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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark One)

[X]     Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2003 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 1-5964

IKON OFFICE SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:    (610) 296-8000

Former name, former address and former fiscal year, if changed since last report:   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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).   Yes   [X]      No  [   ]

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 12, 2003:

Common Stock, no par value                                                                                                                                                                                               146,333,770 shares

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IKON Office Solutions, Inc.

INDEX

PART I.   FINANCIAL INFORMATION

PART II.   OTHER INFORMATION

SIGNATURES

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FORWARD-LOOKING INFORMATION

IKON Office Solutions, Inc. (“we”, “us”, “our”, “IKON”, or the “Company”) may from time to time provide information, whether verbally or in writing, including certain statements included in or incorporated by reference in this Form 10-Q, which constitute “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (“Litigation Reform Act”). These “forward-looking” statements include, but are not limited to, statements regarding the following (and certain matters discussed in greater detail herein): growth opportunities and increasing market share; productivity and infrastructure initiatives; earnings, revenue, cash flow, margin, and cost-savings projections; the effect of competitive pressures on equipment sales; expected savings and lower costs from our productivity and infrastructure initiatives; developing and expanding strategic alliances and partnerships; the impact of e-commerce and e-procurement initiatives; the implementation of e-IKON; anticipated growth rates in the digital and color equipment and outsourcing industries; the effect of foreign currency exchange risk; the reorganization of the Company’s business segments and the anticipated benefits of operational synergies related thereto; and the Company’s ability to finance its current operations and its growth initiatives. Although IKON believes the expectations contained in such “forward-looking” statements are reasonable, it can give no assurance that such expectations will prove correct. References herein to “we”, “us”, “our”, “IKON”, or the “Company” refer to IKON and its subsidiaries unless the context specifically requires otherwise.

The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” and similar expressions, as they relate to the Company or the Company’s management, are intended to identify “forward-looking” statements. Such statements reflect the current views of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company assumes no obligations and does not intend to update these “forward-looking” statements.

In accordance with the provisions of the Litigation Reform Act, the Company is making investors aware that such “forward-looking” statements, because they relate to future events, are by their very nature subject to many important factors which could cause actual results to differ materially from those contained in the “forward-looking” statements. These uncertainties and risks include, but are not limited to, the following (some of which are explained in greater detail herein): conducting operations in a competitive environment and a changing industry (which includes technical services and products that are relatively new to the industry and/or to the Company); delays, difficulties, management transitions and employment issues associated with consolidations and/or changes in business operations; existing and future vendor relationships; risks relating to foreign currency exchange; economic, legal and political issues associated with international operations; the Company’s ability to access capital and meet its debt service requirements (including sensitivity to fluctuations in interest rates); and general economic conditions.

Competition.     IKON operates in a highly competitive environment. A number of companies worldwide with significant financial resources compete with IKON to provide similar products and services, such as Canon, Ricoh, Danka, Pitney Bowes and Xerox. Our competitors may be positioned to offer more favorable product and service terms to the marketplace, resulting in reduced profitability and loss of market share for IKON. Some of our competitors are also suppliers to IKON of the products we sell, service and lease. Competition is based largely upon technology, performance, pricing, quality, reliability, distribution, customer service and support. In addition, we compete against smaller local independent office products distributors. Financial pressures faced by our competitors may cause them to engage in uneconomic pricing practices, which could cause the prices that IKON is able to charge in the future for its products and services to be less than it has historically charged. Our future success is based in large part upon our ability to successfully compete in the markets we currently serve and to expand into additional products and services offerings. These risks could lead to a loss of market share for IKON, resulting in a negative impact on our results of operations.

Pricing.     Our ability to succeed is dependent upon our ability to obtain adequate pricing for the equipment, supplies and services we offer. Depending on competitive market factors, future prices we can obtain for the equipment, supplies and services we offer may vary from historical levels.

Vendor Relationships.     IKON’s access to equipment, parts and supplies depends upon its relationships with, and its ability to purchase equipment on competitive terms from its principal vendors, Canon and Ricoh. IKON has not and does not currently enter into long-term supply contracts with these vendors, and we have no current plans to do so in the future. These vendors are not required to use IKON to distribute their equipment and are free to change the prices and other terms at which they sell to us. In addition, IKON competes with the direct selling efforts of these vendors. Significant deterioration in relationships with, or in the financial condition of, these significant vendors could have an adverse impact on IKON’s ability to sell and lease equipment as well as its ability to provide effective service and technical support. If IKON lost one of these vendors, or if one of the vendors ceased operations, IKON would be forced to expand its relationship with the other vendor, seek out new relationships with other vendors or risk a loss in market share due to diminished product offerings and availability.

Financing Business.     A significant portion of our profits are derived from the financing of equipment provided to our customers. Our ability to provide such financing at competitive rates and to realize profitable margins is highly dependent upon our costs of borrowing. If IKON is unable to continue to have access to its funding sources on terms that allow it to provide leases on competitive terms, IKON’s business could be adversely affected, as IKON’s customers could seek to lease equipment from competitors offering more favorable leasing terms. For the third quarter ended June 30, 2003, approximately 80% of equipment sold by IKON in North America was financed through IOS Capital, LLC (“IOSC”), IKON’s captive leasing subsidiary. IOSC accesses capital using asset securitization transactions, including revolving asset securitization conduit arrangements, public and private offerings of its debt securities, borrowings from commercial lenders and loans from IKON. IOSC relies primarily on asset securitization transactions to finance its lease receivables. There is no assurance that we will continue to have access to our current funding sources, or that we will be able to obtain additional funding on terms that would allow us to provide leases on competitive terms. In particular, during the quarter ended June 30, 2003, Moody’s Investor Services (“Moody’s”) lowered the Company’s senior unsecured credit rating from Baa2 to Ba1 (maintaining our rating under review for further downgrade) and Standard and Poor’s (“S&P”) placed the Company’s BBB- rating on CreditWatch. On August 1, 2003 S&P reaffirmed the Company’s BBB- rating with a negative outlook and removed the Company from CreditWatch. Our access to certain credit markets is dependent upon our credit ratings. Although the Company is currently rated investment grade by Standard and Poor’s, any negative changes to our credit ratings, including any further downgrades, could reduce our access to certain credit markets. There is no assurance that these credit ratings can be maintained and/or the credit markets can be readily accessed.

