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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

x           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

or

o              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number 1-14036

DST SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

(816) 435-1000

(Registrant’s telephone number, including area code)

No Changes

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o No x

Number of shares outstanding of the Company’s common stock as of April 30, 2009:

Common Stock $0.01 par value – 49,715,327

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DST Systems, Inc.

Form 10-Q

March 31, 2009

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The brand, service or product names or marks referred to in this Report are trademarks or service marks, registered or otherwise, of DST Systems, Inc. or its subsidiaries or affiliates or of vendors to the Company.

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DST Systems, Inc.

Form 10-Q

March 31, 2009

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

Introductory Comments

The Condensed Consolidated Financial Statements of DST Systems, Inc. (“DST” or the “Company”) included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented.  These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year 2009.

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DST Systems, Inc.

Condensed Consolidated Balance Sheet

(in millions, except per share amounts)

(unaudited)

The accompanying notes are an integral part of these financial statements.

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DST Systems, Inc.

Condensed Consolidated Statement of Income

(in millions, except per share amounts)

(unaudited)

The accompanying notes are an integral part of these financial statements.

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DST Systems, Inc.

 Condensed Consolidated Statement of Cash Flows

 (in millions)

 (unaudited)

The accompanying notes are an integral part of these financial statements.

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DST Systems, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

1.  Summary of Accounting Policies

The Condensed Consolidated Financial Statements of DST Systems, Inc. (“DST” or the “Company”) included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission.  Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented.  The Condensed Consolidated Balance Sheet as of December 31, 2008 has been derived from the audited Consolidated Balance Sheet at that date, but does not include all of the information and notes required by GAAP for complete financial statements.  These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments (consisting of normal interim closing procedures) necessary to present fairly the financial position of the Company and its subsidiaries at March 31, 2009, and the results of operations for the three months ended March 31, 2009 and 2008, and cash flows for the three months ended March 31, 2009 and 2008.

Certain amounts in the 2008 financial statements have been reclassified to conform to the 2009 presentation.

The results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year 2009.

2.  Acquisition of Argus Health Systems, Inc.

Prior to March 31, 2009, DST owned a 50% interest in Argus Health Systems, Inc. (“Argus”), which provides pharmacy claims processing and other related services to help clients manage pharmacy benefit programs.  Argus recorded revenues of approximately $27.5 million during the three months ended March 31, 2009 and $127.7 million during the year ended December 31, 2008.  On March 31, 2009, DST purchased the remaining 50% interest of Argus for $57.0 million in cash.  As a result, Argus is no longer an unconsolidated affiliate of DST, but rather is a wholly-owned subsidiary and DST will not record equity in earnings of Argus after March 31, 2009, but rather will consolidate the Argus results into the Company’s consolidated financial statements.  As required by generally accepted accounting principles, the Company adopted SFAS No. 141(R), “Business Combinations,” (“SFAS 141R”), on January 1, 2009.  In accordance with SFAS 141R, the acquisition of the remaining 50% of Argus was treated as a step acquisition.  Accordingly, DST remeasured its previously held equity interest in Argus to fair value, in the amount of $57.0 million, and recorded a gain of $41.7 million, which is included in other income (expense), net in the consolidated statement of income.  DST has preliminarily recognized identifiable assets (comprised of proprietary software of $26.0 million, customer relationships of $14.0 million and other intangible assets of $1.0 million) and goodwill resulting from the acquisition of the remaining 50% Argus interest and the remeasurement of DST’s previously held equity interest.  Based on the preliminary purchase price allocation, DST estimates that annual amortization expense from acquired Argus intangible assets will be approximately $4.2 million.  Goodwill of $62.4 million arising from the acquisition is comprised of the assembled workforce of Argus and other assets and is included in the Financial Services Segment.  None of the goodwill is expected to be deductible for income tax purposes.  DST believes that the acquisition of Argus complements its existing DST Health Solutions business, increases the size of DST’s healthcare processing capabilities and will enable the Company to provide broader product offerings to new and existing customers.  Assuming the acquisition of the remaining 50% of Argus had occurred January 1, 2008, the Company’s total revenues would have been $579.7 million and $612.7 million for the three months ended March 31, 2009 and 2008, respectively.  Consolidated proforma net income and diluted earnings per share would not have been materially different from the reported amounts for the three months ended March 31, 2009 and 2008.  The unaudited proforma amounts are not indicative of what actual consolidated results of operations might have been if the acquisition had been effective at the beginning of 2008.

