SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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

For the quarterly period ended September 30, 2001

OR

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

For the transition period from                 to                 

Commission file number 000-13848

CONCORD EFS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	04-2462252
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification Number)

2525 Horizon Lake Drive, Suite 120, Memphis, Tennessee 38133
(Address of Principal Executive Offices)

(901) 371-8000
(Registrant’s Telephone Number, Including Area Code)

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    No 

The number of shares of the registrant’s Common Stock, $0.33 1/3 par value, outstanding as of October 31, 2001 was 503,743,150.

TABLE OF CONTENTS

Item 1. Financial Statements
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Income
	Condensed Consolidated Statements of Cash Flows
	Notes to Condensed Consolidated Financial Statements
Management’s Discussion & Analysis
Quantitative and Qualitative Disclosures About Market Risk
Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index

CONCORD EFS, INC. AND SUBSIDIARIES

Index

		Page Number
PART I — Financial Information
Item 1. Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000		1
	Condensed Consolidated Statements of Income for Three Months and Nine Months ended September 30, 2001 and September 30, 2000		2
	Condensed Consolidated Statements of Cash Flows for Nine Months ended September 30, 2001 and September 30, 2000		3
	Notes to Condensed Consolidated Financial Statements		4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk			19
PART II — Other Information
Item 1. Legal Proceedings			20
Item 6. Exhibits and Reports on Form 8-K			20
Signatures			21

CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)

		September 30,		December 31,
		2001		2000
		(in thousands)
ASSETS
CURRENT ASSETS
	Cash and cash equivalents	$	442,265	$	231,762
	Securities available for sale		1,114,124		649,425
	Accounts receivable, net		346,424		307,756
	Inventories		19,779		15,087
	Prepaid expenses and other current assets		34,036		22,125
	Deferred income taxes		2,876		6,732
TOTAL CURRENT ASSETS			1,959,504		1,232,887
Loans, net			95,117		78,654
Property and equipment, net			229,972		214,662
Goodwill, net			161,433		150,049
Other intangible assets, net			83,540		75,644
Other assets			13,869		9,769
TOTAL ASSETS		$	2,543,435	$	1,761,665
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
	Accounts payable and other liabilities	$	364,539	$	296,980
	Deposits		164,864		125,834
	Accrued liabilities		39,924		48,307
	Accrued restructuring charges		38,417		3,410
	Income taxes payable		64,153		—
	Current maturities of long-term debt		—		3,357
TOTAL CURRENT LIABILITIES			671,897		477,888
Long-term debt			119,483		109,911
Deferred income taxes			17,020		31,871
Other liabilities			4,616		6,412
TOTAL LIABILITIES			813,016		626,082
Commitments and contingent liabilities			—		—
Minority interest in subsidiary			3,195		3,052
STOCKHOLDERS’ EQUITY
	Common stock		167,913		80,485
	Other stockholders’ equity		1,559,311		1,052,046
TOTAL STOCKHOLDERS’ EQUITY			1,727,224		1,132,531
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	2,543,435	$	1,761,665

See Notes to Condensed Consolidated Financial Statements.

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CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

		Three months ended						Nine months ended
		September 30,						September 30,
		2001			2000			2001			2000
		(in thousands, except per share data)
Revenue		$	437,074		$	363,908		$	1,233,398		$	1,005,673
Cost of operations			304,414			259,315			874,301			722,601
Selling, general and administrative expenses			22,348			23,633			68,874			69,515
Acquisition and restructuring charges			—			10,915			125,362			11,691
OPERATING INCOME			110,312			70,045			164,861			201,866
Other income (expense)
Interest income			19,702			12,866			50,424			33,866
Interest expense			(3,510	)		(2,918	)		(9,890	)		(7,931	)
INCOME BEFORE TAXES AND MINORITY INTEREST			126,504			79,993			205,395			227,801
Income taxes			44,910			29,586			78,438			83,296
INCOME BEFORE MINORITY INTEREST			81,594			50,407			126,957			144,505
Minority interest in net income of subsidiary			138			161			311			465
NET INCOME		$	81,456		$	50,246		$	126,646		$	144,040
Pro forma provision for income taxes			—			—			—			260
PRO FORMA NET INCOME		$	81,456		$	50,246		$	126,646		$	143,780
PER SHARE DATA:
	Basic and pro forma basic earnings per share	$	0.16		$	0.11		$	0.26		$	0.30
	Diluted and pro forma diluted earnings per share	$	0.16		$	0.10		$	0.25		$	0.29
AVERAGE SHARES OUTSTANDING:
	Basic shares		503,193			478,218			491,102			477,685
	Diluted shares		524,510			497,956			512,319			493,364

See Notes to Condensed Consolidated Financial Statements.