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Liquidity.     During fiscal 2002 we obtained a $300,000,000 unsecured credit facility (the “Credit Facility”) with a group of lenders. The Credit Facility contains affirmative and negative covenants, including limitations on certain fundamental changes, investments and acquisitions, mergers, certain transactions with affiliates, creation of liens, asset transfers, payment of dividends, intercompany loans and certain restricted payments. The Credit Facility does not affect our ability to continue to securitize lease receivables. The Credit Facility matures on May 24, 2005. During the third quarter of fiscal 2003, the Company tendered and defeased all of IOSC’s 9.75% Notes due June 15, 2004 which removed an early maturity provision within the Credit Facility. The Credit Facility also contains certain financial covenants, including: (i) corporate leverage ratio; (ii) consolidated interest expense ratio; (iii) consolidated asset test ratios; and (iv) limitations on capital expenditures. The Credit Facility contains defaults customary for facilities of this type. In order to provide certain financial flexibility under the corporate leverage ratio, during the third quarter of fiscal 2003 the covenant was modified through March 2004, and the covenant as modified is as follows: (i) at September 30, 2003, 3.75 to 1.00; (ii) at December 31, 2003, 3.60 to 1.00; (iii) at March 31, 2004, 3.40 to 1.00 and (iv) at June 30, 2004 and as of the last day of each quarterly period thereafter, 3.00 to 1.00. This covenant measures a ratio of the Company’s business earnings (excluding finance income and finance expense associated with our financing operations) to corporate non-finance subsidiary debt. As of June 30, 2003, the corporate leverage ratio was 3.40 to 1.00. Failure to be in compliance with any material provision of the Credit Facility, including, without limitation, the financial covenants described above, could have a material adverse effect on our liquidity, financial position and results of operations.

Productivity Initiatives.     IKON’s ability to improve its profit margins is largely dependent on the success of its productivity initiatives to streamline its infrastructure. Such initiatives are aimed at making IKON more profitable and competitive in the long-term and include initiatives such as centralized credit and purchasing, shared services and the implementation of e-IKON, a comprehensive, multi-year initiative designed to web-enable IKON’s information technology infrastructure. IKON’s ability to improve its profit margins through the implementation of these productivity initiatives is dependent upon certain factors that IKON cannot entirely control, including the implementation and transition costs and expenses associated with the initiatives. Our failure to successfully implement these productivity initiatives, or the failure of such initiatives to result in improved margins, could have a material adverse effect on our liquidity, financial position and results of operations.

International Operations.     IKON operates in 8 countries outside of the United States. Approximately 14% of our revenues are derived from our international operations, and approximately 75% of those revenues are derived from Canada and the United Kingdom. Political or economic instability in Canada or the United Kingdom could have a material adverse impact on our results of operations. IKON’s future revenues, costs of operations and profits could be affected by a number of factors related to its international operations, including changes in foreign currency exchange rates, changes in economic conditions from country to country, changes in a country’s political condition, trade protection measures, licensing and other legal requirements and local tax issues. Unanticipated currency fluctuations in the Canadian Dollar, British Pound or Euro vis-a-vis the U.S. Dollar could lead to lower reported consolidated results of operations due to the translation of these currencies.

New Product Offerings.     Our business is driven primarily by customers’ needs and demands and by the products developed and manufactured by third parties. Because IKON distributes products developed and manufactured by third parties, IKON’s business would be adversely affected if its suppliers fail to anticipate which products or technologies will gain market acceptance or if IKON cannot sell these products at competitive prices. IKON cannot be certain that its suppliers will permit IKON to distribute their newly developed products, or that such products will meet our customers’ needs and demands. Additionally, because some of our principal competitors design and manufacture new technology, those competitors may have a competitive advantage over IKON. To successfully compete, IKON must maintain an efficient cost structure, an effective sales and marketing team and offer additional services that distinguish IKON from its competitors. Failure to execute these strategies successfully could result in reduced market share for IKON or could have an adverse impact on its results of operations.

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PART 1.   FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

IKON Office Solutions, Inc.
Consolidated Balance Sheets

See notes to condensed consolidated financial statements.

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IKON Office Solutions, Inc.
Consolidated Statements of Income
(unaudited)

See notes to condensed consolidated financial statements.

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IKON Office Solutions, Inc.
Consolidated Statements of Cash Flows
(unaudited)

See notes to condensed consolidated financial statements

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IKON Office Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
(in thousands, except per share amounts)
(unaudited)

Note 1:   Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of IKON Office Solutions, Inc. and subsidiaries (the “Company”, “we”, or “our”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended September 30, 2002. Certain prior year amounts have been reclassified to conform with the current year presentation.

Significant Accounting Policies

The following provides additional information regarding our significant accounting policies contained in note 1 of the Company’s Annual Report on Form 10-K for the year ended September 30, 2002:

Accounting for Stock-based Compensation

On December 31, 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation- Transition and Disclosure- an amendment to SFAS 123" (“SFAS 148”). SFAS 148 requires additional disclosures that are incremental to those required by SFAS 123 and requires the following disclosures in the Company’s interim financial statements.

As permitted by SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) we continue to account for our stock options in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. Employee stock options are granted at or above the market price at dates of grant which does not require us to recognize any compensation expense. In general, these options expire in ten years (twenty years for certain non-employee director options) and vest over three years (five years for grants issued prior to December 15, 2000). The proceeds from options exercised are credited to shareholders’ equity. A plan for our non-employee directors enables participants to receive their annual directors’ fees in the form of options to purchase shares of common stock at a discount. The discount is equivalent to the annual directors’ fees and is charged to expense.

If we had elected to recognize compensation expense based on the fair value at the date of grant for awards in fiscal years 2003 and 2002, consistent with the provisions of SFAS 123, our net income and earnings per share would have been reduced to the following pro forma amounts:

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Note 2:   Goodwill

The Company has identified the following reporting units and associated goodwill:

Changes in the goodwill balance since September 30, 2002 are attributable to foreign currency translation adjustments.