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The following table summarizes the consideration paid for Argus and the preliminary allocation of the fair value of Argus to the fair values of assets acquired and liabilities assumed at March 31, 2009.  The Company has not yet finalized its accounting of the acquired assets and liabilities assumed; when finalized, it is possible that the amounts appearing in the table below will be adjusted (in millions).

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3.  Client Funds/Obligations

The Company had $283.7 million and $209.3 million of funds held on behalf of clients at March 31, 2009 and December 31, 2008, respectively.  This amount is comprised of funds held on behalf of transfer agency clients and funds held on behalf of pharmacy processing clients.

The Company provides a cash management service for full service mutual fund transfer agency clients, whereby end of day available client bank balances are invested overnight by and in the name of the Company into credit-quality money market funds.  Invested balances are returned to the full service mutual fund transfer agency client accounts the following business day.

Argus acts as a financial intermediary between its clients and pharmacies.  Funds received from clients for the payment of pharmacy claims incurred by its members are invested in credit-quality money market funds and other investments until the claim payments are presented to the bank.  Certain of these amounts are included in funds held on behalf of clients in the consolidated balance sheet and are also recorded as a client funds obligation liability.  Included in funds held on behalf of pharmacy processing clients at March 31, 2009 are approximately $21.5 million of short-term, available-for-sale debt securities.  Investment income earned by Argus on funds held on behalf of clients is included in revenues.  Client funding receivables represent amounts due Argus for pharmacy claims paid by Argus in advance of receiving client funding and for pharmacy claims processed by Argus for which client funding requests have not been made.  Client funding receivables were $99.6 million at March 31, 2009.

The Company had $383.3 million and $209.3 million of client funds obligations at March 31, 2009 and December 31, 2008, respectively.

4.  Other Current Assets

Included in other current assets are the following items (in millions):

5.  Investments

Investments are as follows (in millions):

The Company is a limited partner in various private equity funds.  At March 31, 2009 and December 31, 2008, the Company’s carrying value of these private equity fund investments was approximately $66.8 million and $63.1 million, respectively.  At March 31, 2009, the Company had future capital commitments related to these private equity fund investments of approximately $163.2 million.

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The following table summarizes certain information related to the Company’s available-for-sale securities (in millions):

The following table summarizes the fair value and gross unrealized losses of the Company’s investments by the length of time that the securities have been in a continuous loss position, as of March 31, 2009 (in millions):

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.  These may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.  Such a charge could have a material effect on the Company’s consolidated financial position and results of operations.

The Company recognized $25.6 million and $10.2 million of investment impairments for the three months ended March 31, 2009 and 2008, 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 three months ended March 31, 2009, the Company recognized $4.4 million of impairments on private equity fund and other investments related to adverse market conditions and from poor performance of the underlying investment.  No impairments of private equity fund and other cost method investments were recorded during the three months ended March 31, 2008.  The impairments recorded related primarily to investments in the Financial Services Segment and the Investments and Other Segment.  A decline in a security’s net realizable value that is other than temporary is treated as a loss based on quoted or derived market value and is reflected in other income (expense), net line in the Condensed Consolidated Statement of Income.

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The following table summarizes equity in earnings (losses) of unconsolidated affiliates (in millions):

The Company received a $25.0 million dividend from Boston Financial Data Services, Inc. (“BFDS”) during the three months ended March 31, 2009.  As mentioned above, DST acquired the remaining 50% interest in Argus on March 31, 2009 and will not record equity in earnings of Argus after March 31, 2009, but rather will consolidate the Argus results in DST’s financial statements.

6.  Fair Value Measurements

SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”) establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

As of March 31, 2009, the Company held certain investment assets that are required to be measured at fair value on a recurring basis.  These investments include the Company’s available-for-sale and trading securities whereby fair value is determined using quoted prices in active markets.  Accordingly, the fair value measurements of these investments have been classified as Level 1 in the table below.  In addition, the Company entered into a forward starting interest rate swap in January 2009 that is required to be reported at fair value.  The Company used inputs from quoted prices for similar assets and liabilities in active markets and other observable inputs directly or indirectly related to the measurement of the interest rate swap.  The fair value of the interest rate swap liability has been classified as Level 2 in the table below and is included in other non-current liabilities in the balance sheet.