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CONCORD EFS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine months ended
		September 30,
		2001			2000
		(in thousands)
OPERATING ACTIVITIES
NET CASH PROVIDED BY OPERATING ACTIVITIES		$	317,020		$	229,058
INVESTING ACTIVITIES
	Acquisition of securities available for sale		(948,255	)		(182,531	)
	Proceeds from sales of securities available for sale		374,553			39,209
	Proceeds from maturity of securities available for sale		127,391			20,528
	Purchases of loans		(30,915	)		(53,657	)
	Acquisition of property and equipment		(82,881	)		(59,830	)
	Purchased merchant contracts		(22,581	)		(25,471	)
	Business acquisition		(19,700	)		—
	Other investing activity		7,952			10,003
NET CASH USED IN INVESTING ACTIVITIES			(594,436	)		(251,749	)
FINANCING ACTIVITIES
	Net increase in deposits		39,030			18,940
	Proceeds from notes payable		21,000			24,000
	Payments on notes payable		(14,444	)		(21,487	)
	Proceeds from offering of common stock		421,930			—
	Proceeds from exercise of stock options		21,620			7,326
	Payments on leases payable		(1,217	)		(2,392	)
	Activity by pooled subsidiaries		—			(2,901	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			487,919			23,486
NET INCREASE IN CASH AND CASH EQUIVALENTS			210,503			795
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			231,762			173,099
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	442,265		$	173,894

See Notes to Condensed Consolidated Financial Statements.

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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in Amendment No. 1 to the Concord EFS, Inc. and Subsidiaries (Concord) current report on Form 8-K filed April 16, 2001 for the year ended December 31, 2000.

Nature of Operations: Concord is a vertically integrated electronic transaction processor. Concord acquires, routes, authorizes, captures and settles virtually all types of electronic payment and deposit access transactions for financial institutions and merchants nationwide. Concord’s primary activities consist of Network Services, which provides automated teller machine (ATM) processing, debit card processing, deposit risk management and coast-to-coast debit network access principally for financial institutions, and Payment Services, which provides payment processing for supermarkets, major retailers, petroleum dealers, convenience stores, trucking companies and independent retailers.

Principles of Consolidation: The condensed consolidated financial statements include the accounts of Concord and its subsidiaries after elimination of all material intercompany balances and transactions.

Business Combinations: The condensed consolidated financial statements have been restated for all transactions accounted for as poolings-of-interests to combine the financial position, results of operations and cash flows of the respective companies for all periods presented. Transactions accounted for under the purchase method of accounting reflect the net assets of the acquired company at fair value on the date of acquisition, and the excess of the purchase price over fair value of the assets is recorded as goodwill. The results of operations of the purchased company are included since the date of acquisition.

Reclassification: Certain 2000 amounts have been reclassified to conform to the 2001 presentation.

Recent Pronouncements: In June 2001 the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. Furthermore, pooling-of-interests accounting will be prohibited for business combinations initiated subsequent to June 30, 2001.

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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note A – Basis of Presentation, continued

Concord will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. The effect of the application of the non-amortization provisions of the Statement will be reviewed during the remainder of the year. During 2002, Concord will perform the first of the required impairment tests of goodwill as of January 1, 2002. Concord has not yet determined what the effect of these tests will be on its earnings and financial position.

Note B – Business Combinations

On February 1, 2001 Concord acquired Star Systems, Inc. (STAR_SM), a debit network. The acquisition was accounted for as a pooling-of-interests transaction in which Concord issued approximately 48.0 million shares of its common stock.

On August 21, 2000 Concord acquired Cash Station, Inc. (Cash Station^®), a debit network. The acquisition was accounted for as a pooling-of-interests transaction in which Concord issued approximately 5.0 million shares of its common stock.

On January 31, 2000 Concord acquired National Payment Systems Inc. d/b/a Card Payment Systems, a reseller of payment processing services. The acquisition was accounted for as a pooling-of-interests transaction in which Concord issued approximately 12.5 million shares of its common stock.