Note 3:   Notes Payable, Lease-Backed Notes and Revolving Credit Facility

In June 2003, IOS Capital, LLC (“IOSC”) issued $350,000 of notes payable with an interest rate of 7.25% (7.43% yield including the original issue discount) which matures on June 30, 2008. Interest is paid on the notes semi-annually in June and December beginning December 30, 2003. With the proceeds from the issuance, the Company tendered for its 9.75% notes due June 15, 2004, deposited sufficient funds with an escrow agent to defease the remaining $34,891 of 9.75% notes not tendered and used the remainder of the proceeds for general corporate purposes.

During the nine months ended June 30, 2003, the Company repurchased the following notes payable:

As a result of these repurchases, the Company recognized a loss, including the write-off of unamortized costs, of $26,204, which is included in loss from early extinguishment of debt, in the consolidated statements of income for the nine months ended June 30, 2003.

On April 23, 2003, IKON Receivables Funding, LLC (a wholly-owned subsidiary of IOS Capital) issued Series 2003-1 Lease-Backed Notes (the “2003 Notes-1”) as described below:

Proceeds from the issuance of the 2003-1 Notes were used to make payments on the Company’s revolving asset securitization conduit financing agreements (the “Conduits”), repay borrowings under our unsecured credit facility and increase the Company’s cash balance.

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The 2003-1 Notes were issued pursuant to certain indentures between IKON Receivables Funding, LLC, IOSC and certain indenture trustees. The 2003-1 Notes are collateralized by a pool of office equipment leases or contracts and related assets (the “Leases”) acquired or originated by IOSC (together with the equipment financing portion of each periodic lease or rental payment due under the Leases on or after the related indenture date) and all related casualty payments, retainable deposits, and termination payments. Payments on the 2003-1 Notes are made from payments on the Leases. The 2003-1 Notes have certain credit enhancement features available to noteholders, including reserve accounts, overcollateralization accounts and noncancelable insurance policies from Ambac Assurance Corporation with respect to the 2003-1 Notes. On each payment date, funds available from the collection of lease receivables will be paid to the noteholders in the order of their priority class.

In April 2003, the Company entered into a swap transaction to hedge the variable rate 2003-1 Class A-3a lease-backed note to a fixed rate of 2.095%. This hedge qualifies for evaluation using the “short cut” method of assessing effectiveness; accordingly, there is an assumption of no ineffectiveness.

During the nine months ended June 30, 2003, IOSC repaid $701,082 of lease-backed notes.

At June 30, 2003, the Company had no borrowings under its $300,000 unsecured credit facility. As of June 30, 2003, letters of credit supported by the credit facility amounted to $27,161. The amount available under the credit facility is determined by the level of certain of the Company’s unsecured assets and open letters of credit for the Company and its subsidiaries. The amount available under the credit facility for borrowings or additional letters of credit was $228,993 as of June 30, 2003.

Note 4:   Asset Securitization Conduit Financing

During the nine months ended June 30, 2003, IOSC pledged or transferred $652,978 in financing lease receivables for $551,145 in cash in connection with its Conduits. As of June 30, 2003, IOSC had approximately $480,000 available under the Conduits.

Note 5:   Comprehensive Income

Total comprehensive income is as follows:

The minimum pension liability is adjusted at each fiscal year end; therefore, there is no impact on total comprehensive income during interim periods. The balances for foreign currency translation, minimum pension liability and derivative financial instruments included in accumulated other comprehensive loss in the consolidated balance sheets were $16,548, $(2,445) and $(15,233), respectively, at June 30, 2003 and $(24,190), $(2,445) and $(24,170), respectively, at September 30, 2002.

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Note 6:   Earnings Per Common Share

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

The Company accounts for the effect of its convertible notes in the diluted earnings per common share calculation using the “if converted” method. Under that method, the convertible notes are assumed to be converted to shares (weighted for the number of days outstanding in the period) at a conversion price of $15.03, and interest expense, net of taxes, related to the convertible notes is added back to net income. The calculation of diluted earnings per common share for the third quarter of fiscal 2003 excludes the assumed conversion of the convertible notes because the impact is antidilutive.

Options to purchase 6,477 shares of common stock at $8.30 per share to $46.59 per share were outstanding during the third quarter of fiscal 2003 and options to purchase 6,497 shares of common stock at $11.45 per share to $46.59 per share were outstanding during the third quarter of fiscal 2002, but were not included in the computation of diluted earnings per common share because the options’ prices were greater than the average market price of the common shares; therefore, the effect would be antidilutive.

Options to purchase 8,322 shares of common stock at $7.75 per share to $46.59 per share were outstanding during the first nine months of fiscal 2003 and options to purchase 6,497 shares of common stock at $11.45 per share to $46.59 per share were outstanding during the first nine months of fiscal 2002, but were not included in the computation of diluted earnings per common share because the options’ prices were greater than the average market price of the common shares; therefore, the effect would be antidilutive.

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Note 7:   Segment Reporting

The table below presents segment information for the three months ended June 30, 2003 and 2002:

The table below presents segment information for the nine months ended June 30, 2003 and 2002:

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During fiscal 2003, the Company made certain changes to its segment reporting to reflect the way management views IKON’s business. Due to the Company’s organizational structure change related to centralization of the supply chain function and customer care centers announced in October 2002, IKON no longer allocates these corporate administrative charges to IKON North America. As a result, these costs are included in Corporate in the table above. In addition, a unit of our business imaging services operations which had been included in Other is now included in IKON North America consistent with the way management now views our segments for making operating decisions. Prior year amounts have been reclassified to conform with the current year presentation.

