seasonality Generally, the Company does not have significant seasonal fluctuations in its business operations. Processing and Customer Communications volumes for mutual fund customers are usually highest during the quarter ended March 31 due primarily to processing year-end transactions and printing and mailing of year-end statements and tax forms during January. The Company has historically added operating equipment in the last half of the year in preparation for processing year-end transactions, which has the effect of increasing costs for the second half of the year. Revenues and operating results from individual license sales depend heavily on the timing and size of the contract.

Comprehensive income The Company's comprehensive income totaled $303.0 million, $109.6 million and $317.3 million for the years ended December 31, 2012, 2011 and 2010, respectively. Comprehensive income consists of net income of $324.0 million, $183.1 million and $318.5 million for the years ended December 31, 2012, 2011 and 2010, respectively, and other comprehensive loss of $21.0 million, $73.5 million and $1.2 million in 2012, 2011 and 2010, respectively. Other comprehensive loss consists of unrealized gains (losses) on available-for-sale securities reclassifications for net gains and losses included in net income, unrealized gain (loss) on interest rate swaps, the Company's proportional share of unconsolidated affiliates interest rate swaps, foreign currency translation adjustments and deferred income taxes applicable to these items. The principal difference between net income and comprehensive income is the net change in unrealized gains (losses) on available-for-sale securities.

Other than temporary impairments At December 31, 2012, the Company's available-for-sale securities had gross unrealized holding losses of $1.9 million. If it is determined that a security's net realizable value is other than temporary, a realized loss will be recognized in the statement of operations and the cost basis of the security reduced to its estimated fair value. The Company does not believe that the gross unrealized losses at December 31, 2012 are other than temporary.

The Company recorded unrealized losses on available for sale securities of $2.4 million, $3.8 million and $1.3 million during the years ended December 31, 2012, 2011 and 2010, respectively, which the Company believed were other than temporary. The Company records lower of cost or market valuation adjustments on private equity fund investments and other cost method investments when impairment conditions are present. During the years ended December 31, 2012, 2011 and 2010, the Company recorded $8.3 million, $1.7 million and $1.7 million of impairments on private equity fund and other investments related to adverse market conditions and from poor performance of the underlying investment. The impairments related primarily to investments in the Financial Services and Investments and Other Segments. A decline in a security's net realizable value that is other than temporary is treated as a loss based on quoted market value and is reflected in other income, net, in the statement of income.

Derivative and Hedging Activities Authoritative accounting guidance establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the balance 94-------------------------------------------------------------------------------- Table of Contents sheet and measure those instruments at fair value and that the changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. While it is generally not the Company's practice to enter into derivative contracts, from time to time, the Company utilizes derivatives to manage certain risks. The Company does not enter into derivative arrangements for speculative purposes. At December 31, 2012 and 2011, the Company's forward starting interest rate swap associated with the syndicated real estate credit agreement had a fair value of $2.3 million and $4.3 million liability, respectively.

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