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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note B – Business Combinations, continued

The following table presents selected financial information split among Concord, Card Payment Systems, Cash Station and STAR:

		Three months ended					Nine months ended
		September 30,					September 30,
		2001		2000			2001			2000
		(in thousands, except per share data)
Revenue:
	Concord	$	437,074	$	318,700		$	1,218,526		$	862,543
	Card Payment Systems (1)		—		—			—			4,047
	Cash Station (2)		—		—			—			9,495
	STAR (3)		—		47,066			15,396			134,856
	Intercompany eliminations (4)		—		(1,858	)		(524	)		(5,268	)
	Combined revenue	$	437,074	$	363,908		$	1,233,398		$	1,005,673
Pro forma net income:
	Concord	$	81,456	$	44,053		$	123,718		$	126,979
	Card Payment Systems (1)		—		—			—			650
	Cash Station (2)		—		—			—			816
	STAR (3)		—		6,193			2,928			15,595
	Pro forma provision for Card Payment Systems income taxes (5)		—		—			—			(260	)
	Combined pro forma net income	$	81,456	$	50,246		$	126,646		$	143,780
Pro forma basic earnings per share combined		$	0.16	$	0.11		$	0.26		$	0.30
Pro forma diluted earnings per share combined		$	0.16	$	0.10		$	0.25		$	0.29

(1)	The 2000 amounts reflect the results of Card Payment Systems operations from January 1, 2000 through January 31, 2000. Results of operations from February 1, 2000 are included in Concord amounts.
(2)	The 2000 amounts reflect the results of Cash Station operations from January 1, 2000 through June 30, 2000. Results of operations from July 1, 2000 are included in Concord amounts.
(3)	The three months ended September 30, 2000 amounts reflect the results of STAR operations from July 1, 2000 through September 30, 2000. The nine months ended September 30, 2000 amounts reflect the results of STAR operations from January 1, 2000 through September 30, 2000. The 2001 amounts reflect the results of STAR operations from January 1, 2001 through January 31, 2001. Results of operations from February 1, 2001 are included in Concord amounts.

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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note B – Business Combinations, continued

(4)	All material activity between Concord and STAR has been eliminated.
(5)	The results of operations include pro forma income taxes that would have been required if Card Payment Systems had been a taxable corporation. The former owners of Card Payment Systems were responsible for income taxes for the periods prior to the merger.

Concord owns a majority interest in Primary Payment Systems, Inc., a deposit risk management company. In April 2001 Concord increased its ownership position in Primary Payment Systems to 85% through the purchase of newly issued shares, which largely funded Primary Payment Systems’ acquisition of Wally Industries, Inc. d/b/a WJM Technologies. Primary Payment Systems is immaterial to Concord’s financial statements.

On February 7, 2000 Concord acquired Virtual Cyber Systems, Inc., an Internet software development company. The acquisition of Virtual Cyber Systems, for which Concord paid approximately $2.0 million, was accounted for as a purchase transaction and was immaterial to Concord’s financial statements.

Acquisition and restructuring charges were $125.4 million ($86.4 million, net of taxes) for the three months ended March 31, 2001. The expenses and charges were a result of a company-wide consolidation plan to address areas of operating redundancies created by recent acquisitions. The plan includes consolidation of data centers and other facilities to eliminate redundancies, the reassignment or termination of certain employees timed to coincide with the integration of redundant processing platforms and the functional integration of the STAR organization into Concord. The charges included $63.9 million for combining various processing platforms, $16.0 million for the consolidation of duplicate products and internal systems, $15.6 million for accounting, legal and advisory fees, $19.1 million for the termination of certain data center services contracts, $9.8 million for compensation and severance costs and $1.0 million for other expenses. In connection with the consolidation plan, Concord expects to eliminate approximately 250 positions, 200 of which were eliminated as of September 30, 2001. Compensation and severance costs paid and charged against the restructuring charge accrual were $5.7 million through September 30, 2001. As of September 30, 2001, $38.4 million of the acquisition and restructuring expenses were accrued but unpaid.

As of September 30, 2001, there was no remaining balance related to the 2000 Cash Station restructuring charge accrual.

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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note B – Business Combinations, continued

The following table presents a summary of activity in the 2001 restructuring charge accrual, in thousands:

Balance, December 31, 2000	$	—
Acquisition and restructuring charges		125,362
Cash outlays		67,029
Non-cash writedowns and charges		19,916
Balance, September 30, 2001	$	38,417

The following table presents a summary of the components of the 2001 restructuring charge accrual, in thousands:

Office closings and operational de-conversions	$	25,305
Contract terminations		7,905
Compensation and severance		4,050
Other		1,157
Balance, September 30, 2001	$	38,417

Note C – Stock Split

The Board of Directors approved a two-for-one stock split on August 30, 2001. Shareholders of record as of September 14, 2001 were distributed additional shares on September 28, 2001. All share data, earnings per share and per share data have been restated to reflect the stock split.

Note D – Offering of Common Stock

In June 2001, Concord issued and sold 17,758,000 shares of its common stock pursuant to a registration statement filed with the Securities and Exchange Commission. Pursuant to the same registration statement, the selling stockholders named in the registration statement sold 34,063,698 shares of Concord common stock. Most of the selling stockholders were the previous owners of STAR who received unregistered common stock of Concord in connection with the February 1, 2001 acquisition. Net of the underwriting discount of the offering, Concord received $421.9 million for the common stock it issued and sold. Concord did not receive any proceeds from the sale of shares by the selling stockholders.