The following table presents assets and liabilities measured at fair value on a recurring basis (in millions):

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At March 31, 2009, one of DST’s unconsolidated affiliates had an interest rate swap with a fair market value liability of $61.8 million.  The unconsolidated affiliate used inputs from quoted prices for similar assets and liabilities in active markets and other observable inputs directly or indirectly related to the measurement of the interest rate swap.  The fair value measurement of the interest rate swap has been classified as Level 2 by the unconsolidated affiliate.  The above table presents only assets and liabilities measured at fair value for which the Company controls, and accordingly excludes items held by unconsolidated affiliates.

7.  Goodwill and Intangible Assets

Goodwill

The following table summarizes the changes in the carrying amount of goodwill for the three months ended March 31, 2009, by segment (in millions):

Intangible Assets

The following table summarizes intangible assets (in millions):

During 2009, DST purchased the remaining 50% equity interest in Argus which resulted in $62.4 million of goodwill, $14.0 million of customer relationship intangible assets, $1.0 million of other intangible assets and $26.0 million of proprietary software (which has been included in properties).  Amortization of intangible assets for the three months ended March 31, 2009 and 2008 was approximately $0.9 million and $1.0 million, respectively.  The Company estimates, based on a preliminary allocation of purchase price for Argus, that amortization expense attributable to intangible assets recorded as of March 31, 2009 will be approximately $3.5 million for the remainder of 2009, $4.4 million for 2010, $4.1 million for 2011, $3.9 million for 2012, $3.7 million for 2013 and $25.7 million thereafter.

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8.  Debt

Senior Convertible Debentures

During the three months ended March 31, 2009, the Company recorded a gain of $3.7 million associated with the repurchase of a portion of the Company’s senior convertible debentures at a discount to carrying value.  The Company repurchased approximately $51.5 million in principal amount of the original $540 million 4.125% Series A senior convertible debentures and approximately $2.0 million in principal amount of the original $300 million 3.625% Series B senior convertible debentures.  The outstanding amount of the Series A and Series B senior convertible debentures were $479.9 million and $181.0 million at March 31, 2009, and were $531.4 million and $179.8 million at December 31, 2008.

Accounting for Convertible Debt Instruments

On January 1, 2009, DST adopted FASB Staff Position (“FSP”) No.  APB 14-1, “Accounting for Convertible Debt Instruments that may be Settled in Cash upon Conversion (Including Partial Cash Settlement).”  This FSP clarifies that issuers of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods.  DST retrospectively applied this new accounting standard to all periods prior to January 1, 2009 beginning with August 2003 when the senior convertible debentures were issued.  DST used non-convertible debenture interest rates of 6.35% for the original $540 million 4.125% Series A senior convertible debentures and 5.68% for the original $300 million 3.625% Series B senior convertible debentures.  The retrospective adoption of this accounting standard increased the amount of interest expense recorded by DST for historical income statements periods prior to April 1, 2006 (as the debenture discount would have been fully amortized by that date), but did not impact the three months ended March 31, 2009 or 2008.  The adoption of this standard required DST to retrospectively restate retained earnings and additional paid in capital as of December 31, 2008, which resulted in a reduction of retained earnings of $58.4 million and an increase in additional paid in capital of the same amount, which had no change to total stockholders’ equity.

Real Estate Credit Agreement and Interest Rate Swap

In September 2008, certain subsidiaries of DST entered into a 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, $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 and are based on a 20 year amortization schedule.  At March 31, 2009 and December 31, 2008, amounts outstanding under this agreement were $113.8 million and $114.5 million, respectively.  In January 2009, the Company entered an interest rate swap with a bank to fix the interest rate on this 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.

Financial Accounting Standards Board Statement No. 133 established 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 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.

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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 floating, 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.  SFAS 133 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 March 31, 2009, the fair value of the Company’s pay-fixed, receive-variable, forward starting interest rate swap was a liability of $2.5 million, which is included in other non-current liabilities in the Condensed Consolidated Balance Sheet.  The Company determined there was no ineffectiveness during the three months ended March 31, 2009, which resulted in the changes in fair value of this swap being recorded in other comprehensive income.

