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United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2001

or

For the transition period from                              to                             

Commission file number 1-14036

DST Systems, Inc.
(Exact name of Registrant as specified in its charter)

Registrant's telephone number, including area code (816) 435-1000

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

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 / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in a definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

Aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant as of
January 31, 2002:
Common Stock, $0.01 par value—$5,264,413,715

Number of shares outstanding of the Registrant's common stock as of January 31, 2002:
Common Stock, $0.01 par value—120,522,292

Documents incorporated by reference:

Portions of the following documents are incorporated herein by reference as indicated:

DST Systems, Inc.
2001 Form 10-K Annual Report

Table of Contents

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

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CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING COMMENTS

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. Readers can identify these forward-looking statements by the use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. 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 the Company's amended Current Report on Form 8-K/A dated March 19, 2002, which is hereby incorporated by reference. This report has been filed with the United States Securities and Exchange Commission ("SEC") in Washington, D.C. and can be obtained by contacting the SEC's Public Reference Branch. Readers are strongly encouraged to obtain and consider the factors listed in the March 19, 2002 Current Report and any amendments or modifications thereof when evaluating any forward-looking statements concerning the Company. The Company will not update any forward-looking statements in this Annual Report to reflect future events or developments.

PART I

Item 1.    Business

This discussion of the business of DST Systems, Inc. ("DST" or the "Company") should be read in conjunction with, and is qualified by reference to, Management's Discussion and Analysis of the Company's Financial Condition and Results of Operations ("MD&A") under Item 7 herein. In addition, pursuant to rule 12b-23 under the Securities Exchange Act of 1934, as amended, the information set forth under the headings "Introduction" and "Seasonality" in the MD&A and the segment and geographic information included in Item 8, Note 13 are incorporated herein by reference in partial response to this Item 1.

The Company was originally established in 1969. Through a reorganization in August 1995, the Company is now a corporation organized in the State of Delaware.

RECENT DEVELOPMENTS IN THE COMPANY'S BUSINESS

The recent business developments of the Company and the Company's subsidiaries follow.

EquiServe, Inc. ("EquiServe")

On March 30, 2001, DST completed the acquisition of a 75% interest in EquiServe by purchasing interests held by FleetBoston Financial ("FleetBoston") and Bank One Corporation ("Bank One"). On July 31, 2001, DST completed the acquisition of the remaining 25%, which was owned by Boston Financial Data Services, on essentially the same terms provided to FleetBoston and Bank One. EquiServe is one of the nation's largest corporate transfer agency service providers, maintaining and servicing the records of approximately 27.2 million shareholder accounts for approximately 1,400 publicly traded companies.

The acquisitions were accounted for as a purchase and the results of EquiServe's operations are included in DST's 2001 consolidated financial statements beginning March 30, 2001. The minimum purchase price of $186.7 million is to be paid in four installments. The first installments of approximately $58.5 million were paid at the closings. The second installments, scheduled for February 28, 2002, are estimated to be approximately $55.8 million. The remaining two minimum installments, which total approximately $72.4 million (discounted to $65.2 million for accounting purposes) are payable on February 28, 2003 and February 28, 2004. The remaining minimum purchase

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price installments can increase pursuant to a formula that provides for additional consideration to be paid in cash if EquiServe's revenues as defined in the agreements for the years ending 2000, 2001, 2002 and 2003 exceed certain targeted levels. The minimum purchase price (discounted to $177.3 million for accounting purposes) has been allocated to the net assets acquired based upon their fair values as determined by a valuation. Goodwill will be increased by the amount of contingent consideration paid. This goodwill will not be subject to amortization per Statement of Financial Accounting Standard ("SFAS") No. 142.

Assuming the acquisitions had occurred January 1, 2000, the Company's consolidated revenues would have been $1,742.7 million and $1,671.5 million for the years ended December 31, 2001 and 2000, respectively. Consolidated proforma net income and earnings per share would not have been materially different from the reported amounts for 2001 and 2000. 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 2000.

New Mutual Fund Clients

The Company has preliminary commitments from three new clients to convert approximately 8.8 million mutual fund shareowner accounts to TA2000, of which 1.8 million are scheduled to convert in the first quarter 2002, 0.5 million are scheduled to convert in the third quarter 2002 and 6.5 million are scheduled to convert in the first quarter 2003.

New Products

DST launched two new products in January 2002: TA2000 Subaccounting and Managed Account Platform ("MAP"). TA2000 Subaccounting is offered on a remote basis to broker/dealers who perform shareowner accounting and record keeping for mutual fund accounts that have been sold by the firm's registered representatives. MAP is a proprietary system designed to facilitate the distribution, investment management, trading, reconciliation and reporting for "Managed Accounts." Managed Accounts are generally individual investment accounts offered by financial consultants who provide advisory services and managed by independent money managers using an asset based fee structure.

Portfolio Accounting Systems ("PAS")

On June 29, 2001, DST sold its PAS business to State Street Corporation ("State Street"). DST offered PAS services primarily to the U.S. mutual fund industry on a remote processing basis. DST received, in a taxable transaction, proceeds of $75.0 million, comprised of approximately 1.5 million shares of State Street common stock and cash. In conjunction with the transaction, DST agreed to provide data processing services for PAS and agreed to a non-compete agreement for a period of five years, for which elements a portion of the purchase price has been deferred. DST recognized a one-time gain of $20.0 million after taxes, deferrals and other expenses.

DST recorded revenue related to PAS of $9.8 million for the six months ended June 30, 2001 and $19.5 million for the year ended December 31, 2000. The PAS business unit had approximately 80 associates who transferred to State Street with the transaction.

International Financial Data Services, Canada ("IFDS Canada")

DST Canada had been a wholly owned subsidiary of the Company since June 1993. To align the ownership of the international mutual fund/unit trust shareowner processing businesses, DST Canada was contributed to a joint venture, IFDS Canada, in January 2001, and is now owned 50% by DST and 50% by State Street. DST contributed its shares of DST Canada to the new joint venture while State Street contributed $43.5 million in cash. The Company accounted for the formation of the joint venture as a non-cash, non-taxable exchange. Accordingly, no gain was recognized from the transaction.

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Effective January 2001, DST Canada's results of operations are no longer consolidated with the Company and the earnings of the joint venture are included in the Company's results on the equity basis. On a proforma basis, the contribution of DST Canada to the joint venture did not have a material impact on DST's net income or earnings per share in 2001.

EITF Topic No. D-103

Effective January 1, 2002, the Company adopted, as required, EITF Topic No. D-103, "Income Statement Characterization of Reimbursements received for "Out-of-Pocket" Expenses Incurred." Prior to the issuance of EITF Topic No. D-103, the Company netted the Out-of-Pocket reimbursements from customers with the applicable Out-of-Pocket expenditures. The Company's significant Out-of-Pocket expenses at the consolidated level include postage and telecommunication expenditures and at the Segment level include print mail services between the Financial Services Segment and the Output Solutions Segment. Under EITF Topic No. D-103, the Company will record the reimbursements received for Out-of-Pocket expenses incurred as revenue on an accrual basis. The Company estimates that annual consolidated revenues and consolidated costs and expenses will increase approximately $800 million to $1 billion as a result of adopting the EITF. Because these additional revenues are offset by the reimbursable expenses incurred, adoption of EITF Topic No. D-103 will not impact income from operations or net income. The EITF requires that comparative financial statements for prior periods be reclassified to comply with the new guidance, unless it is impracticable to reclassify prior-period financial statements. The Company is considering its ability to reclassify prior-period financial statements as required by EITF Topic No. D-103. The Company believes that the implementation of this revised accounting treatment will negatively affect the reporting of operating margins of its business segments.

NARRATIVE DESCRIPTION OF BUSINESS

The Company has several operating business units that offer sophisticated information processing and software services and products. These business units are reported as three operating segments (Financial Services, Output Solutions and Customer Management). In addition, investments in certain equity securities and financial interests and the Company's real estate and computer hardware leasing subsidiaries and affiliates have been aggregated into an Investments and Other Segment. A summary of each of the Company's segments follows:

Financial Services

The Financial Services Segment provides sophisticated information processing and computer software services and products primarily to mutual funds, investment managers, corporations, insurance companies, banks, brokers and financial planners. The Company's proprietary software systems include mutual fund shareowner and unit trust accounting and recordkeeping systems offered in the U.S. and selected international markets; a defined-contribution participant recordkeeping system for the U.S. market; securities transfer and related systems offered to corporations, trustees and transfer agents; a variety of portfolio accounting and investment management systems offered to U.S. and international fund accountants and investment managers; and a workflow management and customer contact system offered primarily to mutual funds, insurance companies, health care providers, brokerage firms and banks.

The Financial Services Segment distributes its services and products on a direct basis and through subsidiaries and joint venture affiliates in the U.S., United Kingdom, Canada, Europe, Australia, South Africa and Asia-Pacific and, to a lesser degree, distributes such services and products through various strategic alliances.

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Output Solutions

The Output Solutions Segment provides complete bill and statement processing services and solutions, including electronic presentment, which include generation of customized statements that are produced in sophisticated automated facilities designed to minimize turnaround time and mailing costs. This Segment provides its processing services and solutions in North America to customers of the Company's Financial Services and Customer Management Segments and to telecommunications, utilities and other high volume industries which require high quality, accurate and timely statement processing.

Customer Management

The Customer Management Segment provides sophisticated customer management and open billing solutions to the video/broadband, direct broadcast satellite ("DBS"), wire-line and Internet-protocol telephony, Internet and utility markets worldwide. The Company's software systems enable its clients to manage their operations across all aspects of their business including order processing, customer support, financial reporting, decision support, marketing, field services and collections. This Segment also distributes the Company's workflow management and customer contact systems to the industries it services.

The Customer Management Segment distributes its services and products on a direct basis, through subsidiaries in North America, the United Kingdom and parts of Europe and with international alliance partners in other regions of the world.

Investments and Other

The Investments and Other Segment holds investments in certain equity securities and financial interests and the Company's real estate and computer hardware leasing subsidiaries and affiliates. The Company holds investments in equity securities with a market value of approximately $1.3 billion at December 31, 2001, including approximately 12.8 million shares of State Street with a market value of $668 million and 8.6 million shares of Computer Sciences Corporation ("CSC") with a market value of $423 million. Additionally, the Company owns and operates real estate mostly in the U.S., which is held primarily for lease to the Company's other business segments.

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Industry Revenue

The Company's sources of revenue by major industries served are presented below. The industries listed may be served by more than one of the Company's business segments.

FINANCIAL SERVICES SEGMENT

The Financial Services Segment attributes its growth to the expansion of the mutual fund industry, the acquisition of EquiServe and to the Segment's business strategy. The primary components of the Segment's ongoing business strategy are: (i) enhancement of its technology base and development of new services and products to strengthen its position as the leading provider of information processing services to the U.S. mutual fund market; (ii) expansion into markets where it can provide similar information processing and computer software services and products; and (iii) formation of strategic alliances and joint ventures with or acquisitions of established companies operating in target markets, both in the U.S. and internationally.

The growing volume and complexity of transactions in the financial services and other markets have resulted in increasing demand for more sophisticated systems to timely and accurately process information. Computer technology has provided an effective means of addressing this demand, but requires significant capital investment and expertise. As a result, many financial service organizations have relied on outside providers, such as the Company. The Company expects the information processing needs of these organizations to grow in volume and complexity presenting the Financial Services Segment with significant opportunities to sell its services and products.

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(1)

Processed by International Financial Data Services (U.K.) Limited, an unconsolidated affiliate of the Company.

(2)

Processed by International Financial Data Services (Canada) Limited, an unconsolidated affiliate of the Company.

U.S. Mutual Fund Shareowner Processing

Most of the Financial Services Segment's mutual fund clients are "open-end" mutual fund companies, which obtain funds for investment by making a continuous offering of their shares. Purchases and sales (referred to as "redemptions") of open-end mutual fund shares are typically effected between shareowners and the fund, rather than between shareowners. These transactions are based on the net asset value of the mutual fund on the date of purchase or redemption, which requires that the assets of the fund and the interests of its shareowners be valued daily. Accordingly, timely and accurate accounting and recordkeeping of shareowner and fund investment activity is critical.

Investor attraction to a wide array of mutual fund investment products with increasingly specialized features has significantly increased the number of mutual fund shareowner accounts, the volume of transactions and the complexity of recordkeeping. In addition, new technologies have changed the service requirements and distribution channels of the mutual fund market. The Company has made significant investments in computer capacities and systems to handle the increasing volume and complexity of transactions and distribution channels, to maintain its leadership position and to improve quality and productivity.

The Company typically enters into multi-year written agreements with its clients. Most of the shareowner accounts serviced by the Company are at mutual fund organizations that have been clients of the Company for more than five years.

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Shareowner Accounting and Recordkeeping

The proprietary applications system for U.S. mutual fund recordkeeping and accounting is TA2000, which performs shareowner related functions for mutual funds, including processing purchases, redemptions, exchanges and transfers of shares; maintaining shareowner identification and share ownership records; reconciling cash and share activity; calculating and disbursing commissions to brokers and other distributors; processing dividends; creating and tabulating proxies; reporting sales; and providing information for printing of shareowner transaction and statement data and year-end tax statements. The system processes load, no-load, multi-class and money funds. TA2000 also performs many specialized tasks, such as asset allocation and wrap fee calculations. At December 31, 2001, the Company provided shareowner accounting processing services for approximately 75.6 million U.S. mutual fund shareowner accounts.

Mutual fund shareowner services are offered on full, remote and shared service basis. Selection by a client of the level of service is influenced by a number of factors, including cost and level of desired control over interaction with fund shareowners or distributors. "Full" service processing includes all necessary administrative and clerical support to process and maintain shareowner records, answer telephone inquiries from shareowners, brokers and others, and handle the TA2000 functions described above. In addition, Full service clients may elect to have the Company invest end of day available client bank balances into credit-quality money market funds. "Remote" service processing is designed to allow clients to have their own administrative and clerical staff access TA2000 at the Winchester Data Center using the Company's telecommunications network. "Shared" service processing allows client personnel to handle telephone inquiries while the Company's or an affiliate's personnel retain transaction processing functions. This service is facilitated by the implementation of Automated Work Distributor ("AWD"), which creates electronic images of transactions and makes such images, together with the status of the related transactions, available to the personnel handling the telephone calls.

The Company derives revenues from its mutual fund shareowner accounting services through fees charged for use of the Company's proprietary software systems, clerical processing services and other related products. These fees are generally charged on a per account and number of funds basis for system processing services and on a per account, number of fund and transaction basis for clerical services. The Company's policy is not to license TA2000.