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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note E – Comprehensive Income

Total comprehensive income was $84.4 million and $53.4 million for the three months ended September 30, 2001 and 2000, respectively. Total comprehensive income was $135.9 million and $148.8 million for the nine months ended September 30, 2001 and 2000, respectively. Comprehensive income includes net income and the change in the unrealized gain or loss on securities available for sale arising during the period.

Note F – Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share:

		Three months ended				Nine months ended
		September 30,				September 30,
		2001		2000		2001		2000
		(in thousands, except per share data)
Numerator:
	Net income	$	81,456	$	50,246	$	126,646	$	144,040
Denominator:
	Denominator for basic earnings per share, weighted-average shares		503,193		478,218		491,102		477,685
	Effect of dilutive employee stock options		21,317		19,738		21,217		15,679
	Denominator for diluted earnings per share, adjusted weighted-average shares and assumed conversions		524,510		497,956		512,319		493,364
Basic earnings per share		$	0.16	$	0.11	$	0.26	$	0.30
Diluted earnings per share		$	0.16	$	0.10	$	0.25	$	0.29

Excluding acquisition costs and restructuring charges and related taxes, diluted earnings per share for the nine months ended September 30, 2001 and 2000 were $0.42 and $0.31, respectively. Earnings per share and related per share data have been restated to reflect all stock splits.

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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note G – Operations by Business Segment

Concord has two reportable segments: Network Services and Payment Services.

Concord’s revenue from Network Services consists of processing fees for driving and monitoring ATMs, processing fees for managing debit card records, access and switching fees for network access and fees and other surcharges charged for proprietary ATMs.

Payment Services revenue results from processing payment transactions made by credit cards (such as VISA, MasterCard, Discover, American Express and Diners Club) and debit cards (such as STAR, Pulse and NYCE). Payment Services also includes providing payment cards that enable drivers of trucking companies to purchase fuel and obtain cash advances at truck stops.

Industry segment information for the three months and nine months ended September 30, 2001 and 2000 is presented below, in thousands.

	Three months ended September 30, 2001
	Network		Payment
	Services		Services		Other			Total
Revenue	$	165,188	$	271,886	$	—		$	437,074
Cost of operations		84,239		220,175		—			304,414
Selling, general and administrative expenses		—		—		22,348			22,348
Acquisition and restructuring charges		—		—		—			—
Taxes and interest, net		—		—		28,718			28,718
Minority interest in subsidiary		—		—		138			138
Net income (loss)	$	80,949	$	51,711	$	(51,204	)	$	81,456

	Three months ended September 30, 2000
	Network		Payment
	Services		Services		Other			Total
Revenue	$	130,717	$	233,191	$	—		$	363,908
Cost of operations		72,594		186,721		—			259,315
Selling, general and administrative expenses		—		—		23,633			23,633
Acquisition and restructuring charges		10,915		—		—			10,915
Taxes and interest, net		—		—		19,638			19,638
Minority interest in subsidiary		—		—		161			161
Net income (loss)	$	47,208	$	46,470	$	(43,432	)	$	50,246

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CONCORD EFS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note G – Operations by Business Segment, continued

	Nine months ended September 30, 2001
	Network		Payment
	Services		Services		Other			Total
Revenue	$	469,795	$	763,603	$	—		$	1,233,398
Cost of operations		254,288		620,013		—			874,301
Selling, general and administrative expenses		—		—		68,874			68,874
Acquisition and restructuring charges		103,575		21,787		—			125,362
Taxes and interest, net		—		—		37,904			37,904
Minority interest in subsidiary		—		—		311			311
Net income (loss)	$	111,932	$	121,803	$	(107,089	)	$	126,646

	Nine months ended September 30, 2000
	Network		Payment
	Services		Services		Other			Total
Revenue	$	366,700	$	638,973	$	—		$	1,005,673
Cost of operations		213,794		508,807		—			722,601
Selling, general and administrative expenses		—		—		69,515			69,515
Acquisition and restructuring charges		10,915		776		—			11,691
Taxes and interest, net		—		—		57,361			57,361
Minority interest in subsidiary		—		—		465			465
Net income (loss)	$	141,991	$	129,390	$	(127,341	)	$	144,040