Note 8:   Restructuring and Asset Impairment Charges

In the fourth quarter of fiscal 2001, the Company announced the acceleration of certain cost cutting and infrastructure improvements (as described below) and recorded a pre-tax restructuring and asset impairment charge of $60,000, and reserve adjustments related primarily to the exit of the Company’s telephony operations of $5,300. The related reserve adjustments were included in cost of goods sold for the write-off of obsolete inventory, and selling and administrative expense for the write-off of accounts receivable in the consolidated statement of income. The asset impairments included fixed asset write-offs totaling $6,078 as follows: $100 from technology services businesses closures; $897 from digital print center business closures; $338 from digital print center business sales; and $4,743 relating to IKON infrastructure. The asset impairments also included goodwill write-offs totaling $19,422 as follows: $955 from technology services businesses closures; $6,591 from digital print center business sales; and $11,876 relating to telephony business sales. The Company developed this plan as part of our continuing effort to streamline IKON’s infrastructure to increase future productivity, and to address economic changes within specific marketplaces. This resulted in a charge of $65,300 ($49,235 after-tax). These actions addressed the sale of the Company’s telephony operations and the closing of twelve nonstrategic digital print centers as the Company shifts its focus from transactional work toward contract print work and the support of major accounts. These actions also addressed further downsizing of operational infrastructures throughout the organization as the Company leverages and intensifies prior standardization and centralization initiatives. These actions included the ongoing centralization and consolidation of many selling and administrative functions, including marketplace consolidation, supply chain, finance, customer service, sales support and the realignment of sales coverage against our long-term growth objectives. Additionally, the Company recorded an asset impairment charge of $3,582 ($3,300 after-tax) related to the sale of the Company’s technology education operations. The asset impairments included fixed asset write-offs totaling $828. The asset impairments also included goodwill write-offs totaling $2,754. Therefore, the aggregate charge recorded in fiscal 2001 (the “Fiscal 2001 Charge”) was $68,882 ($52,535 after-tax).

In the first quarter of fiscal 2000, the Company announced plans to improve performance and efficiency and incurred a total pre-tax restructuring and asset impairment charge (the “First Quarter 2000 Charge”) of $105,340 ($78,479 after-tax). The asset impairments included fixed asset write-offs totaling $12,668 as follows: $631 from technology services integration and education business closures; $2,530 from technology services integration and education business downsizing; $1,269 from digital print center business closures; $588 from digital print center business downsizing; $1,405 from document services excess equipment; $1,244 from a technology services business sale; and $5,001 relating to IKON infrastructure. The asset impairments included goodwill write-offs totaling $38,880 as follows: $3,279 from technology services integration business sales; $10,156 from technology services integration and education business closures; $9,566 from digital print center business closures; $14,950 from a technology services business sale; and $929 relating to an IKON Europe closure. These actions addressed under-performance in certain technology services operations, business document services, and business information services locations as well as the Company’s desire to strategically position these businesses for integration and profitable growth. Plans included consolidating or disposing of certain under-performing and non-core locations; implementing productivity enhancements through the consolidation and centralization of activities in inventory management, purchasing, finance/accounting and other administrative functions; and consolidating real estate through the co-location of business units as well as the disposition of unproductive real estate. In the fourth quarter of fiscal 2000, the Company determined that some first quarter restructuring initiatives would not require the level of spending that had been originally estimated, and certain other initiatives would not be implemented due to changing business dynamics. Previously targeted sites were maintained based on their potential for improvement as well as their relationship to IKON’s overall strategic direction. As a result of our integration efforts, locations originally identified for sale or closure were combined with other IKON businesses. As a result, $15,961 was reversed from the First Quarter 2000 Charge, and the total amount of the First Quarter 2000 Charge was reduced to $89,379 ($66,587 after-tax). The components of the reversal were: 538 fewer positions eliminated reduced severance by $1,784, real estate lease payments reduced by $13,426, and contractual commitments reduced by $751. The severance reversal resulted from successfully negotiating business sales whereby affected employees assumed positions with the acquiring companies, higher-than-expected voluntary resignations, and our decision not to implement certain supply chain and shared service center consolidation efforts. The real estate lease payment reversal was primarily the result of our decision not to close certain sites. Also, in the fourth quarter of fiscal 2000, the Company announced other specific actions designed to address the changing market conditions impacting technology services, IKON North America, and outsourcing locations and incurred a total pre-tax restructuring and asset impairment charge (the “Fourth Quarter 2000 Charge”) of $15,789 ($12,353 after-tax). The asset impairments consisted of fixed asset write-offs totaling $2,371 as follows: $1,371 from technology services integration and education business closures; $721 from digital print center business closures; and $279 relating to IKON infrastructure. The First Quarter 2000 Charge (as reduced) and Fourth Quarter 2000 Charge resulted in a net fiscal 2000 charge (the “Fiscal 2000 Charge”) of $105,168 ($78,940 after-tax).

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In the fourth quarter of fiscal 2002, the Company reversed $10,497 ($6,823 after-tax) of its restructuring charges described above. The reversed charges consisted of $7,418 related to severance, $1,667 related to leasehold termination costs and $1,412 related to contractual commitments. The severance reversal was the result of the average cost of severance per employee being less than estimated and 188 fewer positions eliminated than estimated due to voluntary resignations and our decision not to close a digital print center due to changing business dynamics. The reversal of leasehold termination costs and contractual commitments resulted from our decision not to close a digital print center. Additionally, we were also able to reduce our liability through successful equipment and real property lease termination negotiations.

The pre-tax components of the restructuring, net, and asset impairment charges for fiscal 2002, 2001 and 2000 were as follows:

The Company calculated the asset and goodwill impairments as required by SFAS 121 “Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of.” The proceeds received for businesses sold were not sufficient to cover the fixed asset and goodwill balances. As such, those balances were written-off. Goodwill directly associated with businesses that were closed was also written-off.

The following presents a rollforward of the restructuring components of the Fiscal 2001 Charge, Fourth Quarter 2000 Charge and First Quarter 2000 Charge (collectively the “Charges”) from September 30, 2002 to the balance remaining at June 30, 2003, which is included in other accrued expenses in the consolidated balance sheets:

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The projected payments of the remaining balances of the Charges are as follows:

The Company determined its probable sub-lease income through the performance of local commercial real estate market valuations by our external regional real estate brokers. All lease termination amounts are shown net of projected sub-lease income. Projected sub-lease income as of June 30, 2003 was $595, $3,785 and $3,420 for the Fiscal 2001 Charge, Fourth Quarter 2000 Charge and First Quarter 2000 Charge, respectively.