Retirement and Savings Plan Accounting and Recordkeeping

Mutual funds are popular investment vehicles for individual and corporate retirement and savings plans. TA2000 supports Individual Retirement Accounts ("IRAs") including Roth and Educational IRAs (referred to as "Coverdell Educational Savings Accounts") and Section 529 Savings Plans.

The Company's TRAC system provides participant recordkeeping and administration for defined contribution plans, including 401(k), 403(b), 457, money purchase and profit sharing plans that invest in mutual funds, company stock, guaranteed investment contracts and other investment products. TRAC is integrated with TA2000, which eliminates reconciliation problems that occur when different systems are used for participant recordkeeping and mutual fund shareowner accounting. TRAC is offered on a full-service and remote basis by the Company. The Company regards the retirement plan market as a significant growth opportunity for its services and products because (i) that market is relatively new and experiencing significant expansion as more employers shift away from defined benefit programs; (ii) mutual funds, because of their features, are increasingly popular selections for investment by such plans; and (iii) each retirement plan participant normally elects to use multiple mutual fund investment accounts. Revenues from these services are based generally on the number of participants in the defined contribution plans, as well as per account fees for related mutual fund accounts processed on TA2000.

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At December 31, 2001, TA2000 serviced 19.9 million IRA accounts invested in mutual funds, which included 4.6 million Roth and Educational IRA accounts. In addition, TRAC provided recordkeeping for 2.5 million retirement plan participants with 7.4 million related TA2000 mutual fund accounts at December 31, 2001. TA2000 also supported the processing of 0.7 million Section 529 plan accounts at December 31, 2001.

TA2000 Subaccounting

DST launched the TA2000 Subaccounting system in January 2002. TA2000 Subaccounting is offered on a remote basis to broker/dealers who perform shareowner accounting and recordkeeping for mutual fund accounts that have been sold by the firm's registered representatives. The Subaccounting platform, which is an enhancement of TA2000, is designed to meet the complex reconciliation and system interfaces required by broker/dealers who require this capability. Revenues are based generally on a per account and number of funds basis.

Products Supporting Mutual Fund Distribution and Marketing

The Company has developed products to meet the changing service requirements, distribution channels and increasing regulatory requirements affecting the mutual fund market.

The Company processes over 40% of the mutual fund industry's volume on Fund/Serv and Networking, two systems developed by the Depositary Trust and Clearing Corporation for broker distributed mutual funds. The Company has also developed Financial Access Network ("FAN"), the technological infrastructure that facilitates emerging channels of mutual fund sales and distribution via the Internet. Products and services utilizing FAN include (i) FAN Web, which enables clients to offer their investors direct inquiry to account information, financial transaction execution and literature fulfillment through a set of customized Internet templates that link the client's Web site to TA2000, (ii) FAN Web Direct, which offers clients a secure, seamless and efficient processing capability for electronic transactions from a client's own Web application directly into TA2000, (iii) FAN Investment Tracking, which enables shareholders to download their mutual fund transaction data through Quicken for Windows Online Investment Center, (iv) FAN Mail, which provides financial advisors and brokers with trade confirmations, account positions and other data via public network access and (v) Vision, which enables broker/dealers and financial advisors to view their clients' mutual fund and variable annuity positions, process transactions and establish new accounts.

Revenues from these services and products are based generally on the number of transactions processed.

Boston Financial Data Services, Inc. ("BFDS")

BFDS, a 50% owned joint venture with State Street, is an important distribution channel for the Company's services and products. BFDS combines use of the Company's proprietary applications and output solutions capabilities with the marketing capabilities and custodial services of State Street to provide full-service shareowner accounting and recordkeeping services to over 114 U.S. mutual fund companies. BFDS also offers remittance and proxy processing, class action administration services, teleservicing and full-service support for defined contribution plans using the Company's TRAC system. BFDS is the Financial Services Segment's largest customer, accounting for approximately 10.4% of the segment's revenues in 2001.

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International Mutual Fund / Unit Trust Shareowner Processing

The Company provides international shareholder processing through three joint venture companies of the Company and State Street, which are as follows:

International Financial Data Services, U.K. ("IFDS U.K.")

IFDS U.K. offers full and remote service processing for unit trusts and related products serving 3.1 million unitholder accounts at December 31, 2001. It is the largest third party provider of such services in the United Kingdom. IFDS U.K. has developed FAST, a unit trust record keeping system and has converted all accounts serviced by it to FAST as of December 31, 2001.

IFDS U.K. derives revenues from its shareowner accounting services through fees charged for use of its proprietary software systems, clerical processing services and other related products. These fees are generally charged on a per account number of unit trust basis and transaction basis. IFDS U.K.'s policy is not to license FAST.

International Financial Data Services, Canada ("IFDS Canada")

IFDS Canada provides remote mutual fund shareowner processing in Canada and licenses its mutual fund shareowner system to mutual fund companies in related markets outside Canada. Revenues are derived from providing remote mutual fund shareowner processing services and time and material fees for client-specific enhancements and support to the remote processing system, and to a lesser degree, from licensing its mutual fund shareowner system to mutual fund companies. IFDS Canada provides full-service processing to the Canadian mutual fund industry using the iFAST mutual fund system and full-service processing for U.S. offshore mutual funds using TA2000. IFDS Canada also has installed its mutual fund system in Germany, Japan, Saudi Arabia and Switzerland. Canadian mutual fund shareowner accounts serviced decreased to 1.1 million at the end of 2000 primarily from the loss of a client associated with an acquisition. IFDS Canada also services approximately five million accounts under software licensing or facility management, using the iFAST system.

International Financial Data Services, Luxembourg ("IFDS Luxembourg")

IFDS Luxembourg was formed in 2001 to provide mutual fund systems and services to the Luxembourg and continental European market. Utilizing the iFAST system, IFDS Luxembourg serviced approximately 0.1 million accounts at December 31, 2001. Revenues are derived from shareowner accounting services based generally on the number of accounts, number of transactions and number of unit trusts processed.

Corporate Securities Processing

The Company significantly expanded its position in the securities transfer industry through its acquisition of EquiServe in 2001. EquiServe is one of the nation's largest corporate shareholder service providers, maintaining and servicing the records of approximately 27.2 million registered shareholder accounts for more than 1,400 publicly traded companies. EquiServe clients include 17 of the 30 companies in the Dow Jones Industrial Average and 151 of the companies in the Fortune 500.

Registered Ownership Accounting and Recordkeeping

EquiServe delivers a wide range of corporate shareholder service solutions, acting as a company's agent to transfer a shareholder's stock, disburse and reinvest dividends, mail and tabulate proxies, distribute annual reports and provide merger and acquisition services.

EquiServe provides corporations full-service processing, which includes all accounting and data processing support for transfer agent activities related to registered ownership. Registered ownership

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occurs when the beneficial owner of the security is registered on the books and records of the corporation. When investors purchase stock through a broker, the investor may specifically direct the broker to register the shares purchased directly with the corporation. Registered owners receive all corporate communications, dividends, annual reports and proxy material directly from the corporation. Registered ownership comes in two forms: physical certificates or book-entry shares.

EquiServe provides custom services for corporate actions (mergers, acquisitions, stock splits, tender offers, odd-lots, etc.), initial public offerings and demutualization transactions.

EquiServe derives revenues from its securities processing services through fees for use of the Company's proprietary software systems, clerical processing services and other related products. These fees are generally charged on a per account, number of CUSIPs and number of transactions basis for accounting services. EquiServe also derives revenues from investment earnings related to cash balances maintained in corporate transfer agency bank accounts.

Employee Plan Administration

EquiServe services more than 350 employee stock purchase and stock option plans with over two million employee accounts. EquiServe provides a complete range of employee stock option services, from full service administration of employee stock option plans to remote support of companies who do their own recordkeeping services. EquiServe has developed a proprietary employee stock purchase plan system that tracks and reports disqualifying dispositions, utilizes an automated enrollment system and has the ability to provide multilingual printing and multi-currency disbursements to support internationally-based employee participants.

Revenues from these services are based generally on the number of employee accounts in the employee plans, the number of transactions processed and the number of employee plan accounts maintained.

Investment Plan Administration

EquiServe's Investment Plan Administration services encompass all types of investment plans, including direct stock purchase plans ("DSPPs") and traditional dividend reinvestment plans. EquiServe is the market leader in investment plan servicing, with more than 6.9 million plan participants for 105 direct stock purchase plan clients and 396 dividend reinvestment plans.

DSPPs (also called open enrollment plans) offer interested investors who are not current shareholders the opportunity to purchase shares directly in a company without going through a broker.

Revenues from these services are based generally on the number of transactions and the number of investment plan accounts maintained.

Fairway

DST is developing a new securities transfer system called Fairway, which is designed to meet the changing processing and regulatory and processing requirements of the corporate stock transfer industry. DST completed the initial phase of Fairway in 2001 and began converting clients to Fairway during the latter part of 2001. The Fairway conversion schedule is aligned with the completion schedule of the final phase of Fairway, which provides the functionality for the more complex corporate issuers. The implementation of Fairway and other DST proprietary software, such as AWD, will continue to provide EquiServe with the most technologically advanced software in the securities transfer industry. DST also plans to offer Fairway and AWD to other transfer agents on a remote processing basis.

Revenues for remote processing are generally charged on a per account and per CUSIP basis for system processing services. It is the Company's policy not to license Fairway.

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Investment Management Products

DST International Limited, a United Kingdom company, ("DST International"), provides investment management and portfolio accounting software (primarily on a license basis) and services to over 500 clients in 40 countries worldwide, serviced by offices in the United Kingdom, U.S., Australia, New Zealand, Hong Kong, Singapore, Philippines, Thailand, Japan and South Africa. DST International offers a wide range of products and services, both in the U.S. and internationally, which used together form a complete integrated solution for the investment management community.

DST International offers a wide range of products both in the U.S. and internationally which used together form a complete integrated solution for the investment management community.

HiPortfolio/2 is designed for medium and large investment management firms that are seeking a turnkey system for investment accounting that can meet their global and international requirements with minimum customization. HiPortfolio/2 is a scalable, comprehensive front, middle and back office solution with over 250 clients worldwide.

HiInvest is a front and middle office solution for institutional fund managers which includes decision support, modeling, order management, compliance monitoring, performance measurement, performance attribution and client reporting.

HiWealth is a front office solution enabling private wealth managers to manage their clients. In addition to the same attributes as HiInvest, HiWealth includes integrated Customer Relationship Management ("CRM") and full use of the Company's work management software (AWD).

HiNet is a rules-based transaction processing solution aimed at medium to large investment management companies that has a high capacity, retail-focused variant for online Internet trading and portfolio accounting using state-of-the-art technology.

HiMessaging, designed to address the lack of an internationally agreed directive on messaging, offers a flexible and scalable solution for messaging for securities transactions. HiMessaging complies with all current messaging protocols and is fully adaptable for future demands.

HiReporting offers fund managers the opportunity to produce comprehensive reports according to their clients' individual needs. Various delivery mechanisms may be employed, such as Web, fax, CD-ROM and hard copy and the reports may include pictures, logos and graphs.

HiPerformance provides performance analysis for asset managers. The system is scalable to support both institutional and private client fund managers.

HiTrust is a Web-based, multi-currency and multi-lingual solution for mutual fund and unit trust processing. It has been developed for the specific needs of the Far Eastern and Australasian markets.

The Company derives revenues from the above products and services, from license fees, fees for customized installation and programming services and annual maintenance fees.

In addition, DST International also supports its long-established Impart/Uptix and Paladign investment accounting systems. DST International also distributes and supports AWD outside North America.

Automated Workflow Management

Automated Work Distributor ("AWD") is designed to help companies improve operating efficiency and customer satisfaction. The AWD system captures all customer interactions including mail, telephone calls, Internet, e-mail, faxes, etc., at the point of contact, prioritizes and assigns the work to the appropriate resource and tracks the contact through completion. By enforcing standard business processes independent of the origin of a request, AWD allows seamless delivery of consistent service across all channels, resulting in improved customer satisfaction. AWD also enables customers with

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multiple service centers to seamlessly move work between locations, removing geography as a barrier to productivity gains. AWD's automation components allow customers to remove associates from tasks in which human interaction is not required, resulting in often-dramatic productivity improvements. The AWD product suite also includes imaging and document management, a contact center desktop, proactive call scripting, intelligent character recognition, digitized voice processing and full support for e-mail and Web-based customer service.

Initially introduced to enhance the Company's mutual fund shareowner recordkeeping system, AWD was designed to interface with a wide range of high volume application processing systems. AWD utilizes a client server architecture that enables it to operate on Sun Solaris, Microsoft Windows, or IBM iSeries servers utilizing Windows and browser-based desktops. AWD's application-centric architecture allows customers to implement the solution quickly, resulting in a rapid return on investment. The Company's integration toolkits and open product architecture allow AWD to easily interface with customers' existing mainframe or other application systems. AWD's customers include mutual fund and other investment management firms, insurance companies, brokerage firms, banks, healthcare companies and cable TV operators located in the U.S., Canada, United Kingdom, Europe, Australia, South Africa and Asia-Pacific. In addition, Computer Sciences Corporation Financial Services Group distributes the Company's AWD product to life and property and casualty insurance companies worldwide.

The Company has developed modular components enabling AWD to support various channels for customer interaction. These products include EnCorr, which automates the creation of print correspondence; PowerStore, which gives AWD users optical media access; AWD/RIP, which imports work into AWD from other computer systems and external networks; AWD/ST, which streamlines transaction processing with straight-through processing technology; AWD/NetServer, which extends AWD functionality to intranet and Internet environments; and AWD/eMail, which supports communications with e-mail-based users. In addition, AWD/Voice integrates call record/playback and computer-telephony integration technology into the AWD system. AWD/Contact is used by customer service representatives in a workflow-enabled call center environment.

AWD can be installed at the customer's site or the customer can access AWD at DST's AWD Data Center using the Company's telecommunications network.

The Company derives AWD revenues from multi-year bundled service and usage agreements based on the number of users accessing the software and fixed fee perpetual license agreements that may include provisions for additional license payments in the event the number of users increases. The Company also derives AWD revenues from fees for implementation services, custom programming and annual software maintenance.