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CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our condensed consolidated financial statements and the notes to those financial statements, which are included in this report. This report contains forward-looking statements made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and other factors, including those set forth in this paragraph. Important factors that could cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by those statements include, but are not limited to: (i) the failure to successfully execute our corporate consolidation plan, (ii) the loss of key personnel or inability to attract additional qualified personnel, (iii) the loss of key customers, (iv) increasing competition, (v) changes in card association rules and practices, (vi) the inability to remain current with rapid technological change, (vii) risks related to acquisitions, (viii) the imposition of additional state taxes, (ix) continued consolidation in the banking and retail industries, (x) business cycles and the credit risk of our merchant customers, (xi) the outcome of litigation involving VISA and MasterCard, (xii) utility and system interruptions or processing errors, (xiii) susceptibility to fraud at the merchant level, (xiv) changes in card association fees, products or practices, (xv) restrictions on surcharging, (xvi) changes in rules and regulations governing financial institutions and (xvii) volatility of the price of our common stock. We undertake no obligation to publicly update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events or changes to future results over time. See the cautionary statements included as Exhibit 99.1 to our current report on Form 8-K filed on July 18, 2001 for a more detailed discussion of the foregoing and other factors.

Overview

Concord EFS, Inc. (Concord) is a leading, vertically integrated electronic transaction processor. We acquire, route, authorize, capture and settle virtually all types of electronic payment and deposit access transactions for financial institutions and merchants nationwide. Our primary activities consist of Network Services, which provides automatic teller machine (ATM) processing, debit card processing, deposit risk management and coast-to-coast debit network access principally for financial institutions, and Payment Services, which provides payment processing for supermarkets, major retailers, petroleum dealers, convenience stores, trucking companies and independent retailers.

Network Services includes terminal driving and monitoring for ATMs, transaction routing and authorization via the combined STAR_SM MAC_® and Cash Station^® debit network as well as other debit networks, deposit risk management and real-time card management and authorization for personal identification number (PIN)-secured debit and signature debit cards. In addition, we operate the network switch that connects a coast-to-coast network of ATMs and point-of-sale (POS) locations that accept debit cards issued by our member financial institutions. Our network access services include transaction switching and settlement.

We recently expanded our debit network in our Network Services area through two acquisitions. On February 1, 2001 we completed our acquisition of Star Systems, Inc. (STAR), the nation’s largest PIN-secured debit network, based in Maitland, Florida. The merger was accounted for as a pooling-of-interests transaction in which we exchanged approximately 48.0 million shares of our common stock for

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CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview, continued

all of STAR’s outstanding common stock. On August 21, 2000 we completed our acquisition of Cash Station, Inc. (Cash Station), a leading Midwest PIN-secured debit network based in Chicago, Illinois. This acquisition was accounted for as a pooling-of-interests transaction in which we exchanged approximately 5.0 million shares of our stock for all of the outstanding common stock of Cash Station.

Payment Services provides the systems and processing that allow retail clients to accept virtually any type of electronic payment, including all card types — credit, debit, electronic benefits transfer (EBT), prepaid and proprietary cards – as well as a variety of check-based options. We focus on providing payment processing services to selected segments, with specialized systems designed for supermarkets, gas stations, convenience stores and restaurants. Payment Services also includes providing payment cards that enable drivers of trucking companies to purchase fuel and obtain cash advances at truck stops. Our services are completely turn-key, providing merchants with POS terminal equipment, transaction routing and authorization, settlement, funds movement and sponsorship into all credit card associations (such as VISA and MasterCard) and debit networks (such as STAR, Pulse and NYCE).

Early in 2000 we completed two acquisitions in the Payment Services area. On February 7, 2000 we completed our acquisition of Virtual Cyber Systems, Inc., an Internet software development company. This acquisition, for which we paid approximately $2.0 million, was accounted for as a purchase transaction and was immaterial to our financial statements. On January 31, 2000 we completed our acquisition of National Payment Systems Inc. d/b/a/ Card Payment Systems, a New York-based reseller of payment processing services. Card Payment Systems provides card-based payment processing services to independent sales organizations, which in turn sell those services to merchants. The acquisition was accounted for as a pooling-of-interests transaction in which we exchanged approximately 12.5 million shares of our stock for all the outstanding shares of Card Payment Systems’ common stock.

Restatement of Historical Financial Information

The financial information for prior periods presented below and elsewhere in this report has been restated for the results of STAR, Cash Station and Card Payment Systems in accordance with the pooling-of-interests method of accounting for business combinations. The financial information includes the financial position, operating results and cash flows for all periods presented.

Components of Revenue and Expenses

Network Services and Payment Services are our two reportable business segments. These business units are managed separately because they offer distinct products for different end users. All of our revenue is generated in the United States, and no single customer of Concord accounts for a material portion of our revenue. Over 75% percent of our total revenue is tied to contracts with terms of between three and five years.