9.  Income Taxes

The Company records income tax expense during interim periods based on its best estimate of the full year’s effective tax rate.  Certain items are given discrete period treatment and, as a result, the tax effects of such items are reported in full in the relevant interim period.  The Company’s effective tax rate was 14.6% and 5.0% for the three months ended March 31, 2009 and 2008, respectively.  The effective tax rate for the three months ended March 31, 2009 and 2008 was less than the statutory federal income tax rate of 35% primarily from certain items in both periods that were given discrete period treatment.  During 2009, DST recorded a $41.7 million gain on equity interest in Argus with no related income tax expense, reversed approximately $0.9 million of deferred tax liabilities related to the elimination of deferred tax liabilities previously established for equity in earnings of Argus, and recorded an income tax benefit of approximately $5.7 million resulting from a reduction in income tax related liabilities principally associated with the completion of an IRS examination in February 2009 for the tax years ended December 31, 2002 through 2005.  During 2008, the Company recorded an income tax benefit of approximately $23.9 million resulting from a net reduction in the Company’s liabilities for FIN 48 (including approximately $10.4 million of interest and penalties), principally related to the resolution of an IRS examination matter (associated with a transaction that the Company consummated in the 2000 tax year) that was resolved in DST’s favor.  The full year 2009 effective tax rate can be affected as a result of variances among the estimates and amounts of full year 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 unrecognized tax benefits.

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10.  Stockholders’ Equity

Earnings per share

The computation of basic and diluted earnings per share is as follows (in millions, except per share amounts):

The Company had approximately 49.7 million and 52.6 million shares outstanding at March 31, 2009 and 2008, respectively.  Shares from options to purchase shares of common stock that were excluded from the diluted earnings per share calculation because they were anti-dilutive totaled 3.7 million and 0.1 million for the three months ended March 31, 2009 and 2008, respectively.  The Company issued convertible senior debentures that could have a potentially dilutive effect on the Company’s stock if converted in the future.  At March 31, 2009, outstanding Series A debentures are convertible into 9.8 million shares of common stock and the outstanding Series B debentures are convertible into 3.6 million shares of common stock, subject to adjustment.  The Company intends to settle any conversions with cash for the principal amount of the bonds and accrued and unpaid interest and issue common stock for any conversion value amount over the principal and accrued and unpaid interest amounts.  Related to the debentures, the calculation of diluted earnings per share includes an incremental amount of shares assumed to be issued for the conversion spread when the Company’s average daily stock price exceeds $49.08 per share for the Series A bonds and $49.97 for the Series B bonds.  There was additional dilution of approximately 5.3 million shares for the three months ended March 31, 2008 related to the Company’s average daily share price exceeding the then prevailing conversion prices per share, but no dilution during the three months ended March 31, 2009 because of a decline in the Company’s average share price.

Earnings per share — Participating Securities

DST adopted FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”) on January 1, 2009.  Under FSP EITF 03-6-1, certain share-based payment awards that allow holders to receive dividends before they vest should be treated as participating securities.  Although unvested share-based payment awards with nonforfeitable rights to dividends have typically been included in the calculation of diluted EPS using the treasury stock method, these awards are now included in the calculation of basic EPS using the two-class method.  Because DST’s existing restricted stock awards allow holders the right to receive cash dividends on a 1:1 basis, if any, DST is required to treat these awards as participating securities.  Upon adoption of FSP EITF 03-6-1 on January 1, 2009, DST applied this standard retrospectively to all periods prior to 2009.  As presented in the table below, the adoption of FSP EITF 03-6-1 resulted in increases in previously reported average common and diluted shares outstanding.  The increase in average common and diluted shares outstanding reduced previously reported basic and diluted earnings per share in those prior periods.  A comparison of amounts previously reported and as retrospectively restated is presented in the following table (in millions, except per share amounts).

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Note:  Earnings per share are computed independently for each of the quarters presented. Accordingly, the accumulation of 2008 quarterly earnings per share may not equal the total computed for the year.

Comprehensive income (loss)

Components of comprehensive income (loss) consist of the following (in millions):

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One of DST’s unconsolidated affiliates had an interest rate swap liability with a fair market value of $61.8 million and $72.8 million at March 31, 2009 and December 31, 2008, respectively.  DST’s 50% proportionate share of this interest rate swap liability was $30.9 million and $36.4 million at March 31, 2009 and December 31, 2008, respectively.  The Company records in investments its proportionate share of this liability in an amount not to exceed the carrying value of its investment in this unconsolidated affiliate, which resulted in $6.5 million and $6.8 million of the interest rate swap liability being recorded at March 31, 2009 and December 31, 2008, respectively.

Stock repurchases

At March 31, 2009, there were approximately 2.4 million shares remaining to be repurchased under the Company’s existing share repurchase plan.  The Company repurchased 100,000 shares of DST common stock for $2.8 million or approximately $28.00 per share during the three months ended March 31, 2009.  The plan allows, but does not require, the repurchase of common stock in open market and private transactions through December 31, 2011.

11.  Accounts Receivable Securitization Program

The Company’s accounts receivable securitization program reflected $130.0 million of undivided interests held by the third-party multi-seller asset-backed commercial paper conduit at both March 31, 2009 and December 31, 2008.