Managed Account Platform

DST launched MAP in January 2002. MAP is a proprietary system designed to facilitate the distribution, investment management, trading, reconciliation and reporting for "Managed Accounts." Although they can take on different forms, Managed Accounts are generally individual investment accounts offered by financial consultants who provide advisory services and managed by independent money managers using an asset-based fee structure. Managed accounts can be individually profiled for risk, goals and preferences, are managed for tax efficiency and can be diversified among several types of investment instruments including stocks, bonds and mutual funds.

MAP is a fully integrated product that utilizes AWD and HiInvest. MAP increases automation and data flow between the plan sponsor, who distributes the product, and the investment manager, who is responsible for managing the account portfolio. MAP links the plan sponsor and investment manager through the use of AWD. The HiInvest component completes the loop with its trading, reporting, performance management and reconciliation functions. The open design of MAP will allow it to be

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integrated with other DST proprietary products and is enhanced to facilitate the distribution of other securities by financial consultants and money managers.

Revenues for MAP are derived from recurring revenue based on the number of accounts.

Winchester Information Processing Services

Winchester Information Processing Services primarily supports the computing needs of the Company's Financial Services Segment and certain products of the Output Solutions Segment with two data centers in Kansas City, Missouri.

The Winchester Data Center ("Winchester") is the Company's primary central computer operations and data processing facility. Winchester has a total of 163,000 square feet, of which 76,000 square feet is raised floor computer room space. Winchester has seven mainframe computers with a combined processing capacity of more than 10,100 million instructions per second and direct access storage devices with an aggregate storage capacity that exceeds 46 trillion bytes. Winchester also contains more than 300 servers supporting NT, UNIX and AS/400 small and midrange computing environments. These servers are used to support DST's products and processing for certain of the Company's affiliates. The physical facility is designed to withstand tornado-force winds.

The AWD Data Center supports the Company's AWD Image processing services. The facility has a total of 13,000 square feet. The computer room houses IBM AS/400 computers and optical storage systems, which support more than 12,000 AWD Image users. AWD users include DST's Full-Service area as well as several of the Company's remote AWD customers and other financial services companies. The AWD Data Center also houses over 350 servers supporting various Company products and Winchester's remote tape storage using IBM's automated tape libraries. The Company derives revenues from its AWD data center based upon data center capacity utilized, which is significantly influenced by the volume of transactions or the number of users.

Both data centers are staffed 24-hours-a-day, seven-days-a-week and have self-contained power plants with mechanical and electrical systems designed to operate virtually without interruption in the event of commercial power loss. The data centers utilize fully redundant telecommunications networks serving the Company's clients. The networks, which serve more than 120,000 computer users, have redundant pathing and software, which provides for automatic rerouting of data transmission in the event of carrier circuit failure.

The Company has an agreement with a commercial disaster recovery provider for computer processing in the event of a computer failure at Winchester. The Company's data communications network is linked to the disaster recovery provider's facility and network to enable client access to the disaster recovery facility. The AS/400 processors at the AWD Data Center and the AS/400 processors at Winchester provide contingency plan capabilities for each other's processing needs. The Company regularly tests the disaster recovery processes for both data centers.

Argus Health Systems, Inc. ("Argus")

Argus is a 50% owned joint venture of the Company and a privately held life insurance holding company. Argus provides claims processing, information services and administrative support for pharmacy program management. These services include reporting features, reimbursements, call center, pharmacy network management, clinical information services and rebates. Argus' proprietary claims processing system, Integrated Pharmacy Network System ("IPNS"), is an interactive, database managed processing system for administration of prescription drug claims, pharmacy and member reimbursement and drug utilization review. IPNS, which provides substantial flexibility to accommodate varying provider requirements, allows point-of-sale monitoring and control of pharmacy plan benefits with

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on-line benefit authorization and can alert dispensing pharmacists to potential medication problems arising from such factors as duplicate prescriptions, incorrect dosage and drug interactions.

The Company provides data processing, telecommunications and output solutions services to Argus and Argus operates IPNS at Winchester and the AWD Data Center. Its primary clients are providers of pharmacy benefit plans including insurance companies, health maintenance organizations, preferred provider organizations and other pharmacy benefit managers.

Wall Street Access L.L.C. ("Wall Street Access")

Wall Street Access is a provider of online brokerage services to individual traders and professional money managers. The Company acquired a 6% interest in Wall Street Access in January 2001 for approximately $7 million. The securities purchase agreement with Wall Street Access contains put/call provisions whereby the Company's interest in Wall Street Access may be increased to 20% for approximately $16.0 million.

Customer Concentration

The Financial Services Segment's five largest customers accounted for 26.5% of segment revenues in 2001, including 10.4% from its largest customer.

Marketing / Distribution

In the U.S., Canada and select international markets, the Financial Services Segment identifies potential users of its products and services and tailors its marketing programs to focus on their needs. The Segment's marketing efforts also include cross-selling the Company's wide range of services and products to its existing clients. The Segment's sales efforts are closely coordinated with its joint venture and strategic alliance partners.

Sources of new business for the Segment include (i) existing clients, particularly with respect to complementary and new services and products; (ii) companies relying on their own in-house capabilities and not using outside vendors; (iii) companies using competitors' systems; and (iv) new entrants into the markets served by the Company. The Company considers its existing client base to be one of its best sources of new business.

The Company's mutual fund systems and related services and products are marketed to mutual fund management firms and to distributors of mutual fund shares, such as banks, insurance companies, brokerage firms and third party administration firms. Increasingly, such firms manage multiple mutual fund products to address different investment objectives. Generally, mutual fund products are promoted and distributed in fund groups which provide investors with a variety of mutual fund investments and the ability to exchange investments from one fund to another within the group. This often means that a single service agent, such as the Company, is used for all funds in the group.

The Company's corporate securities processing services and products are marketed to corporate secretaries and investor relation personnel of publicly trade companies, management firms and distributors of closed end mutual funds and mutual insurance companies considering demutualization transactions. The Company maintains a sales and marketing staff, including client services and technical support teams to target these markets.

DST International markets its investment management and portfolio accounting software and services directly to medium and large investment management firms. Generally, DST International's customers are seeking a turnkey system for investment accounting that can meet their requirements with a minimum amount of customization. Each of DST International's offices has a dedicated sales force and a team of consultants that can sell, install and implement these products.

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Competition

The Company believes that competition in the markets in which the Financial Services Segment operates is based largely on quality of service, features offered, the ability to handle rapidly changing transaction volumes, commitment to processing capacity and software development and price. The Company believes there is significant existing competition in its markets. The Company's ability to compete effectively is dependent on the availability of capital. Some of the Company's competitors have greater resources and greater access to capital than the Company and its affiliates.

The Company's shareowner accounting systems compete not only with third-party providers but also with in-house systems and brokerage firms that perform subaccounting services for the brokerage firms' customers that purchase or sell shares of mutual funds of the Company's clients. Financial institutions competing with the Company may have an advantage because they can take into consideration the value of their clients' funds on deposit in pricing their services. The Company believes its most significant competitors for third party shareowner accounting systems are PFPC, Inc. and SunGard Data Systems, Inc.

The Company's corporate securities services and products compete with other third party providers and companies who perform their services in-house with licensed or internally developed systems. Financial institutions competing with the Company may have an advantage because they can take into consideration the value of their clients' funds on deposit in pricing their services. The Company believes its most significant competitors for corporate securities processing services are Mellon Bank, Bank of New York, Computer Share, Inc., American Stock Transfer and SunGard Data Systems, Inc.

The Company has significant competition with its investment management systems. Principal competitors are bundled service providers, third-party software service providers and those companies that license their products. Competitive factors are the accuracy and timeliness of processed information provided to customers, features and adaptability of the software, level and quality of customer support, level of software development expertise and price. The Company believes that it competes effectively in the market by its ongoing investment in its products and the development of new products to meet the needs of the portfolio accountants and investment managers. The Company believes its most significant competitors for investment management systems are SunGard Data Systems, Inc., State Street Corporation (including Princeton Financial Systems, Inc.), Misys plc, SS&C Technologies, Inc., Advent Software, Inc. and Datastream Systems, Inc.

The Company's automated workflow system competes with other data processing and financial software vendors. Competitive factors include features and adaptability of the software, level and quality of customer support, level of software development expertise and price. The Company believes that it can compete effectively in those markets the Company chooses to pursue. The Company believes its most significant competitors for automated workflow systems are Filenet Corporation, International Business Machines Corporation ("IBM"), Siebel Systems, Inc. and Staffware plc.

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OUTPUT SOLUTIONS SEGMENT

The Output Solutions Segment is an industry-leading provider of integrated print and electronic communications solutions that enable leading businesses to create lasting, profitable one-to-one relationships with their customers. The customized bill and statement processing services and electronic bill payment and presentment solutions offered establish this group as a preferred service supplier to the financial services industry, the telecommunications industry, as well as other industries which value customer communications and require high quality, accurate and timely bill and statement processing. The Company also offers a variety of complementary professional services, including consulting, application development, fulfillment and client training, as well as statement design and formatting services that allow clients to enrich their customer relationships through the use of statements as personalized communication and marketing tools.

The Company is among the largest first class mailers in the U.S., mailing 1.9 billion items in 2001. Sources of revenue by major industry served are listed below.

Statement and Billing Services

Statement and billing services and solutions are provided in fully integrated and automated production environments that rapidly and cost-effectively transform electronic data into informative, accurate and customized statements. The Company's highly automated production environment allows clients to maximize postal savings while minimizing delivery time.

For the financial services industry, the Company performs electronic printing, variable and selective insertion, presorted mailing and distribution of custom designed shareowner and other account based communications, including transaction confirmations, dividend checks, account statements and year-end tax reports. The Company offers its clients the capability for personalizing their customer communications.

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The Company provides both print and electronic bill and statement processing and presentment solutions to the video/broadband/satellite TV, telecommunications, utilities, transportation, rapid delivery, credit card and other service industries.

Addressing the needs of multi-service providers, the Company also offers consolidated statements which combine data from multiple services and funds into a single integrated statement, which can offer clients significant savings both in paper and mailing costs and can also be a marketing tool for companies seeking to establish brand name recognition and sell combined services. The Company's highly evolved electronic solutions offer even more savings to those clients who are promoting greater use of Internet based bills and statements with their customers.

The Company derives revenues from its bill and statement processing services based generally on the number of images processed and the range of customization and personalization options chosen by the clients.

Direct Access, the Company's proprietary Web-based program, enables the Company's billing customers to have near real-time monitoring and reporting functions. Using standard Internet browsers and entry through secured access to the Company's extranet, customers can monitor their job information from the moment of completed data stream transmission to the moment the data leaves the Company's facilities, thus providing the power to view every step of the process remotely. This capability is being made available to all customers and will serve as the future portal through which clients will access from their desktops the job management tools and campaign development being made available.

The Company's automated information and technology infrastructure, which electronically prepares and monitors the statement until final printing, provides the basis for the Company's electronic statement presentment and payment products and services. The Company believes that as electronic statements and payment solutions become more accepted, communications service providers, utilities, financial services as well as many other companies with high volume regular communications with their customers will require electronic statement and bill presentment solutions. The e.bill.anywhere product is designed for electronic bill presentment and payment; Informa is intended for online electronic presentment of mutual fund and brokerage statements, confirmations and tax documents; and e-Proxy is designed for online electronic balloting.

Key marketing alliances have been established with industry leading companies to extend the reach and value of the company's electronic solutions. Because of its industry leading volumes, state-of-the-art processing systems and client relationships, the Company believes it is in the unique position of being a one-stop, full-service supplier of fully integrated print and electronic customer communications that enable its clients to build lasting and profitable one-to-one relationships with their customers.

The Company offers a full range of technical support for its clients. Customized programming tools have been developed that allow electronic information streams from a variety of client systems to be received without the need to make changes to the customer's software. These tools enable rapid and smooth transitions when clients outsource their statement processing and electronic functions.

Revenues from electronic statement and payment solutions are generated from initial implementation fees and recurring revenue based on the number of statements viewed or transactions processed. These revenues are influenced by both new account acquisitions and customer adoption rates.

Communications Management

Rapid Confirm

For the brokerage industry, the Company offers Rapid Confirm, one of the fastest ways to deliver trade confirmations. Utilizing a large domestic distributive print network, Rapid Confirm provides speed of delivery through the United States Postal Service. The Company also offers electronic delivery of trade

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confirmations over the Internet. With distributive print-mail sites strategically located throughout the U.S., 90% of the Segment's mail is delivered in two days or less at discounted presort rates. Confirmations may be consolidated, householded and may be printed with highlight color for greater visual impact.

Rapid Enroller

The Company's Rapid Enroller allows defined contribution plan providers to offer fast, fully personalized documentation to plan participants. Utilizing state-of-the-art print-on-demand technology, Rapid Enroller enables customized packaging based on client and recipient information.

Rapid Fulfillment

The Company offers sophisticated, real-time print-on-demand fulfillment through its Rapid Fulfillment product. As a substitute for offset printing and warehousing of documents, Rapid Fulfillment reduces the costs of fulfillment and ensures that the clients' customers receive the most current version of the fulfillment material.

eLLITE

For mutual funds and brokerage firms, the Company offers eLLITE, an Internet-based channel for the distribution of fund marketing and compliance documents. eLLITE allows customers to locate and download information from hundreds of reports in just a few keystrokes.

Design and Other Products and Services

Creative Design Services

The Company offers statement-based marketing and creative design services that allow clients to transform customer statements into communication tools. The statement is a key form of regular communication between a service provider and its customers. The Company gives clients the opportunity through statement-based marketing and creative design services to use the paper or electronic statement to reinforce a corporate image, advertise special offers and features, deliver customer-specific messages and otherwise market services to their customers.

Campaign Management

The Company offers a robust suite of solutions that allows clients to segment their customer databases for the purpose of directing targeted campaign materials at selected audiences. These solutions facilitate customer acquisition and retention, product cross selling and brand awareness building among the many marketing applications offered by the Company.

Archival and Retrieval Solutions

The need for archival and customer service retrieval of statements is addressed by the Segment's viewing and storage solutions which enable customer service representatives to view a statement image in virtually any format, from CD-ROM, to electronic data transmission, or over the Internet. Representatives are able to answer customer service calls quickly and improve first-call resolution rates. The Company also offers sophisticated computer output microfilm capabilities for long-term archival.

Production Facilities

The Company's primary production facilities are in the Sacramento, Kansas City, Hartford, Boston, Chicago, Denver, New York, St. Louis and Toronto metropolitan areas. These facilities use roll form

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and sheet fed production processes and can perform variable and selective insertion and pre-sorted mailing.