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CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Components of Revenue and Expenses, continued

A principal component of our revenue is derived from Network Services (37.8% and 35.9% for the three months ended September 30, 2001 and 2000 and 38.1% and 36.5% for the nine months ended September 30, 2001 and 2000). Network Services revenue consists of processing fees for driving and monitoring ATMs, processing fees for managing debit card records and access and switching fees for network access. We recognize this revenue at the time of the transaction.

The majority of our revenue (62.2% and 64.1% for the three months ended September 30, 2001 and 2000 and 61.9% and 63.5% for the nine months ended September 30, 2001 and 2000) is generated from fee income related to Payment Services. Revenue from Payment Services primarily includes discount fees charged to merchants, which are a percentage of the dollar amount of each credit card transaction we process, as well as a flat fee per transaction. The discount fee is negotiated with each merchant and typically constitutes a bundled rate for the transaction authorization, processing, settlement and funds transfer services we provide. The balance of Payment Services revenue is derived from transaction fees for processing debit card and EBT card transactions, check verification and authorization services and sales of POS terminals. We recognize this revenue at the time of the transaction.

The following table is a listing of revenue by segment for the periods indicated:

	Three months				Nine months
	ended September 30,				ended September 30,
	2001		2000		2001		2000
	(in millions)				(in millions)
Network Services	$	165.2	$	130.7	$	469.8	$	366.7
Payment Services		271.9		233.2		763.6		639.0
Total	$	437.1	$	363.9	$	1,233.4	$	1,005.7

Cost of operations includes all costs directly attributable to providing services to our customers. The most significant component of cost of operations is interchange and assessment fees, which are amounts charged by the credit and debit networks. Interchange and assessment fees are billed primarily as a percentage of dollar volume processed and, to a lesser extent, as a transaction fee. Cost of operations also includes telecommunications costs, personnel costs, occupancy costs, depreciation, the cost of equipment leased and sold, the cost of operating our debit network and other miscellaneous merchant supplies and services expenses. We strive to maintain a highly efficient operational structure, which includes volume purchasing arrangements with equipment and communications vendors and direct membership by our subsidiary, EFS National Bank, in bank card associations and major debit networks.

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CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Components of Revenue and Expenses, continued

The following table lists cost of operations by segment for the periods indicated:

	Three months				Nine months
	ended September 30,				ended September 30,
	2001		2000		2001		2000
	(in millions)				(in millions)
Network Services	$	84.2	$	72.6	$	254.3	$	213.8
Payment Services		220.2		186.7		620.0		508.8
Total	$	304.4	$	259.3	$	874.3	$	722.6

Our selling, general and administrative expenses include certain salaries and wages and other general administrative expenses. These costs are not allocated to the reportable segments.

Results of Operations

The following table shows, for the periods indicated, the percentage of revenue represented by certain items on our consolidated statements of income:

	Three months ended						Nine months ended
	September 30,						September 30,
	2001			2000			2001			2000
Revenue		100.0	%		100.0	%		100.0	%		100.0	%
Cost of operations		69.7			71.3			70.9			71.9
Selling, general and administrative expenses		5.1			6.5			5.6			6.9
Acquisition and restructuring charges		—			3.0			10.1			1.2
Operating income		25.2			19.2			13.4			20.0
Interest income, net		3.7			2.7			3.3			2.6
Income before taxes		28.9			21.9			16.7			22.6
Income taxes		10.3			8.1			6.4			8.3
Net income		18.6	%		13.8	%		10.3	%		14.3	%

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CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Third Quarter 2001 Compared to 2000

Revenue in the third quarter 2001 increased 20.1% to $437.1 million from $363.9 million in 2000. In the third quarter 2001 Network Services accounted for 37.8% of revenue, and Payment Services accounted for 62.2%. Network Services revenue in the third quarter 2001 increased 26.4% compared to 2000 as a result of the addition of new network and processing customers and increases in transaction volumes. The increased transaction volumes resulted primarily from increased use of our network debit cards for payment at the point of sale. Revenue from Payment Services in the third quarter 2001 increased 16.6% compared to 2000, due primarily to increased transaction volumes. The increased volumes resulted from the addition of new merchants and the widening acceptance of debit and EBT card transactions at new and existing merchants.

Cost of operations decreased in the third quarter 2001 to 69.7% of revenue compared to 71.3% in 2000. This decrease was due primarily to a decrease, as a percentage of revenue, in certain operating costs such as telecommunications, payroll expenses and depreciation and amortization expenses.

In the third quarter 2001 selling, general and administrative expenses decreased, as a percentage of revenue, to 5.1% from 6.5% in 2000. Overall, selling, general and administrative expenses decreased to $22.3 million in the third quarter 2001 from $23.6 million in 2000. This decrease is primarily attributable to less direct marketing expense and reduced headcount.