All actions related to our restructuring are complete. Severance payments to terminated employees are made in installments. The charges for leasehold termination costs relate to real estate lease contracts where the Company has exited certain locations and is required to make payments over the remaining lease term.

All locations affected by the Charges (23, 5 and 22 locations for the Fiscal 2001 Charge, Fourth Quarter 2000 Charge and First Quarter 2000 Charge, respectively) have been closed and all employees affected by the Charges (1,412, 386 and 1,394 employees for the Fiscal 2001 Charge, Fourth Quarter 2000 Charge and First Quarter 2000 Charge, respectively) have been terminated.

Note 9:   Synthetic Leases

On November 21, 2001, IKON entered into a synthetic lease agreement totaling $18,659 for the purpose of leasing its corporate headquarters in Malvern, Pennsylvania (the “Corporate Lease”). Under the terms of the Corporate Lease, IKON is required to occupy the facility for a term of five years from the agreement date. The Corporate Lease also provides for a residual value guarantee and includes a purchase option at the lessor’s original cost of the property. If IKON terminates the Corporate Lease prior to the end of the lease term, IKON is obligated to purchase the leased property at a price equal to the remaining lease balance. Because IKON is required to only pay the yield due on the Corporate Lease, IKON’s nominal rental rate under the Corporate Lease is different from what IKON would be required to pay under a market rental rate. The Corporate Lease contains one financial covenant that requires IKON to meet a funded debt to total capitalization ratio test. The test requires IKON’s total funded debt to not exceed fifty percent of IKON’s total capitalization. A failure to maintain the covenant would constitute a default pursuant to the Corporate Lease and would permit the lessor to either require IKON to purchase the leased property for the then-current lease balance, terminate IKON’s right of possession of the leased property, or sell the leased property and apply the proceeds to the current lease balance. IKON obtains valuations of the property covered by the Corporate Lease on a regular basis. If market conditions result in a valuation that is less than the guaranteed residual value of the property, IKON records a charge to income. As of June 30, 2003 and September 30, 2002, the accrued shortfall between the contractual obligation and the estimated fair value of the leased assets under the Corporate Lease equaled $400. As a result of the Company’s adoption of the remaining provisions of FASB Interpretation Number 46 (“FIN 46”) “Consolidation of Variable Interest Entities, an interpretation of ARB 51” on July 1, 2003, this property, and the associated lease liability, will be recorded on the Company’s balance sheet.

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On January 10, 2003, IKON terminated a synthetic lease agreement and paid $23,901 to acquire three properties under the lease. The Company previously recorded a reserve of $13,387 for the expected shortfall between the contractual obligation and the estimated fair value of the leased assets. Two of the three acquired properties were sold during the third quarter of fiscal 2003 and no additional shortfall was incurred. The remaining property is currently for sale.

Note 10:   Contingencies

The Company is involved in a number of environmental remediation actions to investigate and clean up certain sites related to its discontinued operations in accordance with applicable federal and state laws. Uncertainties about the status of laws and regulations, technology and information related to individual sites, including the magnitude of possible contamination, the timing and extent of required corrective actions and proportionate liabilities of other responsible parties, make it difficult to develop a meaningful estimate of probable future remediation costs. While the actual costs of remediation at these sites may vary from management’s estimate because of these uncertainties, the Company had accrued balances of $7,960 and $8,314 as of June 30, 2003 and September 30, 2002, respectively, for its environmental liabilities, and the accrual is based on management’s best estimate of the aggregate environmental remediation exposure. The measurement of environmental liabilities is based on an evaluation of currently available facts with respect to each individual site and considers factors such as existing technology, presently enacted laws and regulations, prior experience in remediation of contaminated sites and any studies performed for a site. As assessments and remediation progress at individual sites, these liabilities are reviewed and adjusted to reflect additional technical and legal information that becomes available. After consideration of the defenses available to the Company, the accrual for such exposure, insurance coverage and other responsible parties, management does not believe that its obligations to remediate these sites would have a material adverse effect on the Company’s consolidated financial statements.

The accruals for environmental liabilities are reflected in the consolidated balance sheet as part of other accrued liabilities. The Company has not recorded any potential third party recoveries. The Company is indemnified by an environmental contractor performing remedial work at a site in Bedford Heights, OH. The contractor has agreed to indemnify the Company from cost overruns associated with the plan of remediation. Further, the Company has cost sharing arrangements in place with other potentially responsible parties (“PRP’s”) at sites located in Barkhamsted, CT and Rockford, IL. The cost-sharing agreement for the Barkhamsted, CT site relates to apportionment of expenses associated with non-time critical removal actions and operation and maintenance work, such as capping the landfill, maintaining the landfill, fixing erosion rills and gullies, maintaining site security, maintaining vegetative growth on the landfill cap and groundwater monitoring. Under the agreement, the Company and other PRP’s agreed to reimburse Rural Refuse Disposal District No. 2, a Connecticut Municipal Authority, for 50% of these costs. The Company currently pays a 4.54% share of these costs. The cost-sharing arrangement for the Rockford, IL site relates to apportioning the costs of a Remedial Investigation/Feasibility Study and certain operation and maintenance work, such as fencing the site, removing waste liquids and sludges, capping a former surface impoundment and demolishing certain buildings. Under this arrangement, the Company pays 5.12% of these costs.

During the nine months ended June 30, 2003 and 2002, the Company did not incur any expenses for environmental capital projects. During the nine months ended June 30, 2003 and 2002, the Company incurred various expenses in conjunction with its obligations under consent decrees, orders, voluntary remediation plans, settlement agreements and to comply with environmental laws and regulations. For the nine months ended June 30, 2003 and 2002, these expenses were $437 and $2,264, respectively. All expenses were charged against the related environmental accrual. The Company will continue to incur expenses in order to comply with its obligations under consent decrees, orders, voluntary remediation plans, settlement agreements and to comply with environmental laws and regulations.