The Company has patented processes and technologies that provide a fully integrated, computerized and automated production environment. The production system (i) processes, logs, verifies and authenticates customer data, (ii) creates automated production controls for a statement, including form bar codes, weight and thickness parameters, unique statement tracking numbers, "due out" dates, address correction, carrier route/delivery point bar codes and postal processing parameters, (iii) models production runs on-line before printing or electronic transmission and (iv) enables postal processing, sorting and discounting to be performed on-line.

Full real-time automation enables the Company to monitor quality, control remakes, predict and schedule production loading, verify customer data, forecast production volumes and maintain production system history on-line. The system is controlled by an on-line production control system that is based on advanced client/server architecture and has high-speed data transmission capabilities.

Customer Concentration

The Output Solutions Segment's five largest customers accounted for 24.5% of segment revenues in 2001, including 9.9% from its largest client.

Customer Diversification

The Output Solutions Segment enjoys a broad diversified base of industry leading customers throughout North America. It is well known throughout the financial services market, the telecommunications and broadband segments as well as enjoying strong positions in transportation, package delivery, utilities, insurance and other sectors where frequent communications through statements, invoices or bills to large customer bases are the norm.

Marketing / Distribution

The Company believes its integrated print and electronic bill and statement processing services offer increased revenue opportunities both within its existing diverse client base as well as in new markets. The Company maintains a field operations sales staff, including client services and technical support teams and significant design resources, to target these market segments. Key marketing alliances have been established with industry leading companies to extend the reach and value of the Company's integrated print and electronic solutions.

Competition

The key competitive factors in the Output Solutions Segment are the ability to offer integrated print and electronic solutions, the range of customization options available for personalizing communications and their ease of application, the quality and speed of services provided, the quality of customer support, the ability to handle large volumes efficiently and price. The most significant competitors for print or electronic delivery solutions services are in-house service providers, local companies in the cities where the Company's printing operations are located and national competitors such as Moore Corporation Ltd., Bowne and Co. Inc., Automated Data Processing, Inc., PFPC, Inc., CSG Systems International, Inc., Derivion Corporation, Electronic Data Systems, Inc., IBM and Princeton eCom.

Intellectual Property

The Company holds various U.S. patents covering various aspects of its statement processing services. The Company has no foreign patents. The Company believes that although the patents it holds are valuable, they are not critical to the Company's success, which depends principally upon its product

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quality, marketing and service skills. However, despite patent protection, the Company may be vulnerable to competitors who attempt to imitate the Company's systems or processes and manufacturing techniques and processes. In addition, other companies and inventors may receive patents that contain claims applicable to the Company's system and processes.

CUSTOMER MANAGEMENT SEGMENT

The Company's Customer Management Segment provides customer management, billing and marketing solutions to the video/broadband, direct broadcast satellite ("DBS"), wire-line and Internet Protocol ("IP") telephony, Internet and utility markets. The Segment serves more than 40 million broadband customers and more than five million utility customers worldwide. The Company's products are currently used by the largest DBS provider in the U.S., as well as by seven of the top 10 U.S. video/broadband companies.

The Segment's revenues are primarily based on the number of subscribers, the end-users of the services offered by its clients, the number of bills mailed and/or the number of images produced. These agreements are typically subject to periodic renewals and inflation-based fee adjustments. Certain of the Company's customers license the customer management software under term license agreements.

The Segment offers a comprehensive customer management and billing solution by providing core customer care products that are supplemented with the products and services offered from the Company's other operating segments.

Systems and Services

Customer Care and Billing

The Company's comprehensive solution includes a flexible and open platform on which to base a complete back-office and customer support system. The Company provides four platforms, each designed for specific markets: DDP/SQL and Intelecable serve the video/broadband market worldwide; Subscriber Transaction Management System ("STMS) serves the DBS industry; and Affinity serves the global utility market.

DDP/SQL has supported the U.S. video/broadband market for more than 20 years and currently runs in nearly 400 locations supporting more than 21 million cable subscribers.

Intelecable is a convergent billing system supporting video, voice, data and other IP services. The customer care and billing platform now supports over nine million end-users in 119 locations in 15 countries and operates in a variety of languages, including Japanese.

STMS was specifically developed to manage the customer experience and billing activities for DirecTV, Inc., the largest DBS provider in the U.S.

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Affinity and CUSTIMA support the complex billing activities of water, electric, gas and municipal utility providers on four continents that provide services to five million domestic, commercial and industrial customers.

To supplement the Company's customer care and billing products, the Company offers the following Internet solutions: CyberCSR; High Speed Data Services ("HSDS"); and TechConnect. These products use the Internet to create an interactive experience for the customer, decrease operational costs and expand the functionality of the billing system.

CyberCSR is a customizable Web interface to DDP/SQL and Intelecable, allowing customers to handle their own customer service tasks and provision services immediately.

HSDS enables provisioning, billing, customer care and troubleshooting for either national Internet service providers or clients' internal Internet access service.

TechConnect is designed to increase the productivity of installers and technicians in the field by providing access to job and customer information via the Internet from the field.

Customer Relationship Management

Integrating the Company's core billing platforms with AWD allows the Company to offer clients a workflow and customer relationship management product. AWD's ability to integrate multiple back-office systems to present a single view of the customer is a valuable tool to the broadband industry, which operates with multiple systems due to mergers and acquisitions.

StarGate is a data warehouse and decision support tool that extracts important information from the customer database to predict buying behavior and forecast the market. The reporting element of StarGate allows clients to analyze their businesses, such as defining operational strengths and weaknesses.

Professional Services, Training and Support

The Company provides consulting and training services to ensure that customers leverage the most from their business. The professional services teams make recommendations on launching new services; oversee or assist with back-office operations such as integrations, implementations and conversions; provide interactive and customized training classes; and design custom-tailored applications and interfaces to improve operational efficiency. The Company provides complete product documentation and training services to users of its software products, including CD-ROM-based product documentation and training.

Customer Concentration

The Customer Management Segment's five largest customers accounted for 65.9% of segment revenues in 2001, including 25.4% from its largest client.

Marketing / Distribution

Software and services are sold primarily to video/broadband/satellite television, DBS, utility and multiple service providers through direct sales channels and in conjunction with international alliance partners. In both the U.S. and United Kingdom, the Company operates a software and services sales and marketing team, including account management, product management and technical support teams.

The Segment's international sales staff is coordinated by geographic area, including dedicated account and technical support personnel located in the U.S., United Kingdom, Brazil, Australia and Hong Kong. In addition to direct sales, the Company has contracted with alliance partners throughout the world who are responsible for sales, marketing, support and local customization.

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Competition

The market for the Company's products and services in the Customer Management Segment is highly competitive and competition is increasing as additional market opportunities arise and continued consolidation within the market occurs. The Company competes with both independent providers and developers of in-house systems. The Company believes its most significant competitors for customer management software systems are Convergys, Inc., CSG Systems International, Inc. and Portal Software.

The Company expects its competitors to continue to improve the design and performance of their current systems and processes and to introduce new systems and processes with improved price/performance characteristics. The Company believes that to remain competitive it will require significant financial resources in order to market its existing products and services, to maintain customer service and support and to invest in research and development.

INVESTMENTS AND OTHER SEGMENT

The Investments and Other Segment is comprised of certain investments in equity securities, certain financial interests and the Company's real estate and computer hardware leasing subsidiaries and affiliates.

Investments

The Company holds certain investments in equity securities with a market value of approximately $1.3 billion at December 31, 2001, including approximately 12.8 million shares of State Street with a market value of $668 million and 8.6 million shares of CSC with a market value of $423 million.

Real Estate

The Company's real estate subsidiaries and affiliates own approximately 1.1 million square feet of office space and approximately 0.8 million square feet of production facilities which are held primarily for lease to the Company's other business segments. The real estate subsidiaries also hold master leases in certain properties which are leased to the Company's operating segments.

SOFTWARE DEVELOPMENT AND MAINTENANCE

The Company's research and development efforts are focused on introducing new products and services as well as ongoing enhancement of its existing products and services. The Company expended $183.4 million, $195.7 million and $172.4 million in 2001, 2000 and 1999, respectively, for software development and maintenance and enhancements to the Company's proprietary systems and software products of which $43.2 million, $43.6 million and $26.6 million was capitalized in 2001, 2000 and 1999, respectively.

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EMPLOYEES

As of December 31, 2001, the Company and its majority owned subsidiaries employed approximately 11,200 employees, including approximately 6,400 in the Financial Services Segment, 4,100 in the Output Solutions Segment and 700 in the Customer Management Segment. In addition, 50% owned unconsolidated affiliates of the Company and its subsidiaries employed approximately 4,600 employees, including approximately 3,000 at BFDS, 700 at IFDS U.K. and 500 at IFDS Canada. None of the Company's employees are represented by a labor union or covered by a collective bargaining agreement. The Company considers its employee relations to be good.

Item 2. Properties

The following table provides certain summary information with respect to the principal properties owned or leased by the Company. The Company believes the facilities, office space and other properties owned or leased are adequate for its current operations.

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(1)

Property specified as used for production in the above table includes space used for manufacturing operations and warehouse space.

(2)

Within Kansas City, MO, the Company owns a number of surface parking lots, various developed and undeveloped properties and a 0.5 million square foot underground storage facility that is primarily leased to third parties. The Company also owns approximately 200 acres of undeveloped land adjacent to its buildings in Sacramento, CA.

(3)

Includes approximately 2.1 million square feet of property owned or leased by the Company's real estate subsidiaries, which are part of the Investments and Other Segment. These properties are leased to other segments of the Company, including approximately 0.9 million square feet in the Financial Services Segment, 1.0 million square feet in the Output Solutions Segment and 0.2 million square feet in the Customer Management Segment.

(4)

Includes a 0.2 million square foot office facility that has a put option that obligates the Company to purchase the facility upon proper notice. The purchase price would be approximately $29 million.

(5)

The Winchester Data Center is mortgaged with indebtedness of $16.7 million as of December 31, 2001.

(6)

Includes a property that is mortgaged with indebtedness of $1.0 million as of December 31, 2001.

The discussion under "Winchester Information Processing Services" in Item 1 hereto is hereby incorporated by reference in partial response to this Item 2.

Item 3.    Legal Proceedings

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, management believes, after consultation with legal counsel, that the final outcome in such proceedings, in the aggregate, would not have a material adverse effect on the consolidated financial condition or results of operations of the Company.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

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Executive Officers and Significant Employees of the Company

Pursuant to General Instruction G (3) of Form 10-K and instruction 3 to paragraph (b) of Item 401 of Regulation S-K, the following list is included as an unnumbered Item in Part I of this Annual Report on Form 10-K in lieu of being included in the Company's Definitive Proxy Statement in connection with its annual meeting of stockholders scheduled for May 14, 2002.

All executive officers are elected by and serve at the discretion of the Company's Board of Directors. Certain of the executive officers have employment agreements with the Company. There are no arrangements or understandings between the executive officers and any other person pursuant to which he was or is to be selected as an officer, except with respect to the executive officers who have entered into employment agreements, which agreements designate the position or positions to be held by the executive officer. None of the executive officers are related to one another.

Thomas A. McDonnell, age 56, has served as director of the Company since 1971. He has served as Chief Executive Officer of the Company since October 1984 and as President of the Company since January 1973 (except for a 30 month period from October 1984 to April 1987). He served as Treasurer of the Company from February 1973 to September 1995 and as Vice Chairman of the Board from June 1984 to September 1995. He is a director of BHA Group, Inc., Commerce Bancshares, Inc., Computer Sciences Corporation, Euronet Worldwide, Inc., Blue Valley Ban Corp and Garmin Ltd.

Thomas A. McCullough, age 59, has served as director of the Company since 1990, as Executive Vice President since April 1987 and as Chief Operating Officer since May 2001. His responsibilities include Winchester Data Center, full-service mutual fund processing, remote-service mutual fund client servicing, information systems, Automated Work Distributor products, securities transfer and product sales and marketing. Since September 2000, he has served as Chairman and Chief Executive Officer of BFDS, which is 50% owned by the Company.

Charles W. Schellhorn, age 53, has served since March 1999 as Vice Chairman of DST Systems of California, Inc. (formerly USCS International, Inc.), a wholly owned subsidiary of the Company. He has served since May 2000 as President and Chief Executive Officer and since September 2000 as Chairman of the Board of DST Output, Inc., an indirect wholly owned subsidiary of the Company. He had previously served from 1991 to 1999 as President and Chairman of the Board of DST Output, Inc. Since March 1999, he has served as President of Argus Health Systems, Inc., which is 50% owned by the Company.

Donald J. Kenney, age 54, has served since October 2000 as President and Chief Executive Officer of EquiServe, Inc. (formerly EquiServe Limited Partnership), a wholly owned subsidiary of the Company. Prior to joining the Company, he had been Executive Vice President of National City Corporation from 1998 through 1999 and Executive Vice President of First of America Bank Corporation from 1993 through 1998.

Peter J. Nault, age 45, has served since June 2001 as President of DST Innovis, Inc., an indirect wholly owned subsidiary of the Company and since May 1999 as President of DST Interactive, Inc., a wholly owned subsidiary of the Company.

J. Michael Winn, age 55, has served since June 1993 as Managing Director of DST International Limited, a wholly owned subsidiary of the Company.

Jonathan J. Boehm, age 41, joined the Company as a Group Vice President in November 1997. He is responsible for the Company's full-service mutual fund processing and corporate support. Prior to joining the Company, he had been an officer of Kemper Service Company from October 1990 through November 1997.

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Robert C. Canfield, age 63, has served as Senior Vice President, General Counsel and Secretary of the Company since August 1995. He was Senior Vice President-Law of the Company from March 1992 to August 1995.

Kenneth V. Hager, age 51, has served as Vice President and Chief Financial Officer of the Company since April 1988 and as Treasurer since August 1995. He is responsible for the financial and internal audit functions of the Company.

John W. McBride, age 59, joined the Company in 1985 and has served as Group Vice President of the Company since 1993. He is responsible for the operations of the Company's AWD Data Center.

Robert L. Tritt, age 46 joined the Company in 1977 and has served as Group Vice President of the Company since 1989. He is responsible for the Company's remote mutual fund processing operations and for mutual fund product development.

Michael A. Waterford, age 59, has served as Group Vice President of the Company since 1986. He is responsible for development of Fairway, business contingency planning and other projects

PART II

Item 5.    Market for the Company's Common Stock and Related Stockholder Matters

The Company's common stock trades under the symbol "DST" on the New York Stock Exchange ("NYSE") and the Chicago Stock Exchange. As of February 26, 2002, there were approximately 30,300 beneficial owners of the Company's common stock.