12.  Commitments and Contingencies

The Company and its subsidiaries are involved in various legal proceedings arising in the normal course of their businesses.  While the ultimate outcome of these legal proceedings cannot be predicted with certainty, it is the opinion of management that the final outcome in such proceedings, in the aggregate, would not have a material adverse effect on the consolidated financial condition, results of operations and cash flow of the Company.

The Company has letters of credit of $8.3 million and $9.0 million outstanding at March 31, 2009 and December 31, 2008, respectively.  Letters of credit are secured by the Company’s debt facility.

As disclosed in Note 5, the Company has future capital commitments related to its private equity fund investments.

The Company has entered into agreements with certain officers whereby upon defined circumstances constituting a change in control of the Company, certain benefit entitlements are automatically funded and such officers are entitled to specific cash payments upon termination of employment.

The Company has established trusts to provide for the funding of corporate commitments and entitlements of Company officers, directors, employees and others in the event of a change in control of the Company.  Assets held in such trusts at March 31, 2009 were not significant.

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 $2.0 million plus any enforcement costs related to a mortgage loan to a 33% owned real estate joint venture.  The loan matures on July 1, 2010.  At March 31, 2009, the Company’s guarantee totaled $1.0 million.

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

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and to have 50% voting/managing interest in the case of partnerships.  The agreements generally provide that the Company or the other party has the option to establish a price payable in cash, or a promise to pay cash, for all of the other’s ownership in the joint venture and to submit an 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 purchase, or to elect to purchase the offering party’s interest at the offering price.  The Company cannot estimate the potential aggregate offering price that it could be required to receive or elect to pay in the event this option becomes operable; 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 lease 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.  Such indemnity obligations include the following:

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, which 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.

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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.

At March 31, 2009 and December 31, 2008, 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 FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.”

13.  Accounting Standards

Earnings Per Share Proposed Accounting Standard

The Financial Accounting Standards Board (the “FASB”) previously issued an exposure draft, revised in August 2008, on a proposed accounting standard that would amend SFAS No. 128, “Earnings per Share” (“SFAS 128”), to clarify guidance for mandatorily convertible instruments, the treasury stock method, contingently issuable shares, and contracts that may be settled in cash or shares.

The proposed amendment, which is designed for convergence with international accounting standards, would require the use of the “if-converted” method from the date of issuance of the convertible debentures.  The proposed amendment would remove the ability of a company to support the presumption that the convertible securities will be satisfied in cash and not converted into shares of common stock.  Accordingly, the Company’s stated intention to settle conversions of its convertible debentures with cash for the principal and accrued and unpaid interest and issue common stock for any conversion value amount over the principal and accrued and unpaid interest amounts would no longer be accepted under SFAS 128, if amended as proposed.  The final standard has yet to be issued.  Retrospective application would be required for all changes to SFAS 128, except that retrospective application would be prohibited for contracts that were either settled in cash prior to adoption or modified prior to adoption to require cash settlement.  For DST, adoption of this statement, as proposed, will require retroactive restatement of the Company’s diluted earnings per share calculations subsequent to the issuance of the convertible debentures.  In calculating diluted earnings per share under the revised SFAS 128 “if converted” method included in the exposure draft, the Company would need to increase net income for the interest expense associated with the convertible debentures, net of tax, and increase the incremental shares assumed to be issued upon conversion by approximately 13.4 million shares (less shares already included in diluted earnings per share), the amount of shares that would be issued if all $660.9 million of the senior convertible debentures at March 31, 2009 would be converted to equity.  The revised SFAS 128 exposure draft also contains other EPS computational changes (e.g., treasury stock method considerations) that may have an

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effect on the Company’s diluted earnings per share calculation.  DST is continuing to monitor the FASB’s progress towards finalizing this proposed accounting standard.

The proposed change in accounting principle would affect the calculation of diluted earnings per share during the period the debentures are outstanding, but would not affect DST’s ability to ultimately settle the convertible debentures in cash, shares or any combination thereof.

The estimated impact of this new accounting standard reflects the Company’s current estimates based upon the exposure draft in its current form.  There may be material differences between these estimates and the actual impact of the standard when issued as final.

14.  Segment Information

The Company’s operating business units offer sophisticated information processing and software services and products.  The Company has elected to organize and report on these business units as two operating Segments (Financial Services and Output Solutions).  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 an Investments and Other Segment.

Information concerning total assets by reporting segment is as follows (in millions):