The Company has an accrual related to black lung and worker’s compensation liabilities relating to the operations of a former subsidiary, Barnes & Tucker Company (“B&T”). B&T owned and operated coal mines throughout Pennsylvania. IKON sold B&T in 1986. In connection with the sale, IKON entered into a financing agreement with B&T whereby IKON agreed to reimburse B&T for 95% of all costs and expenses incurred by B&T for black lung and worker’s compensation liabilities, until said liabilities were extinguished. From 1986 through 2000, IKON reimbursed B&T in accordance with the terms of the financing agreement. In 2000, B&T filed for bankruptcy protection under Chapter 11. The bankruptcy court approved a plan of reorganization which created a black lung trust and a worker’s compensation trust to handle the administration of all black lung and worker’s compensation claims relating to B&T. IKON now reimburses the trusts for 95% of the costs and expenses incurred by the trusts for black lung and worker’s compensation claims. As of June 30, 2003 and September 30, 2002, the Company’s accrual for black lung and worker’s compensation liabilities related to B&T was $15,834 and $16,734, respectively.

There are other contingent liabilities for taxes, guarantees, other lawsuits and various other matters occurring in the ordinary course of business. On the basis of information furnished by counsel and others, and after consideration of the defenses available to the Company and any related reserves and insurance coverage, management believes that none of these other contingencies will materially affect the consolidated financial statements of the Company.

Note 11:   Financial Instruments

As of June 30, 2003, all of the Company’s derivatives designated as hedges are interest rate swaps which qualify for evaluation using the “short cut” method for assessing effectiveness. As such, there is an assumption of no ineffectiveness. The Company uses interest rate swaps to fix the interest rates on its variable rate classes of lease-backed notes, which results in a lower cost of capital than if we had issued fixed rate notes. During the nine months ended June 30, 2003, unrealized gains totaling $8,938 after taxes, were recorded in accumulated other comprehensive loss.

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Note 12:   Pending Accounting Changes

In January 2003, the FASB approved FASB Interpretation Number 46 (“FIN 46”) “Consolidation of Variable Interest Entities, an interpretation of ARB 51". The primary objectives of FIN 46 are to provide guidance for the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE (the “primary beneficiary”). This new model for consolidation applies to an entity which either (1) the equity investors (if any) do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, this interpretation requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. Certain disclosure requirements were effective for financial statements issued after January 31, 2003. The remaining provisions were effective immediately for all VIE’s created after January 31, 2003 and were effective beginning in the first interim or annual reporting period beginning after June 15, 2003 for all VIE’s created before February 1, 2003. The Company has evaluated the impact of the application of this interpretation, and determined that there is not a material impact from the application of this interpretation on our consolidated financial statements.

In April 2003, the FASB approved SFAS 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in contracts and for hedging activities under SFAS 133. In particular, SFAS 149 amends SFAS 133 for decisions made as part of the Derivatives Implementation Group process, other FASB projects dealing with financial instruments, and implementation issues raised in connection with the application of the definition of a derivative. SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 with the exception of implementation issues that have been effective under other pronouncements for fiscal quarters that began prior to June 15, 2003, which should be applied in accordance with their respective effective dates. The Company has evaluated the impact of the application of this interpretation, and determined that there is not a material impact from the adoption of SFAS 149 on our consolidated financial statements.

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 affects three types of freestanding financial instruments that should now be classified as liabilities. (1) Mandatorily redeemable shares which are required to be redeemed at a specified or determinable date or upon an event certain to occur, (2) put options and forward purchase contracts, which involves financial instruments embodying an obligation that the issuer must or could choose to settle by issuing a variable number of its shares or other equity instruments based solely on something other than the issuer’s own equity shares and (3) certain obligations that can be settled with shares, the monetary value of which is fixed, or tied to a variable (such as a market index) or varies inversely with the value of the issuers’ shares. FAS 150 also requires disclosures about alternative ways of settling the instruments and the capital structure of entities whose shares are mandatorily redeemable. SFAS 150 is effective for all financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company is currently evaluating the impact of the adoption of this statement, but does not expect a material impact from the adoption of SFAS 150 on our consolidated financial statements.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

All dollar and share amounts are in thousands.

IKON Office Solutions, Inc. (“IKON” or the “Company”) is a leading provider of products and services that help businesses manage document workflow and increase efficiency. IKON provides customers with total business solutions for every office, production and outsourcing need, including copiers and printers, color solutions, distributed printing, facilities management, imaging and legal document solutions, as well as network design and consulting and e-business development. IKON has locations worldwide, including locations in the United States, Canada, Mexico and Europe. References herein to “we”, “us” or “our” refer to IKON and its subsidiaries unless the context specifically requires otherwise.

Critical Accounting Policies

In response to the SEC’s Release No. 33-8040, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies,” we have identified below the accounting principles critical to our business and results of operations. We determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We state these accounting policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the notes to the consolidated financial statements contained in our Annual Report on Form 10-K for our fiscal year ended September 30, 2002, and at relevant sections in this discussion and analysis. In addition, we believe our most critical accounting policies include the following:

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Revenue Recognition.    We install the majority of the equipment we sell. Revenues for company-installed copier/printer equipment and technology hardware, included in net sales, are recognized upon receipt of a signed sales contract and “delivery and acceptance” certificate. The “delivery and acceptance” certificate confirms that the product has been delivered, installed, accepted, is in good condition, and is satisfactory. Revenues for customer installed copier/printer equipment and technology hardware, included in net sales, are recognized upon receipt of a sales contract and delivery. Generally, the Company does not offer any equipment warranties in addition to those which are provided by the equipment manufacturer. Revenues for sales of supplies are recognized at time of shipment following the placement of an order from a customer. Revenues for monthly equipment service and facilities management service are recognized in the month in which the service is performed. Revenues for other services and rentals are recognized in the period performed. The present value of payments due under sales-type lease contracts is recorded as revenue within net sales and cost of goods sold is charged with the book value of the equipment when products are delivered to and accepted by the customer. Finance income is recognized over the related lease term.