No cash dividends have been paid since the initial public offering of the Company's common stock on October 31, 1995. The Company intends to retain its earnings for use in its business and therefore does not anticipate paying any cash dividends in the foreseeable future. Under the Company's syndicated line of credit, the Company is limited, on an annual basis, to making dividends or repurchasing its capital stock in any fiscal year in an amount not to exceed 20% of consolidated net tangible assets.

The information set forth in response to Item 201 of Regulation S-K in Part II Item 8, Financial Statements and Supplementary Data at Note 14, Quarterly Financial Data (Unaudited) ("Note 14"), in this Form 10-K is incorporated by reference in partial response to this Item 5. The prices set forth in Note 14 do not include commissions and do not necessarily represent actual transactions. The closing price of the Company's common stock on the NYSE on December 31, 2001 was $49.85.

On January 11, 1999, pursuant to the exercise of a stock option assumed by the Company in the USCS Merger, the Company sold 78 shares of its common stock at an aggregate price of $2,076.36 to a former employee of USCS who terminated his employment prior to the USCS Merger. In connection with the merger of IRIN, INC. ("IRIN") with and into a wholly owned subsidiary of DST, on September 28, 2000, the Company issued a total of 65,001 shares of the Company's common stock to the three individual shareholders of IRIN in exchange for a total of 1,500 shares of the common stock of IRIN held by such individual shareholders. The shares of the Company's common stock described above were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933 under Section 4(2) of such Act for transactions by an issuer not involving any public offering.

Item 6.    Selected Consolidated Financial Data

The following table sets forth selected consolidated financial data of the Company. The selected consolidated balance sheet data as of December 31, 2001 and 2000 and the selected consolidated income statement data for the years ended December 31, 2001, 2000 and 1999 were derived from the Company's audited consolidated financial statements and the related notes thereto which are included in Item 8 of this annual report on Form 10-K. The selected consolidated balance sheet data as of December 31, 1999, 1998 and 1997 and the selected consolidated income statement data for the year

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ended December 31, 1998 and 1997 were derived from the Company's audited consolidated financial statements, not included herein. This selected consolidated financial data should be read in conjunction with and is qualified by reference to "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 of this Annual Report on Form 10-K and the Company's audited consolidated financial statements, including the notes thereto, and the report of independent accountants thereon and the other financial information included in Item 8 of this Form 10-K.

(1)

In 2001, the Company recognized a $4.9 million reduction of costs and expenses and an $8.7 million reduction in depreciation and amortization associated with a state sales tax refund. Software and intangible asset impairments were recognized as additional depreciation and amortization of $19.5 million in 2001.

(2)

In 1998, the Company recognized $33.1 million in merger and integration costs related to the USCS International, Inc. ("USCS") and Custima International acquisition. This amount is comprised of $16.9 million of integration costs and $9.1 million of transaction costs related the merger with USCS. This also includes $7.1 million related to the purchase by USCS of 100% of Custima International.

(3)

Other income consists mainly of interest income, dividends received on investments held by the Company (principally shares of State Street stock), net gains on sales of available-for-sale equity securities, amortization of deferred non-operating gains and gains (losses) from equipment dispositions. The 2001, 2000 and 1999 amounts include $13.8 million, $41.8 million and $8.9 million respectively, of net gains related to available-for-sale securities and other investments. The 2001 amount includes $7.2 million associated with a state sales tax refund. The 2000 amount includes a $10.8 million pretax settlement of a legal dispute related to a former equity investment.

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The settlement agreement resolves all outstanding issues related to this former equity investment. The 1999 security gains were offset by net losses on equipment dispositions of $3.5 million in 1999.

(4)

On June 29, 2001, DST sold its Portfolio Accounting Systems ("PAS") business to State Street Corporation ("State Street"). DST offered PAS services primarily to the U.S. mutual fund industry on a remote processing basis. DST received, in a taxable transaction, proceeds of $75.0 million, comprised of approximately 1.5 million shares of State Street common stock and cash. In conjunction with the transaction, DST agreed to provide data processing services for PAS and agreed to a non-compete agreement for a period of five years, for which elements a portion of the purchase price has been deferred. DST recognized a one-time gain of $20.0 million after taxes, deferrals and other expenses.

(5)

The 2001 equity in earnings of unconsolidated affiliates includes a non-recurring charge related to lease abandonment charges of $1.0 million for BFDS and $3.0 million for IFDS U.K.

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

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. Readers can identify these forward-looking statements by the use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of management's assumptions are 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 the Company's amended Current Report on Form 8-K/A dated March 19, 2002, which is hereby incorporated by reference. This report has been filed with the United States Securities and Exchange Commission ("SEC") in Washington, D.C. and can be obtained by contacting the SEC's Public Reference Branch. Readers are strongly encouraged to obtain and consider the factors listed in the March 19, 2002 Current Report and any amendments or modifications thereof when evaluating any forward-looking statements concerning the Company. The Company will not update any forward-looking statements in this Annual Report to reflect future events or developments.

Introduction

Originally established in 1969, DST is a leading global provider of sophisticated information processing and computer software services and products to the financial services industry (primarily mutual funds, corporations and investment managers), video/broadband/satellite TV industry, communications industry and other service industries. The Company's business units are reported as three operating segments (Financial Services, Output Solutions and Customer Management). In addition, investments in certain equity securities and financial interests and the Company's real estate and computer hardware leasing subsidiaries and affiliates have been aggregated into an Investments and Other Segment.

The Financial Services Segment's revenues are generated from a variety of sources. The Company's mutual fund and securities processing revenues are primarily dependent upon the number of accounts or transactions processed. The Company also derives revenues from investment earnings related to cash balances maintained in corporate transfer agency bank accounts. The Company also licenses its work management 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 material. Income from insurance premiums is recognized as revenue as earned, but is eliminated in consolidation for the portion that relates to premiums from the Company's other consolidated subsidiaries. The

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Financial Services Segment derives part of its income from its pro rata share in the earnings (losses) of certain unconsolidated affiliates, primarily Boston Financial Data Services, Inc. ("BFDS"), International Financial Data Services, U.K. ("IFDS U.K."), International Financial Data Services, Canada ("IFDS Canada") and Argus Health Systems, Inc. ("Argus"). The Company provides data processing services to Argus to process its proprietary applications and to certain other clients who utilize the Company's Automated Work Distributor ("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 Output Solutions Segment's revenues for presentation and delivery (either printed or electronic) of customer documents and archival depend on the number of statements mailed and/or the number of images produced. Formatting and custom programming revenues are based on time and materials billings or on the number of images produced.

The Customer Management Segment primarily derives its revenues from customer management processing and computer software services and products based on the number of end-users of the services offered by its clients, the number of bills mailed and/or the number of images produced under multi-year bundled service and usage agreements. Certain of the Company's customers, principally outside the U.S., license the customer management software. Revenues for fixed fee license agreements are recognized as the software is delivered and all customer obligations have been met. Such fixed fee license amounts have not been material.

The Investments and Other Segment's investment income (dividends, interest and gains/losses on sale of securities) is recorded as other income. Income from financing leases is recognized as revenue at a constant periodic rate of return on the net investment in the lease. Rental income from Company owned and operated real estate is recorded as revenue, but is eliminated in consolidation for the portion that relates to real estate leased to the Company's other consolidated subsidiaries.

Significant Events

EquiServe, Inc. ("EquiServe")

On March 30, 2001, DST completed the acquisition of a 75% interest in EquiServe by purchasing interests held by FleetBoston Financial ("FleetBoston") and Bank One Corporation ("Bank One"). On July 31, 2001, DST completed the acquisition of the remaining 25%, which was owned by Boston Financial Data Services, on essentially the same terms provided to FleetBoston and Bank One. EquiServe is one of the nation's largest corporate transfer agency service providers, maintaining and servicing the records of approximately 27.2 million shareholder accounts for approximately 1,400 publicly traded companies.

The acquisitions were accounted for as a purchase and the results of EquiServe's operations are included in DST's 2001 consolidated financial statements beginning March 30, 2001. The minimum purchase price of $186.7 million is to be paid in four installments. The first installments of approximately $58.5 million were paid at the closings. The second installments, scheduled for February 28, 2002, are estimated to be approximately $55.8 million. The remaining two minimum installments, which total approximately $72.4 million (discounted to $65.2 million for accounting purposes) are payable on February 28, 2003 and February 28, 2004. The remaining minimum purchase price installments can increase pursuant to a formula that provides for additional consideration to be paid in cash if EquiServe's revenues as defined in the agreements for the years ending 2000, 2001, 2002 and 2003 exceed certain targeted levels.

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The following table, which is based upon a valuation, summarizes the allocation of the minimum purchase price (discounted to $177.3 million for accounting purposes) to the fair values of assets acquired and liabilities assumed at the dates of the acquisitions. There was not a significant change in the fair values of assets acquired or liabilities assumed between the two acquisition dates.

The intangible assets represent customer relationships and are being amortized over a 20 year life.

A restructuring provision of $15.9 million was recorded for employee severances and contract termination costs related to the acquisition. The restructuring provision increased goodwill in the same amount. The restructuring provision for employee severance costs, which affected employees across nearly all classifications and locations, was $12.5 million relating to approximately 610 employees, of which 179 employees have been separated from the Company as of December 31, 2001. The remaining employee severances of approximately $10.5 million are expected to be paid in 2002. Contract termination costs of approximately $3.4 million were paid in 2001.

Goodwill includes $10.4 million of intangibles relating to workforce in place. The net carrying value of the workforce in place at December 31, 2001 was $9.2 million. The $150.6 million of goodwill is expected to be fully deductible for income tax purposes and was assigned to the Financial Services Segment. Goodwill will be increased by the amount of contingent consideration paid. This goodwill will not be subject to amortization per Statement of Financial Accounting Standard ("SFAS") No. 142.

Assuming the acquisitions had occurred January 1, 2000, the Company's consolidated revenues would have been $1,742.7 million and $1,671.5 million for the years ended December 31, 2001 and 2000, respectively. Consolidated proforma net income and earnings per share would not have been materially different from the reported amounts for 2001 and 2000. 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 2000.

New Mutual Fund Clients

The Company has preliminary commitments from three new clients to convert approximately 8.8 million mutual fund shareowner accounts to TA2000, of which 1.8 million are scheduled to convert in the first quarter 2002, 0.5 million are scheduled to convert in the third quarter 2002 and 6.5 million are scheduled to convert in the first quarter 2003.

New Products

DST launched two new products in January 2002: TA2000 Subaccounting and Managed Account Platform ("MAP"). TA2000 Subaccounting is offered on a remote basis to broker/dealers who perform shareowner accounting and record keeping for mutual fund accounts that have been sold by the firm's registered representatives. MAP is a proprietary system designed to facilitate the distribution, investment management, trading, reconciliation and reporting for "Managed Accounts." Managed

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Accounts are generally individual investment accounts offered by financial consultants who provide advisory services, and managed by independent money managers using an asset based fee structure.

Portfolio Accounting Systems ("PAS")

On June 29, 2001, DST sold its PAS business to State Street Corporation ("State Street"). DST offered PAS services primarily to the U.S. mutual fund industry on a remote processing basis. DST received, in a taxable transaction, proceeds of $75.0 million, comprised of approximately 1.5 million shares of State Street common stock and cash. In conjunction with the transaction, DST agreed to provide data processing services for PAS and agreed to a non-compete agreement for a period of five years, for which elements a portion of the purchase price has been deferred. DST recognized a one-time gain of $20.0 million after taxes, deferrals and other expenses.

DST recorded revenue related to PAS of $9.8 million for the six months ended June 30, 2001 and $19.5 million for the year ended December 31, 2000. The PAS business unit had approximately 80 associates who transferred to State Street with the transaction.

International Financial Data Services, Canada ("IFDS Canada")

DST Canada had been a wholly owned subsidiary of the Company since June 1993. To align the ownership of the international mutual fund/unit trust shareowner processing businesses, DST Canada was contributed to a joint venture, IFDS Canada, in January 2001, and is now owned 50% by DST and 50% by State Street. DST contributed its shares of DST Canada to the new joint venture while State Street contributed $43.5 million in cash. The Company accounted for the formation of the joint venture as a non-cash, non-taxable exchange. Accordingly, no gain was recognized from the transaction. Effective January 2001, DST Canada's results of operations are no longer consolidated with the Company and the earnings of the joint venture are included in the Company's results on the equity basis. On a proforma basis, the contribution of DST Canada to the joint venture did not have a material impact on DST's net income or earnings per share in 2001.

Stock Split

On September 26, 2000, the Company's Board of Directors approved a 2-for-1 split of the Company's common stock, in the form of a dividend of one share for each share held of record at the close of business on October 6, 2000. The distribution occurred on October 19, 2000. All references to stockholders' equity, shares outstanding and earnings per share amounts have been restated to reflect this stock split.

Stock Repurchase Programs

At December 31, 2001, the Company had 2.9 million shares remaining to be purchased under existing share repurchase programs. On February 26, 2002, the Company's Board of Directors extended the expiration of the above programs from September 30, 2002 to April 30, 2003. In addition, on February 26, 2002, the Board of Directors also authorized a new share repurchase program beginning March 4, 2002 and ending February 29, 2004 for up to six million shares. Shares repurchased under these programs will be utilized for the Company's stock award, employee stock purchase and stock option programs and general corporate purposes. The purchases may be made in private or market transactions and will be made in compliance with SEC regulations. The Company expended $250.3 million for approximately 6.8 million shares, $177.2 million for approximately 5.0 million shares and $52.2 million for approximately 1.7 million shares in 2001, 2000 and 1999, respectively, under these programs.

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New Accounting Standards

Effective July 1, 2001, the Company adopted, as required, SFAS No. 141, "Business Combinations." SFAS No. 141 addresses financial accounting and reporting for business combinations, requiring the use of the purchase accounting method, and is effective beginning July 1, 2001.

Effective July 1, 2001 for goodwill and intangible assets acquired after June 30, 2001 and effective January 1, 2002 for all goodwill and intangible assets, the Company adopted, as required, SFAS No. 142, "Goodwill and Other Intangible Assets." This statement addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. Intangible assets that have finite lives will continue to be amortized over their useful lives. At December 31, 2001, the Company and its unconsolidated affiliates had approximately $174 million of goodwill and intangible assets that have indefinite useful lives. Amortization of these amounts will cease beginning January 1, 2002 and will be subject to periodic impairment tests. In management's opinion, no such impairment exists at December 31, 2001. The Company estimates that the favorable 2002 after tax impact of ceasing goodwill and intangible amortization is approximately $7.1 million.