There were no acquisition and restructuring charges in the third quarter 2001 compared to $10.9 million in 2000 related to the acquisition of Cash Station.

Excluding acquisition and restructuring charges, operating income as a percentage of revenue increased to 25.2% in the third quarter 2001 from 22.3% in 2000. This increase in operating income resulted from our company-wide consolidation activities and continuing focus on cost control.

Net interest income improved as a percentage of revenue to 3.7% in the third quarter 2001 compared to 2.7% in 2000. The improvement was the result of returns we received from investing available cash, which increased the third quarter interest income by 53.1% over 2000.

Our overall tax rate decreased to 35.5% in the third quarter 2001 compared to 37.0% in 2000. Excluding acquisition and restructuring charges, the tax rate was 36.3% in 2000.

Net income, as a percentage of revenue, increased to 18.6% in the third quarter 2001 from 13.8% in 2000. Excluding acquisition and restructuring charges, net income as a percentage of revenue was 15.9% in 2000. This increase is the result of improved margins, reduced selling, general and administrative expenses and increased interest income.

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CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Nine Months Ended September 30, 2001 Compared to 2000

Revenue in the nine months ended September 30, 2001 increased 22.6% to $1,233.4 million from $1,005.7 million in 2000. In the nine months ended September 30, 2001 Network Services accounted for 38.1% of revenue, and Payment Services accounted for 61.9%. Network Services revenue in the nine months ended September 30, 2001 increased 28.1% compared to 2000 as a result of the addition of new network and processing customers and increases in transaction volumes. The increased transaction volumes resulted primarily from increased use of our network debit cards for payment at the point of sale. Revenue from Payment Services in the nine months ended September 30, 2001 increased 19.5% compared to 2000, due primarily to increased transaction volumes. The increased volumes resulted from the addition of new merchants and the widening acceptance of debit and EBT card transactions at new and existing merchants.

Cost of operations in the nine months ended September 30, 2001 decreased to 70.9% of revenue compared to 71.9% in 2000. This decrease was due primarily to a decrease, as a percentage of revenue, in certain operating costs such as telecommunications, payroll expenses and depreciation and amortization expenses.

In the nine months ended September 30, 2001 selling, general and administrative expenses decreased, as a percentage of revenue, to 5.6% from 6.9% in 2000. Overall, selling, general and administrative expenses decreased to $68.9 million in the nine months ended September 30, 2001 from $69.5 million in 2000. This decrease is primarily attributable to less direct marketing expense and reduced headcount.

Acquisition and restructuring charges in the nine months ended September 30, 2001 were $125.4 million compared to $11.7 million in 2000. In the first quarter of 2001, we initiated a company-wide consolidation plan to address areas of operating redundancies created by our recent acquisitions. The plan includes consolidation of data centers and other facilities to eliminate redundancies, the reassignment or termination of certain employees timed to coincide with the integration of redundant processing platforms and the functional integration of the STAR organization into Concord. During the next six months we intend to take steps to capture synergies within our network operations and align our resources across the enterprise for greater efficiency and improved service delivery. During the first quarter of 2001, we incurred a charge of $125.4 million ($86.4 million, net of taxes) related to our consolidation plan, including costs incurred in combining operating platforms and facilities, communications conversion costs, asset write-offs, severance and compensation costs, as well as investment banking fees and advisory, legal and accounting fees incurred in the acquisition of STAR.

We accrued charges of $63.9 million for combining various STAR processing platforms and facilities that will be closed and consolidated. We also accrued $16.0 million for duplicate products and systems such as abandoned products and internal systems that do not support our new network strategy. Various data center services contracts were terminated as part of the overall restructuring, for which we accrued $19.1 million. The consolidation of products, services, processing platforms and facilities created personnel duplications. As a result, we accrued compensation and severance costs of $9.8 million to diminish redundancies and consolidate operational groups. In addition to these charges, we also incurred other expenses of $1.0 million and legal, accounting and advisory fees totaling $15.6 million in connection with the STAR merger.

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CONCORD EFS, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Nine Months Ended September 30, 2001 Compared to 2000, continued

In the nine months ended September 30, 2001, $86.9 million of expenses were charged against the restructuring accrual. These expenses were primarily related to combining processing platforms and facilities, duplicate products and systems, legal, accounting and advisory fees and data center services contract terminations.

Excluding acquisition and restructuring charges, operating income as a percentage of revenue increased in the nine months ended September 30, 2001 to 23.5% from 21.2% in 2000. This increase in operating income resulted from our company-wide consolidation activities and continuing focus on cost control.

Net interest income improved as a percentage of revenue to 3.3% in the nine months ended September 30, 2001 compared to 2.6% in 2000. The improvement was the result of returns we received from investing available cash, which increased interest income in the nine months ended September 30, 2001 by 48.9% compared to 2000.