Supporting the Company’s objective to provide complete solutions to its customers, the Company generally bundles a service agreement with copier/printer equipment when it is sold. The typical agreement includes a minimum number of copies for a base service fee plus an overage charge for any copies in excess of the minimum. Revenue for each element of a bundled contract is derived from our national price lists for equipment and service. The national price list for equipment includes a price range between the manufacturers’ suggested retail price (“MSRP”) and the minimum price for which our sales force is permitted to sell equipment. The price list for equipment is updated monthly to reflect any vendor-communicated changes in MSRP and any changes in the fair value for which equipment is being sold to customers. The national price list for service reflects the price of service charged to customers. The price list for service is updated quarterly to reflect new service offerings and any changes in the competitive environment affecting the fair value for which service is being provided to customers. The national price list, therefore, is representative of the fair value of each element of a bundled agreement when it is sold unaccompanied by the other elements.

Revenue for a bundled contract is first allocated to service revenue using the fair value per our national price list. The remaining revenue is allocated to equipment revenue and finance income based on a net present value calculation utilizing an appropriate interest rate that considers the creditworthiness of the customer, term of the lease, transaction size, and costs of financing. The equipment revenue is compared to the national price list. If the equipment revenue falls within the price range per the national price list, no adjustment is required. If the equipment revenue is not within the price range per the national price list, service and equipment revenues are proportionately adjusted while holding the interest rate constant, so that both service and equipment revenues fall within the price range per the national price list.

Goodwill.     IKON evaluates goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) 142. SFAS 142 prescribes a two-step method for determining goodwill impairment. In the first step, we determine the fair value of the reporting unit using expected future discounted cash flows. If the net book value of the reporting unit exceeds the fair value, we would then perform the second step of the impairment test which requires allocation of the reporting unit’s fair value to all of its assets and liabilities in a manner similar to a purchase price allocation, with any residual fair value being allocated to goodwill. The fair value of the goodwill is then compared to its carrying amount to determine impairment. If future discounted cash flows are less favorable than those anticipated, goodwill may be impaired.

Inventories.     Inventories are stated at the lower of cost or market using the average cost or specific identification methods and consist of finished goods available for sale. IKON writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those anticipated, inventory adjustments may be required.

Allowances for Receivables.     IKON maintains allowances for doubtful accounts and lease defaults for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of IKON’s customers were to deteriorate, resulting in an impairment of their ability to make required payments, changes to our allowances may be required.

Income Taxes.     Income taxes are determined in accordance with SFAS 109, which requires recognition of deferred income tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred income tax liabilities and assets are determined based on the difference between financial statement and tax basis of liabilities and assets using enacted tax rates in effect for the year in which the differences are expected to reverse. SFAS 109 also provides for the recognition of deferred tax assets if it is more likely than not that the assets will be realized in future years. A valuation allowance has been established for deferred tax assets for which realization is not likely. In assessing the valuation allowance, IKON has considered future taxable income and ongoing prudent and feasible tax planning strategies. However, in the event that IKON determines the value of a deferred tax asset has fluctuated from its net recorded amount, an adjustment to the deferred tax asset would be necessary.

Pension.     Certain assumptions are used in the calculation of the actuarial valuation of our Company-sponsored defined benefit pension plans. These assumptions include the weighted average discount rate, rates of increase in compensation levels and expected long-term rates of return on assets. If actual results are less favorable than those assumed, additional pension expense may be required.

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Residual Values.     IKON estimates the residual value of equipment sold under sales-type leases. Our residual values are based on the dollar value of the equipment. Residual values generally range between 0% to 22% of MSRP, depending on equipment model and lease term. We evaluate residual values quarterly for impairment. Changes in market conditions could cause actual residual values to differ from estimated values, which could accelerate write-down of the value of the equipment.

Our preparation of this Quarterly Report on Form 10-Q and other financial statements filed with the SEC requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements and notes. Actual results could differ from those estimates and assumptions.

Results of Operations

This discussion reviews the results of operations of the Company as reported in the consolidated statements of income.

Three Months Ended June 30, 2003
Compared to the Three Months Ended June 30, 2002

Results of operations for the third quarter of fiscal 2003, compared to the third quarter of fiscal 2002, were as follows:

Revenues for the third quarter of fiscal 2003 were $1,150,809, compared to $1,218,616 during the third quarter of fiscal 2002, representing a decrease of $67,807, or 5.6%, including a 1.6% benefit from foreign currency. Of this decrease, $41,392 resulted from the impact of our actions to exit, sell or downsize certain non-strategic businesses (telephony, education and technology hardware businesses, and certain digital print centers) during fiscal 2002. Excluding the impact of these actions, revenues for the quarter were down approximately 2.3%.

Net sales, which includes revenues from the sale of copier/printer equipment, supplies and technology hardware, decreased by $62,213, or 10.4%, including a 2.0% benefit from foreign currency, compared to the third quarter of fiscal 2002. Approximately one-half of the decrease, or $31,050, was attributable to a decline in sales of technology-related hardware, as discussed above. Excluding the impact of technology-related hardware, net sales were down approximately 5.7%. Revenues from sales of copier/printer equipment decreased by 6.2%, or $26,520, compared to the third quarter of fiscal 2002 due to higher than average vendor backorders, changes in product sales mix, delays in large purchasing decisions by our customers, and lower average selling prices as new technologies were introduced at lower price points, particularly in color equipment. These decreases were partially offset by an increase in placements of copier/printer equipment of approximately 6% compared to the third quarter of fiscal 2002.

Services, which includes revenues from the servicing of copier/printer equipment, outsourcing and other services, decreased by $10,091, or 1.9%, including a 1.4% benefit from foreign currency, compared to the third quarter of fiscal 2002. Revenues from the servicing of copier/printer equipment increased by approximately 0.1%, or $321. Revenues from outsourcing and other service offerings were impacted by our actions to exit, sell or downsize certain non-strategic businesses during fiscal 2002, which accounted for $10,342 of the total services revenue decline. Excluding the impact of these actions, outsourcing and other services remained consistent compared to the prior year.