Effective January 1, 2002, the Company adopted, as required, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. FAS 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, FAS 144 expands the scope of discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in a disposal transaction. The Company believes that the impact of SFAS 144 will not be material.

Effective January 1, 2002, the Company adopted, as required, EITF Topic No. D-103, "Income Statement Characterization of Reimbursements received for "Out-of-Pocket" Expenses Incurred." Prior to the issuance of EITF Topic No. D-103, the Company netted the Out-of-Pocket reimbursements from customers with the applicable Out-of-Pocket expenditures. The Company's significant Out-of-Pocket expenses at the consolidated level include postage and telecommunication expenditures and at the Segment level include print mail services between the Financial Services Segment and the Output Solutions Segment. Under EITF Topic No. D-103, the Company will record the reimbursements received for Out-of-Pocket expenses incurred as revenue on an accrual basis. The Company estimates that annual consolidated revenues and consolidated costs and expenses will increase approximately $800 million to $1 billion as a result of adopting the EITF. Because these additional revenues are offset by the reimbursable expenses incurred, adoption of EITF Topic No. D-103 will not impact income from operations or net income. The EITF requires that comparative financial statements for prior periods be reclassified to comply with the new guidance, unless it is impracticable to reclassify prior-period financial statements. The Company is considering its ability to reclassify prior-period financial statements as required by EITF Topic No. D-103. The Company believes that the implementation of this revised accounting treatment will negatively affect the reporting of operating margins of its business segments.

The estimated impact of these new accounting standards reflects the Company's current views. There may be material differences between these estimates and the actual impact of these standards.

Critical Accounting Policies

The Company's discussion and analysis of its financial condition and results of operations 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 financial

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statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other 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; and accounting for investments.

Revenue recognition

In 2001, the Company derived over 90% of its revenues as a result of providing processing and services under contracts. The majority of the amount was billed on a monthly basis generally with thirty day collection terms. Revenues are recognized for monthly processing and services upon completion of the services. In the event a portion of the Company's revenues are due six 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 material basis. There are exceptions, whereby certain commercial arrangements require that we enter into a fixed fee arrangement for development and consulting services. For fixed fee arrangements, we recognize revenue on a "percentage of completion" basis.

The Company derives less than 10% of its revenues from licensing products. The Company licenses its asset management products, its AWD product generally to non-mutual fund customers and international customers and its Intelecable and Affinity products to international customers. 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.

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

For all revenues, 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 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 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 two separate accounting pronouncements. The first, SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed," effective January 1, 1986, applies to software that will be sold or delivered to third parties and requires

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capitalization of research and development costs after technological feasibility has been established and management is committed to funding the project. The second pronouncement, Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," effective January 1, 1999, requires capitalization of certain development costs after the design has been approved 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. Excluding Fairway, the Company has assigned lives of three to five years for capitalized software development. The Company assigned an estimated economic life of ten years for capitalized Fairway development costs, due to management's estimate of when the base functionality will be replaced through enhancements or upgrades.

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.

Depreciation of fixed assets

The Company's philosophy on personal property, specifically data processing equipment, is to own the property as opposed to leasing it where practicable. The Company believes this approach provides it better flexibility of 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 and leasehold improvements over estimated economic lives of three to ten years and generally uses accelerated depreciation methods for domestic assets and straight-line depreciation for international assets. 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 assesses the impairment of identifiable intangibles, long-lived assets and related goodwill and enterprise level goodwill 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 and enterprise level goodwill may not be recoverable based upon the existence of one or more of the above indicators of impairment, the Company measures any impairment based on gross cash flows.

In 2002, SFAS No. 142, "Goodwill and Other Intangible Assets," became effective and as a result, the Company and its unconsolidated affiliates will cease to amortize approximately $174 million of goodwill. In lieu of amortization, the Company is required to perform an initial impairment review of goodwill in 2002 and an annual impairment review thereafter. The Company expects to complete the initial review during the first half of 2002.

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The Company currently does not expect to record an impairment charge upon completion of the initial impairment review. However, there can be no assurance that at the time the review is completed a material impairment charge will not be recorded.

Accounting for investments

The Company has two significant types of investments: 1) investments in available-for-sale securities, which is comprised principally from investments in State Street and Computer Sciences Corporation; and 2) investments in unconsolidated affiliates, which is comprised principally of BFDS, IFDS U.K., IFDS Canada, Argus and certain real estate joint ventures.

The Company accounts for investments in corporations, for which it owns less than 20% and does not have significant influence, in accordance with SFAS 115. Under SFAS 115, the Company is required to designate its equity investments as trading or available-for-sale. At December 31, 2001, the Company had approximately $1.3 billion 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, 2001, the Company's available-for-sale securities had gross unrealized holding gains of $683.8 million and gross unrealized holding losses of $3.3 million.

The impact of a 10% change in fair value of these investments would be approximately $82 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.

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 do not control and for all investments in partnerships and similar interests in which the Company does not control. The Company classifies these investments as unconsolidated affiliates. Under the equity method, the Company recognizes, on an equity basis, 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. The Company's carrying value of unconsolidated affiliates approximates its pro-rata share of the unconsolidated affiliates net tangible assets.

Although the Company does not expect that it will need to record an impairment charge for its investments in unconsolidated affiliates, future adverse changes in market conditions or poor operating results of unconsolidated affiliates could result in losses or an inability to recover the carrying value of the unconsolidated affiliate investment that may not be reflected in the investment's carrying value, thereby possibly requiring an impairment charge in the future.

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Results of Operations

The following table summarizes the Company's operating results (amounts in millions, except per share amounts).

Consolidated revenues

Consolidated revenues increased $297.9 million or 21.9% in 2001 and $134.6 million or 11.0% in 2000. Consolidated revenue growth in 2001 was primarily a result of higher Financial Services Segments revenues, while revenue growth in 2000 was primarily a result of higher Financial Services and Output Solutions Segments revenues. Consolidated and Financial Services Segment revenues were affected by the inclusion of revenues from EquiServe and PAS in 2001 and DST Canada and PAS in 2000. Excluding EquiServe and PAS revenues in 2001 and DST Canada and PAS revenues in 2000, 2001

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consolidated and Financial Services Segment revenues would have increased $84.1 million or 6.4% and $68.9 million or 12.0%, respectively, as shown below (dollars in millions):

Financial Services Segment revenues increased $282.7 million or 45.5% in 2001. The increase in 2001 Financial Services Segment revenues resulted from increased U.S. revenues of $300.7 million or 59.8%, primarily as a result of the inclusion of EquiServe and increases in mutual fund shareowner accounts processed of 4.9% to 75.6 million at December 31, 2001, partially offset by an $18.0 million or 15.3% decrease in international revenue due primarily to DST Canada's results of operations no longer being consolidated with the Company's operating results. The 2000 Financial Services Segment revenues growth of $66.1 million or 11.9% resulted from increased U.S. revenues of $76.1 million or 17.8%, primarily as a result of an increase in mutual fund shareowner accounts processed of 27.8% to 72.1 million at December 31, 2000, partially offset by a $10.0 million or 7.8% decrease in international revenues from lower professional services and Canadian mutual fund processing revenues.

Output Solutions Segment revenues increased $19.5 million or 3.3% in 2001 and $80.0 million or 15.6% in 2000. Revenue growth in 2001 resulted from increased volumes from the financial service and video service industries, partially offset by a continued decline in brokerage related marketing fulfillment and trade confirmation volumes and the market interruptions following the events of September 11, 2001. The growth in 2000 was a result of an increase in volume of statements and images produced from the growth in existing customers in the Financial Services and Customer Management Segments and new customers, primarily in telecommunications and other high-volume markets.

Customer Management Segment revenues increased $3.8 million or 1.9% in 2001 and decreased $8.0 million or 3.9% in 2000. The increase in revenues for 2001 is primarily due to increased processing and software service revenues, partially offset by lower equipment sales. Revenues for 2000 were adversely affected by consolidation in the U.S. cable television industry, partially offset by higher satellite subscriber revenues.

Investments and Other Segment revenues increased $6.9 million or 20.8% in 2001 and $0.3 million or 0.9% in 2000. Segment revenues are primarily rental income for facilities leased to the Company's operating segments and hardware leasing activities.

Income from operations

Consolidated income from operations increased $28.9 million or 10.9% in 2001 and $64.9 million or 32.5% in 2000. The operating margin was 17.7%, 19.4% and 16.3% in 2001, 2000 and 1999, respectively. U.S. income from operations increased $22.1 million or 9.2% in 2001 and $60.1 million or 33.4% in 2000. The U.S. operating margin was 17.2%, 19.9% and 17.0% in 2001, 2000 and 1999, respectively. International income from operations increased $6.8 million or 27.8% in 2001 and $4.8 million or 24.4% in 2000. The international operating margin was 23.1%, 16.0% and 11.8% in 2001, 2000 and 1999, respectively. Income from operations in 2001 was reduced by $5.9 million in non-recurring items. The Financial Services Segment recognized a $4.9 million reduction of costs and expenses and an $8.7 million reduction in depreciation and amortization associated with a state sales tax refund in 2001. Software and intangible asset impairments were recognized as additional depreciation and amortization of $3.7 million in the Output Solutions Segment and $15.8 million in the

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Customer Management Segment in 2001. Excluding these non-recurring items, consolidated income from operations increased $34.8 million or 13.2% in 2001.

Financial Services Segment income from operations increased $43.1 million or 24.0% in 2001 and increased $56.5 million or 46.0% in 2000. Financial Services operating margin was 24.6%, 28.9% and 22.1% in 2001, 2000 and 1999, respectively. The decrease in the 2001 operating margin resulted from the acquisition of EquiServe and the absence of DST Canada and the PAS business in 2001, partially offset by increased U.S. revenues related to mutual fund shareowner processing and the reduction of costs and expenses depreciation and amortization associated with a state sales tax refund. Excluding the reductions of costs and expenses and depreciation and amortization associated with the state sales tax refund, Financial Services income from operations for 2001 would have increased $29.5 million or 16.5% compared to 2000 and 2001 Financial Services operating margin would have decreased to 23.1% from 28.9% in 2000, resulting from increased U.S. revenues related to mutual fund shareowner processing. The increase in 2000 Financial Services Segment operating margin resulted from increased U.S. revenues.

Output Solutions Segment income from operations increased $0.5 million or 0.8% in 2001 and increased $16.0 million or 32.7% in 2000. Output Solutions Segment operating margin was 10.7%, 11.0% and 9.6% in 2001, 2000 and 1999, respectively. The decrease in the 2001 operating margin results are primarily from software impairments of $3.7 million. Excluding these software impairments, the 2001 Output Solutions Segment operating margin would have increased to 11.3% in 2001 from 11.0% in 2000. The improvement in the 2000 operating margin results are primarily from an increased volume of images and statements produced, which were partially offset by the increased spending in Internet-based product development costs.

Customer Management Segment income from operations decreased $16.6 million or 109.9% in 2001 and $6.2 million or 29.1% in 2000. The decrease in 2001 was primarily due to intangible and software impairments of $15.8 million. Excluding these intangible and software impairments, the 2001 Customer Management Segment operating margin would have decreased to 7.2% in 2001 from 7.7% in 2000. The decrease in 2001 was primarily due to higher personnel costs. The decrease in 2000 was primarily due to a decline in processing and software services revenues.

Investments and Other Segment income from operations was $7.1 million, $5.2 million and $6.6 million in 2001, 2000 and 1999, respectively. The 2001 amount increased primarily due to higher real estate revenues partially offset by lower hardware leasing revenues and the 2000 amount declined primarily due to lower hardware leasing revenues partially offset by higher real estate revenues.

Interest expense

Interest expense was $7.5 million in 2001 compared to $5.6 million in 2000 and $5.2 million in 1999. Average debt balances were higher in 2001 compared to 2000 primarily as a result of common stock repurchases and the EquiServe acquisition. Average interest rates were lower in 2001 compared to 2000. Average debt balances and interest rates were higher for 2000 compared to 1999.

Other income, net

Other income consists mainly of interest income, dividends received on investments held by the Company (principally, shares of State Street stock), net gains on sales of securities principally from the Investments and Other Segment, amortization of deferred non-operating gains and gains (losses) from equipment dispositions. The 2001, 2000 and 1999 amounts include $13.8 million, $41.8 million and $8.9 million, respectively, of net gains on securities and other investments. The 2001 amount includes $7.2 million of interest related to a state sales tax refund. During the fourth quarter of 2000, 325,000 shares of State Street common stock were liquidated primarily in conjunction with the formation and capitalization of a wholly owned captive insurance company that will principally manage the Company's

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self-insured risks. The 2000 amount also includes a $10.8 million pretax gain for the settlement of a legal dispute related to a former equity investment. The settlement agreement resolves all outstanding issues related to this former equity investment. The 1999 gains were offset by net losses on equipment dispositions of $3.5 million.

Gain on sale of PAS

On June 29, 2001, DST sold its PAS business to State Street. DST offered PAS services primarily to the U.S. mutual fund industry on a remote processing basis. DST received, in a taxable transaction, proceeds of $75.0 million, comprised of approximately 1.5 million shares of State Street common stock and cash. In conjunction with the transaction, DST agreed to provide data processing services for PAS and agreed to a non-compete agreement for a period of five years, for which elements a portion of the purchase price has been deferred. DST recognized a one-time gain of $20.0 million after taxes, deferrals and other expenses.

DST recorded revenue related to PAS of $9.8 million for the six months ended June 30, 2001 and $19.5 million for the year ended December 31, 2000. The PAS business unit had approximately 80 associates who transferred to State Street with the transaction.

Equity in earnings and losses of unconsolidated affiliates

Equity in earnings (losses) of unconsolidated affiliates, net of income taxes provided by the unconsolidated affiliates and related goodwill amortization, is as follows (in millions):

Equity in earnings of unconsolidated affiliates decreased $12.9 million in 2001. Decreased earnings were recorded at BFDS in 2001 from a non-recurring charge of $1.0 million related to lease abandonment charges, a decline in brokerage industry transaction revenue and a lack of mutual fund revenue growth. Decreased earnings at IFDS U.K. resulted primarily from a non-recurring charge of $3.0 million related to lease abandonment charges as IFDS U.K. is relocating from four building sites to a single location. IFDS U.K. 2001 results reflect an increase in accounts serviced to 3.1 million at December 31, 2001, which is 0.4 million or 14.8% above year end 2000 levels. IFDS Canada results include the results of DST Canada, which was contributed to the joint venture in January 2001. The 2001 loss reported in Other is primarily the result of exchange-America losses. The exchange-America venture was discontinued in the fourth quarter of 2001.