Our overall tax rate increased to 38.2% in the nine months ended September 30, 2001 compared to 36.6% in 2000. Excluding acquisition and restructuring charges, the tax rate was 35.5% in the nine months ended September 30, 2001 compared to 36.2% in 2000.

Net income, as a percentage of revenue, decreased to 10.3% in the nine months ended September 30, 2001 from 14.3% in 2000, due primarily to the acquisition and restructuring charges. Excluding these charges and related tax items, net income, as a percentage of revenue, increased to 17.3% for the nine months ended September 30, 2001 compared to 15.1% in 2000. This increase is the result of improved margins, reduced selling, general and administrative expenses and increased interest income.

Liquidity and Capital Resources

In the nine months ended September 30, 2001, we generated $317.0 million from operating activities. We also received $421.9 million from our stock offering, $21.0 million in proceeds from Federal Home Loan Bank advances, and $21.6 million from stock issued for exercises of options under our stock option plan. From cash provided by operating and financing activities, we invested $446.3 million in securities, net of sales and maturities. We also spent $82.9 million on capital additions, $19.7 million for a business acquisition and $22.6 million to purchase merchant contracts. Additionally, we reduced debt by $14.4 million. Our capital additions were primarily for communications equipment, POS terminals, new computer equipment and capitalized software.

Our assets are primarily monetary, consisting of cash, assets convertible into cash, securities owned and receivables. Because of their liquidity, these assets are not significantly affected by inflation. We believe that anticipated replacement costs of equipment, furniture and leasehold improvements will not materially affect operations. However, the rate of inflation affects our expenses, such as those for employee compensation and telecommunications, which may not be readily recoverable in the price of services offered by us.

We believe that our available credit and cash generated from operations are adequate to meet our capital and operating needs. EFS National Bank and EFS Federal Savings Bank, our wholly owned financial institution subsidiaries, exceed required regulatory capital ratios.

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CONCORD EFS, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk

Since December 31, 2000, there have been no changes with regard to market risk that would require further quantitative or qualitative disclosure. For our quantitative and qualitative disclosures about market risk for the fiscal year ending December 31, 2000, refer to Exhibit 99.3 to Amendment No. 1 to our current report on Form 8-K, filed April 16, 2001.

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CONCORD EFS, INC. AND SUBSIDIARIES

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Pending proceedings and developments that may be considered material were reported in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001 and June 30, 2001, filed with the Securities and Exchange Commission on May 15, 2001 and August 7, 2001, respectively. We are also a party to various routine lawsuits arising out of the conduct of our business, none of which is expected to have a material adverse effect upon our financial condition or results of operations.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit
Number	Description of Exhibit
2.1	Agreement and Plan of Merger, dated as of October 6, 2000, among Concord EFS, Inc., Orion Acquisition Corp. and Star Systems, Inc. is incorporated herein by reference to Exhibit 10 to Concord’s quarterly report on Form 10-Q (File No. 000-13848), filed on November 14, 2000.
3.1	Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 4.4 to Amendment No. 1 to Concord’s registration statement on Form S-3 (File No. 333-61084), filed on June 4, 2001.
3.2	Amended and Restated Bylaws of Concord EFS, Inc. are incorporated herein by reference to Exhibit 4.2 to Concord’s registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999.

(b) Reports on Form 8-K

None

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CONCORD EFS, INC.
Date: November 9, 2001	By:	/s/ Dan M. Palmer Dan M. Palmer Chairman of the Board and Chief Executive Officer
Date: November 9, 2001	By:	/s/ Edward T. Haslam Edward T. Haslam Senior Vice President, Chief Financial Officer and Treasurer

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CONCORD EFS, INC. AND SUBSIDIARIES
FORM 10-Q LISTING OF EXHIBITS

Exhibit
Number	Description of Exhibit
2.1	Agreement and Plan of Merger, dated as of October 6, 2000, among Concord EFS, Inc., Orion Acquisition Corp. and Star Systems, Inc. is incorporated herein by reference to Exhibit 10 to Concord’s quarterly report on Form 10-Q (File No. 000-13848), filed on November 14, 2000.
3.1	Restated Certificate of Incorporation of Concord EFS, Inc. is incorporated herein by reference to Exhibit 4.4 to Amendment No. 1 to Concord’s registration statement on Form S-3 (File No. 333-61084), filed on June 4, 2001.
3.2	Amended and Restated Bylaws of Concord EFS, Inc. are incorporated herein by reference to Exhibit 4.2 to Concord’s registration statement on Form S-8 (File No. 333-74215), filed on March 10, 1999.