Equity in earnings of unconsolidated affiliates increased $4.8 million in 2000 as a result of increased levels of mutual fund activity at BFDS and decreased losses at IFDS U.K., reflecting an increase in accounts serviced at IFDS U.K. to 2.7 million at December 31, 2000 as compared to 2.0 million accounts at December 31, 1999.

Income taxes

The Company's effective tax rate was 35.4%, 35.9% and 35.9% for the years ended December 31, 2001, 2000 and 1999, respectively. Excluding the taxes provided on the PAS transaction, the effective tax rate would have been 35.1% for the year ended 2001. The tax rates were affected by tax benefits relating to

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certain international operations and recognition of state tax benefits associated with income apportionment rules.

Net income

The Company's net income (and earnings per share) for 2001, 2000 and 1999 was $228.2 million ($1.86 basic earnings per share and $1.81 diluted earnings per share), $215.8 million ($1.72 basic earnings per share and $1.67 diluted earnings per share) and $138.1 million ($1.09 basic earnings per share and $1.06 diluted earnings per share, respectively. Excluding the impact of the 2001 gain on the sale of the PAS business, the 2001 state sales tax refund, net gains on securities in 2001, 2000 and 1999, the 2001 software and intangible asset impairments, the 2001 joint venture lease abandonment charges and the previously discussed litigation settlement gain in 2000, the Company's net income and earnings per share for 2001, 2000 and 1999 would have been $201.2 million ($1.64 basic earnings per share and $1.60 diluted earnings per share), $181.5 million ($1.45 basic earnings per share and $1.40 diluted earnings per share) and $131.9 million ($1.04 basic earnings per share and $1.02 diluted earnings per share), respectively.

Year to Year Business Segment Comparisons

FINANCIAL SERVICES SEGMENT

Revenues

Financial Services Segment revenues for 2001 increased 45.5% over 2000 to $903.7 million. U.S. Financial Services revenues increased 59.8% to $803.8 million in 2001. Excluding EquiServe and PAS from the current year and PAS from the prior year, U.S. revenues for 2001 increased 12.3% to $543.0 million. U.S. mutual fund processing revenues for 2001 increased 13.4% over 2000 as shareowner accounts serviced increased 4.9% from 72.1 million at December 31, 2000 to 75.6 million at December 31, 2001. U.S. AWD product revenues for 2001 increased 38.5% over 2000. U.S. AWD workstations licensed were 57,800 at December 31, 2001, an increase of 20.7% over year end 2000 levels, principally from workstations for Comcast Cable Communications, Inc. (Comcast") and insurance industry clients.

Financial Services Segment revenues from international operations for 2001 decreased 15.3% to $99.9 million. The revenue decrease resulted primarily from DST Canada's results of operations no longer being consolidated with the Company's operating results. Excluding DST Canada from the prior year, revenues from international operations for 2001 would have increased $9.5 million or 10.5% over 2000. The increase is primarily a result of an increase in investment management software license revenues and higher investment management and AWD software maintenance revenues. International AWD workstations licensed were 27,700 at December 31, 2001, an increase of 9.5% over year end 2000 levels.

Financial Services Segment revenues for 2000 increased 11.9% over 1999 to $621.0 million. U.S. Financial Services revenues increased 17.8% to $503.1 million in 2000. U.S. mutual fund processing revenues for 2000 increased 19.3% over the prior year as shareowner accounts serviced increased 27.8% from 56.4 million at December 31, 1999 to 72.1 million at December 31, 2000.

Financial Services Segment revenues from international operations for 2000 decreased 7.8% to $117.9 million. The revenue decrease resulted primarily from lower revenues from professional service and Canadian mutual fund processing partially offset by higher AWD software maintenance revenues. Canadian shareowner accounts serviced decreased 37.5% from 2.4 million at December 31, 1999 to 1.5 million at December 31, 2000 primarily from the loss of a client associated with an acquisition.

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Costs and expenses

Financial Services Segment costs and expenses for 2001 increased 62.7% over 2000 to $606.4 million. Personnel costs for 2001 increased 51.3% over 2000 as a result of the addition of EquiServe and increased staff levels to support revenue growth. Costs and expenses for 2001 were reduced by $4.9 million related to a state sales tax refund.

Segment costs and expenses for 2000 increased 1.9% to $372.6 million over 1999. In addition, costs and expenses in 2000 included a $3.9 million recovery of costs previously expensed in 1999 associated with a terminated international software development contract.

Depreciation and amortization

Financial Services Segment depreciation and amortization for 2001 and 2000 increased 8.4% or $5.8 million and 3.9% or $2.6 million, respectively. The increase in 2001 is primarily attributable to EquiServe, partially offset by an $8.7 million reduction in depreciation associated with a state sales tax refund. The increase in 2000 was primarily attributable to increased capital additions during 2000 and amortization of capitalized internal use software costs.

Income from operations

Financial Services Segment income from operations for 2001 and 2000 increased 24.0% to $222.4 million and 46.0% to $179.3 million, respectively, over the comparable prior year. The operating margins were 24.6%, 28.9% and 22.1% in 2001, 2000 and 1999, respectively. The decrease in operating margin in 2001 resulted primarily from the acquisition of EquiServe and the absence of the PAS business, partially offset by increased U.S. revenues and a state sales tax refund. The increase in the 2000 operating margin was a result of increased U.S. revenues.

OUTPUT SOLUTIONS SEGMENT

Revenues

Output Solutions Segment revenues for 2001 increased 3.3% to $611.7 million compared to 2000. The growth in Segment revenue was derived primarily from increased volumes from the financial service and video service industries partially offset by a loss of a telecommunications customer and the decline in brokerage related marketing fulfillment and trade confirmation volumes and the market interruptions following the events of September 11, 2001.

Output Solutions Segment revenues for 2000 increased 15.6% to $592.2 million compared to 1999. The growth in Segment revenues was derived from an increase in the volume of statements and images produced which was partially related to the growth of existing customers in the Financial Services and Customer Management Segments and new customers, primarily in telecommunications and other high-volume markets.

Costs and expenses

Output Solutions Segment costs and expenses for 2001 and 2000 increased 2.5% to $503.7 million and 14.2% to $491.5 million, respectively, over the comparable prior year. Personnel costs for 2001 and 2000 increased 5.5% and 21.1%, respectively, over the comparable prior year. The increases were due primarily to increased staff levels and purchased material costs to support volume growth and higher Internet-based electronic bill and statement product development and selling costs.

Depreciation and amortization

Output Solutions Segment depreciation and amortization increased 19.0% to $42.5 million in 2001 and 8.2% to $35.7 million in 2000. The increases as compared to prior years were attributable to increased

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print/mail capital additions, including capitalized internal software development costs, to support revenue growth. The 2001 increase includes $3.7 million of software asset impairments.

Income from operations

Output Solutions Segment income from operations for 2001 and 2000 increased $0.5 million or 0.8% and $16.0 million or 32.7%, principally from increased image and statement revenues. The Segment's operating margins were 10.7%, 11.0% and 9.6% in 2001, 2000 and 1999, respectively. Excluding the 2001 software asset impairment of $3.7 million, 2001 income from operations increased $4.2 million or 6.5% over 2000.

CUSTOMER MANAGEMENT SEGMENT

Revenues

Customer Management Segment revenues for 2001 increased 1.9% to $198.8 million as compared to 2000. Processing and software service revenues increased 6.4% to $190.3 million in 2001. Equipment sales decreased 47.5% to $8.5 million in 2001. AWD software license revenues were recognized in 2001 from the AWD license agreement with Comcast. Total cable and satellite subscribers serviced were 40.9 million at December 31, 2001, a decrease of 5.8% compared to year end 2000 levels, principally from the loss of MediaOne subscribers and lower international cable subscribers serviced.

Customer Management Segment revenues for 2000 decreased 3.9% to $195.0 million. Processing and software revenues decreased 6.2% to $178.8 million, partially offset by an increase in equipment sales of 30.6% to $16.2 million. Revenues were adversely affected by consolidation in the U.S. cable television industry, partially offset by higher satellite subscriber revenues.

Costs and expenses

Customer Management Segment costs and expenses for 2001 and 2000 increased 2.4% to $167.9 million and decreased 2.0% to $163.9 million, respectively, over the comparable prior year. The increase in 2001 was a result of higher personnel costs. The decrease in 2000 was primarily attributable to decreased costs associated with lower processing and service revenues and to the management of personnel costs.

Depreciation and amortization

Customer Management Segment depreciation and amortization for 2001 and 2000 increased 102.5% to $32.4 million and 11.1% to $16.0 million, respectively, over the comparable prior year. The 2001 increase includes $15.8 million of intangible and software asset impairments. The increase in 2000 was primarily attributable to increased amortization of capitalized software development costs.

Income from operations

Customer Management Segment income from operations decreased $16.6 million and $6.2 million in 2001 and 2000, respectively. The 2001 decrease was related to the intangible and software asset impairment of $15.8 million. The decrease in 2000 was attributable to decreased processing and service revenues. The Segment's operating loss margin was 0.8% in 2001 and the Segment's operating margin was 7.7% and 10.5% in 2000 and 1999, respectively. Excluding the 2001 intangible and software asset impairment of $15.8 million, 2001 income from operations decreased $0.8 million or 5.3% compared to 2000.

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INVESTMENTS AND OTHER SEGMENT

Revenues

Investments and Other Segment revenues totaled $40.1 million, $33.2 million and $32.9 million in 2001, 2000 and 1999, respectively. Real estate revenues of $38.5 million, $29.5 million and $26.7 million in 2001, 2000 and 1999, respectively, were primarily derived from the lease of facilities to the Company's other business segments. Revenues of $1.6 million, $3.7 million and $6.2 million in 2001, 2000 and 1999, respectively, were derived from the Segment's hardware leasing activities.

Costs and expenses

Investments and Other Segment costs and expenses increased in 2001 primarily as a result of additional real estate activities. Investments and Other Segment costs and expenses increased in 2000 primarily as a result of changes in real estate related costs.

Depreciation and amortization

Investments and Other Segment depreciation and amortization increased $1.8 million in 2001 as a result of increased depreciation related to additional real estate activities. Segment depreciation and amortization decreased $1.1 million in 2000 as a result of a one-time charge in 1999 related to certain equipment leased to third parties.

Income from operations

Investments and Other Segment income from operations totaled $7.1 million, $5.2 million and $6.6 million in 2001, 2000 and 1999, respectively. The increase in 2001 income from operations is a result of higher real estate revenues. The decrease in 2000 income from operations is primarily related to decreased revenues from hardware leasing activities.

Liquidity and Capital Resources

The Company's cash flow from operating activities totaled $367.4 million, $333.8 million and $252.3 million in 2001, 2000 and 1999, respectively. Operating cash flows in 2001 were primarily impacted by net income of $228.2 million, the impact of depreciation and amortization of $159.4 million, deferred taxes of $11.6 million, decreases in accounts receivable of $27.1 million and net realized gains from investments and sale of PAS of $46.6 million. The Company utilized its 2001 operating cash flows, in addition to draws on its revolving credit facility, to reinvest capital in its existing business, fund the first installments of the EquiServe acquisition, fund investments and advances to unconsolidated affiliates and fund treasury stock purchases. The Company had $84.4 million of cash and cash equivalents at December 31, 2001.

During the fourth quarter 2000, the Company initiated a cash management service for 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. All invested balances are returned to the transfer agency client accounts the following business day.

Accounts receivable decreased in 2001 by approximately $27.1 million or 7.5% from 2000 primarily from intensified collection efforts. The Company collects from its clients and remits to the U.S. Postal Service a significant amount of postage. A significant number of contracts allow the Company to pre-bill and/or require deposits from its clients to mitigate the effect on cash flow.

The Company's research and development efforts are focused on introducing new products and services as well as on enhancing its existing products and services. The Company expended $183.4 million, $195.7 million and $172.4 million in 2001, 2000 and 1999, respectively, for software development and

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maintenance and enhancements to the Company's proprietary systems and software products of which $43.2 million, $43.6 million and $26.6 million was capitalized in 2001, 2000 and 1999, respectively.

The Company continues to make significant investments in capital equipment, software, systems and facilities. During the years ended December 31, 2001, 2000 and 1999, the Company expended approximately $194.0 million, $176.0 million and $139.0 million, respectively, in capital expenditures for equipment, software, systems and facilities which includes amounts directly paid by third-party lenders. Capitalized costs of software developed for internal use totaled $36.3 million, $33.8 million and $21.6 million in 2001, 2000 and 1999, respectively. Capitalized development costs for systems to be sold or licensed to third parties were $6.9 million, $9.8 million and $5.0 million for 2001, 2000 and 1999, respectively. Capital expenditures for 2001, 2000 and 1999 include $2.7 million, $1.2 million and $9.6 million for assets placed in service in 2000, 1999 and 1998, respectively. 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.

The Company had approximately $22.6 million, $14.3 million and $16.9 million of advances to unconsolidated affiliates during 2001, 2000 and 1999, respectively. In addition, the Company expended approximately $35.2 million and $4.9 million during 2001 and 2000, respectively, for acquisitions of subsidiaries, net of cash acquired.

The Company made $79.5 million, $75.5 million and $43.9 million in 2001, 2000 and 1999, respectively, of investments in available-for-sale securities and other investments. Proceeds of $57.8 million, $83.2 million and $24.8 million and gross realized gains of $21.1 million, $48.1 million and $12.4 million were recorded in 2001, 2000 and 1999, respectively, from the sale of available-for-sale securities. Gross realized losses of $2.2 million and $5.6 million were recorded in 2001 and 2000, respectively. There were no gross realized losses in 1999 on available-for-sale securities.

The total aggregate minimum purchase price for EquiServe was $186.7 million and is to be paid in four installments. The first installments of approximately $58.5 million were paid at the closings and were funded from borrowings under the Company's existing lines of credit. The second installments, scheduled for February 28, 2002, are estimated to be approximately $55.8 million. The remaining two minimum installments, which total approximately $72.4 million (discounted to $65.2 million for accounting purposes) at December 31, 2001, are payable on February 28, 2003 and February 28, 2004. These installments can increase pursuant to a formula that provides for additional consideration to be paid in cash if EquiServe's revenues as defined in the agreements for the years ending 2000, 2001, 2002 and 2003 exceed certain targeted levels. The minimum purchase price (discounted to $177.3 million for accounting purposes) has been allocated to the net assets acquired based upon their fair values as determined by a valuation. Goodwill will be increased by the amount of contingent consideration paid. This goodwill will not be subject to amortization per SFAS No. 142.

In December 2001, the Company entered into a $285 million (increased to $315 million in February 2002) unsecured revolving credit facility with a syndicate of U.S. and international banks. The $315 million facility is comprised of a $210 million three-year facility and a $105 million 364-day facility. Borrowings under the facility are available at rates based on the offshore (LIBOR), Federal Funds or prime rates. An annual facility fee of 0.1% to 0.125% is required on the total facility. An additional utilization fee of 0.125% is required if the aggregate principal amount outstanding plus letter of credit obligations exceeds 33% of the total facility. The revolving credit facility has a grid that adjusts borrowing costs up or down based upon applicable credit ratings. The Company has not obtained a credit rating and, accordingly, is not subject to the grid. In the event the Company obtains a credit rating, the grid would become operable and may result in fluctuations in borrowing costs. Among other provisions, the revolving credit facility limits consolidated indebtedness, subsidiary indebtedness, asset dispositions and requires certain coverage ratios to be maintained. In addition, the Company is limited, on an annual basis, to making dividends or repurchasing its capital stock in any fiscal year in

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an amount not to exceed 20% of consolidated net tangible assets. In the event of default, which includes, but is not limited to, a default in performance of covenants, default in payment of principal of loans or change of control, as defined, the syndicated lenders may elect to declare the principal and interest under the syndicated line of credit as due and payable and in certain situations automatically terminate the syndicated line of credit. In the event the Company experiences a material adverse change, as defined in the revolving credit facility, the lenders may not be required to make additional loans under the facility.

The $315 million revolving credit facility replaced the Company's previous $125 million five year revolving credit facility and $120 million 364-day revolving credit facility. At December 31, 2001, there was $113.1 million outstanding under the $315 million revolving credit facility. No borrowings were outstanding under the previous facilities at December 31, 2000.

One of the Company's subsidiaries maintains a 364-day $50 million line of credit for working capital requirements and general corporate purposes. The line of credit is scheduled to mature May 2002. The subsidiary plans to renew the facility. Borrowings under the facility are available at rates based on the Euro dollar, fed funds or LIBOR rates. Commitment fees of 0.1% to 0.2% per annum on the unused portions are payable quarterly. Among other provisions, the agreement requires the subsidiary to maintain unencumbered liquid assets and stockholder's equity of at least $300 million and to maintain certain interest coverage ratios. The subsidiary was in compliance with these provisions at December 31, 2001. In the event of non-compliance, an event of default may occur, which could result in the loan become immediately due and payable. At December 31, 2001 and 2000, there were $43.0 million and $50.0 million outstanding under the line of credit, respectively.

The Company's long-term debt increased $174.7 million in 2001 primarily as a result of common stock repurchases and the acquisition of EquiServe.

On September 26, 2000, the Company's Board of Directors approved a 2-for-1 split of the Company's common stock, in the form of a dividend of one share for each share held of record at the close of business on October 6, 2000. The distribution occurred on October 19, 2000. All references to shares outstanding and earnings per share amounts have been restated to reflect this stock split.

At December 31, 2001, the Company had 2.9 million shares remaining to be purchased under existing share repurchase programs. On February 26, 2002, the Company's Board of Directors extended the expiration of the above programs from September 30, 2002 to April 30, 2003. In addition, on February 26, 2002, the Board of Directors also authorized a new share repurchase program beginning March 4, 2002 and ending February 29, 2004 for up to six million shares. Shares repurchased under these programs will be utilized for the Company's stock award, employee stock purchase and stock option programs and general corporate purposes. The purchases may be made in private or market transactions and will be made in compliance with SEC regulations. The Company expended $250.3 million for approximately 6.8 million shares, $177.2 million for approximately 5.0 million shares and $52.2 million for approximately 1.7 million shares in 2001, 2000 and 1999, respectively, under these programs.

During the fourth quarter 1999, the first quarter 2000 and the third quarter 2001, the Company entered into forward stock purchase agreements for the repurchase of up to 11.5 million shares of its common stock as a means of securing potentially favorable prices for future purchases of its stock. During 2001, and included in the numbers set forth in the preceding paragraph, the Company purchased 5.4 million shares under these agreements for $182.8 million. As of December 31, 2001, the cost to settle a remaining forward purchase agreement, which expires in September 2002, would be approximately $42.3 million for approximately 1.0 million shares of common stock. The agreement allows the Company to elect net cash or net share settlement in lieu of physical settlement of the shares.

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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 bank and 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 longer term liquidity and capital requirements will also be met through cash provided by operating activities, the Company's $315 million revolving credit facility described above, as well as the Company's $1.3 billion of investments in available-for-sale securities at December 31, 2001. While the Company could meet operating cash and capital requirements through the sale of available-for-sale securities, the actual proceeds received could be materially less than the market value of the securities.

Internal use software

Effective January 1, 1999, the Company adopted, as required, Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Prior to the adoption of SOP 98-1, the Company expensed the costs of internally developed proprietary software as it was incurred. SOP 98-1, effective for fiscal periods beginning after December 15, 1998, required that certain costs for the development of internal use software be capitalized, including the costs of coding, software configuration, upgrades and enhancements. The Company capitalized $19.3 million, $28.5 million and $24.0 million of costs, net of related amortization, related to the development of internal use software for the years ended December 31, 2001, 2000 and 1999, respectively, including $0.3 million, $0.2 million and $2.4 million, respectively, of capitalized costs at an unconsolidated subsidiary. These costs will be amortized under the Company's current policy on a straight-line basis, depending on the nature of the project, generally over a three year period beginning on the date such software is complete.

Unconsolidated affiliates

The Company has formed operating joint ventures to enter into or expand its presence in target markets. In order to further penetrate the mutual fund market, in 1974 the Company formed BFDS, a 50% owned joint venture with State Street Bank, a leading mutual fund custodian. The Company's international mutual fund/unit trust shareowner processing businesses (IFDS U.K., IFDS Canada and IFDS Luxembourg) are also owned 50% by DST and 50% by State Street. In addition, in 1989 the Company gained access to the information processing market for the health insurance industry through Argus Health Systems, Inc., a 50% owned joint venture, which provides pharmacy claim processing for managed care providers. The Company also utilizes real estate joint ventures as a means of capturing potential appreciation and economic development tax incentives of leased properties. The largest of these real estate joint ventures was formed in 1988. The Company receives revenues for processing services and products provided to the operating joint ventures. The Company pays lease payments to certain real estate 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 Company's unconsolidated affiliates had a carrying value of $149.5 million and $121.5 million at December 31, 2001 and 2000, respectively. Advances to these unconsolidated affiliates were $43.3 million, $11.7 million and $18.0 million in 2001, 2000 and 1999, respectively. The Company recognized revenues from these unconsolidated affiliates of $147.4 million, $139.4 million and $104.9 million in 2001, 2000 and 1999, respectively. The Company paid these unconsolidated affiliates $21.7 million, $11.1 million and $7.5 million in 2001, 2000 and 1999, respectively, for products, services and leases. At December 31, 2001 and 2000, the Company's unconsolidated affiliates owed the

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Company $11.3 million and $13.5 million, respectively. The Company owed $3.2 million to unconsolidated affiliates at December 31, 2001. The amount owed in 2000 was immaterial. In 2001, the Company paid $14.6 million to BFDS as the first installment related to the EquiServe acquisition. At December 31, 2001, the Company owed $30.3 million to BFDS related to the EquiServe acquisition.

The Company has entered into an agreement to guarantee 100% of a $40 million revolving credit facility of a 50% owned real estate joint venture. The Company has entered into an agreement with the other 50% partner in the joint venture, whereby the Company can recover 50% of payments made pursuant to the guarantee on the revolving credit facility from the joint venture partner. The joint venture partner has also granted a security interest in its partnership interest in the joint venture as security for the partner's obligations under the agreement. At December 31, 2001, borrowings of $27.5 million were outstanding under this credit facility.

The Company has entered into an agreement to guarantee 50% of a $3.2 million construction loan of a 50% owned real estate joint venture.

The Company has entered into an agreement to guarantee 49% of a $2.2 million mortgage loan of a 50% owned real estate joint venture.

The Company and State Street have each guaranteed 50% of a lease obligation of IFDS U.K., which requires IFDS U.K. to make annual rent payments of approximately $2.8 million for the next 15 years for its use of a commercial office building. The commercial office building is owned by a wholly owned affiliate of IFDS Canada and was financed with a $19.5 million mortgage from a bank. The loan has a floating interest rate based upon LIBOR and fully amortizes over the 15 year term. To fix the rate of borrowing costs, the IFDS Canada affiliate entered into a 15 year interest rate hedge agreement with the same bank. The interest rate hedge, which has an initial notional amount value of approximately $19.5 million and scheduled reductions that coincide with the scheduled principal payments for the mortgage loan, was entered into for the purpose of fixing the borrowing costs of the mortgage at approximately 6.3%. The Company and State Street have each guaranteed 50% of the notional amounts of the interest rate hedge obligations.

The Company acquired a 6% interest in Wall Street Access in January 2001 for $7.0 million. The securities purchase agreement with Wall Street Access contains put/call provisions whereby the Company's interest in Wall Street Access may be increased to 20% for approximately $16.0 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 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 stock 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.

Seasonality

Generally, the Company does not have significant seasonal fluctuations in its business operations. Processing and output solutions volumes for mutual fund and corporate securities transfer processing 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

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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 $113.7 million, $205.7 million and $311.5 million in 2001, 2000 and 1999, respectively. Comprehensive income consists of net income of $228.2 million, $215.8 million and $138.1 million in 2001, 2000 and 1999, respectively, and other comprehensive losses of $114.5 million and $10.1 million in 2001 and 2000, respectively, and other comprehensive income of $173.4 million in 1999. Other comprehensive income (loss) consists of unrealized gains (losses) on available-for-sale securities, net of deferred taxes, reclassifications for net gains included in net income and foreign currency translation adjustments. The Company had a net unrealized loss on available-for-sale securities of $112.8 million and $6.7 million in 2001 and 2000, respectively, and net unrealized gains on available-for-sale securities of $174.1 million in 1999. The Company's net unrealized losses and gains on available-for-sale securities results primarily from changes in the market value of the Company's investments in approximately 12.8 million shares of State Street common stock, approximately 8.6 million shares of Computer Sciences Corporation common stock and approximately 2.2 million shares of Euronet Worldwide, Inc. At December 31, 2001, these three investments had an aggregate pre-tax unrealized gain of approximately $658.8 million. The amounts of foreign currency translation adjustments included in other comprehensive income are immaterial.

Derivative and Hedging Activities

SFAS 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. This statement, as amended, became effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). The implementation of the new standard has not had a material effect on the consolidated results of operations of the Company.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

In the operations of its businesses, the Company's financial results can be affected by changes in equity pricing, interest rates and currency exchange rates. Changes in interest rates and exchange rates have not materially impacted the consolidated financial position, results of operations or cash flows of the Company. Changes in equity values of the Company's investments have had a material effect on the Company's comprehensive income and financial position.

Available-for-sale equity price risk

The Company's investments in available-for-sale equity securities are subject to price risk. The fair value of the Company's available-for-sale investments as of December 31, 2001 was approximately $1.3 billion. The impact of a 10% change in fair value of these investments would be approximately $82 million to comprehensive income. As discussed under "Comprehensive Income" above, net unrealized gains and losses on the Company's investments in available-for-sale securities have had a material effect on the Company's comprehensive income (loss) and financial position.

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Interest rate risk

The Company derives a certain amount of its service revenues from investment earnings related to cash balances maintained in transfer agency customer bank accounts that the Company is agent to. The balances maintained in the bank accounts are subject to fluctuation. At December 31, 2001, there was approximately $1.4 billion of cash balances maintained in such accounts. The Company estimates that a 50 basis point change in interest earnings rate would be approximately $4.5 million of net income.

At December 31, 2001, the Company had $243.4 million of long-term debt, of which $158.1 million was subject to variable interest rates (Federal Funds rates, LIBOR rates, Prime rates). The Company estimates that a 10% increase in interest rates would not be material to the Company's consolidated pretax earnings or to the fair value of its debt.

Foreign currency exchange rate risk

The operation of the Company's subsidiaries in international markets results in exposure to movements in currency exchange rates. The principal currencies involved are the British pound, Canadian dollar and Australian dollar. As currency exchange rates change, translation of the financial results of international operations into U.S. dollars does not now materially affect, and has not historically materially affected, the consolidated financial results of the Company.

The Company's international subsidiaries use the local currency as the functional currency. The Company translates all assets and liabilities at year-end exchange rates and income and expense accounts at average rates during the year. While it is generally not the Company's practice to enter into derivative contracts, from time to time the Company and its subsidiaries do utilize forward foreign currency exchange contracts to minimize the impact of currency movements.

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Item 8. Financial Statements and Supplementary Data

Report of Management

To the Stockholders of DST Systems, Inc.

The accompanying consolidated financial statements of DST Systems, Inc. and its subsidiaries were prepared by management in conformity with accounting principles generally accepted in the United States of America. In preparing the financial statements, management has made judgments and estimates based on currently available information. Other financial information included in this annual report is consistent with that in the consolidated financial statements.

The Company maintains a system of internal accounting controls designed to provide reasonable assurance that its assets are safeguarded and that its financial records are reliable. Management monitors the system for compliance and the Company's internal auditors measure its effectiveness and recommend possible improvements thereto.

Independent accountants provide an objective assessment of the degree to which management meets its responsibility for fairness of financial reporting. They regularly evaluate the system of internal accounting controls and perform such tests and other procedures as they deem necessary to express an opinion on the fairness of the consolidated financial statements.

The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting controls through its Audit Committee which is composed solely of directors who are not officers or employees of the Company. This committee meets regularly with the independent accountants, management and internal auditors to discuss the scope and results of their work and their comments on the adequacy of internal accounting controls and the quality of external financial reporting.

Report of Independent Accountants

To the Stockholders and Board of Directors
of DST Systems, Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of DST Systems, Inc. and its subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

Kansas City, Missouri
February 26, 2002

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DST Systems, Inc.

Consolidated Balance Sheet

(dollars in millions, except per share amounts)

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

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DST Systems, Inc.

Consolidated Statement of Income

(in millions, except per share amounts)