Finance income is generated by IKON’s wholly-owned leasing subsidiaries. IOS Capital, LLC (“IOSC”), IKON’s leasing subsidiary in the United States, accounted for approximately 89% of IKON’s finance income for the third quarter of fiscal 2003. Finance income increased by $4,497, or 4.9%, including a 1.1% benefit from foreign currency, compared to the third quarter of fiscal 2002, primarily due to growth in the lease portfolio.

Overall gross margin decreased to 39.4% for the third quarter of fiscal 2003, compared to 39.7% for the third quarter of fiscal 2002. The gross margin on net sales decreased to 32.6% from 34.7% in the third quarter of fiscal 2002, primarily due to the shift in the sales mix of copier/printer equipment sold during the period, lower average selling prices and other cost of sales adjustments. The impact of these items was partially offset by lower sales of lower-margin technology hardware. The gross margin on services remained consistent compared to the third quarter of fiscal 2002. The gross margin on finance income increased to 62.5% from 57.8% in the third quarter of fiscal 2002, primarily due to the effect of lower average borrowing rates compared to the third quarter of fiscal 2002. The average financing rate on our lease receivables was approximately 11.0% and 10.8% at June 30, 2003 and 2002, respectively. Additionally, our finance subsidiaries average cost of debt was approximately 5.2% and 5.8% as of June 30, 2003 and 2002, respectively.

Selling and administrative expense decreased by $11,281, or 2.8% compared to third quarter of fiscal 2002. The decrease was due to $20,001 from improved productivity, centralization and consolidation initiatives including headcount reductions and $6,930 from the downsizing or elimination of unprofitable businesses. The Company incurred $16,830 of increased pension costs and e-IKON expenses and $8,132 of higher bad debt expense, which were partially offset by a $9,312 decline in expenses related to operational performance compensation costs. As a result of declines in revenue, selling and administrative expense as a percentage of revenue was 33.9% for the third quarter of fiscal 2003, compared to 32.9% for the third quarter of 2002.

Our operating income decreased by $19,159 compared to the third quarter of fiscal 2002. Our operating margin was 5.5% in the third quarter of fiscal 2003 compared to 6.8% in the third quarter of fiscal 2002. Operating margin is calculated as operating income divided by total revenue.

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During the third quarter of fiscal 2003, the Company tendered $205,609 par value of its 9.75% notes due June 15, 2004, for $223,844 and repurchased all outstanding private placement debt ($55,000 par value) for $61,327. In addition, the Company repurchased $28,509 par value of its 6.75% bonds due in November 2004 for $29,329. As a result of these financing actions, the Company recognized a loss from the early extinguishment of debt, including the write-off of unamortized costs, of $27,454 during the third quarter of fiscal 2003.

Interest expense, net was $12,765 in the third quarter of fiscal 2003 compared to $12,955 in the third quarter of fiscal 2002.

The effective income tax rate was 37.8% in the third quarter of fiscal 2003 compared to 38.4% in the third quarter of fiscal 2002. The decrease in the effective tax rate is primarily due to a cumulative increase in the tax provision during the third quarter of fiscal 2002 to achieve a year to date effective tax rate of 37.3%, due to the inability to record tax benefits on losses incurred in foreign jurisdictions. In addition, there was an increase in the effective tax rate for fiscal 2003 due to an increase in our state tax rates.

Diluted earnings per common share were $0.10 in the third quarter of fiscal 2003 compared to $0.28 in the third quarter of fiscal 2002.

Review of Business Segments

During fiscal 2003, the Company made certain changes to its segment reporting to reflect the way management views IKON’s business. Due to the Company’s organizational structure change related to centralization of the supply chain function and customer care centers announced in October 2002, IKON no longer allocates corporate administrative charges to IKON North America. As a result, these administrative costs are included in Corporate. In addition, a unit of our business imaging services operations which had been included in Other is now included in IKON North America consistent with the way management now makes operating decisions. Prior year amounts have been reclassified to conform to the current year presentation.

IKON North America

Net sales decreased by $68,616, or 12.8%, to $465,644 in the third quarter of fiscal 2003 from $534,260 in the third quarter of fiscal 2002. Approximately $29,946 of the decrease was due to a decline in sales of technology-related hardware reflecting our strategy to de-emphasize certain low margin products. The remaining decrease was due to declines in supplies and sales of copier/printer equipment which have been impacted by a slower economy, delayed purchasing decisions by our customers and changes in sales mix as a result of new, lower-priced technologies, and higher than average vendor backorders at June 30, 2003. Service revenues decreased by $14,964, or 3.1%, to $465,654 in the third quarter of fiscal 2003 from $480,618 in the third quarter of fiscal 2002. Approximately $10,521 of the decline resulted from a decrease in revenue from outsourcing and other service offerings, of which approximately $4,249 was due to the impact of our actions to exit, sell or downsize certain non-strategic businesses during fiscal 2002. The remainder of the decline in revenue from outsourcing and other service offerings was due to customers’ business downsizing, customer’s decisions to in-source and reduced demand for legal document services, arising from a slowdown in the legal industry and fewer commercial transactions that utilize such services. The decrease in revenues from the servicing of copier/printer equipment was primarily due to mix. Finance income increased by $3,840, or 4.4%, to $91,432 in the third quarter of fiscal 2003, from $87,592 in the third quarter of fiscal 2002 primarily due to growth in the lease portfolio compared to the third quarter of fiscal 2002. Operating income decreased by $32,073, or 19.2%, to $135,365 in the third quarter of fiscal 2003 from $167,438 in the third quarter of fiscal 2002. The decrease was due to lower gross margins, which were partially offset by lower selling and administrative costs as discussed above.

IKON Europe

Net sales increased by $6,905, or 10.8%, to $70,709 in the third quarter of fiscal 2003 from $63,804 in the third quarter of fiscal 2002. This primarily resulted from a decrease in sales of copier/printer equipment of approximately $600 and a decrease in technology-related hardware of approximately $1,800, offset by an increase in revenue of approximately $9,300 due to strengthened foreign currencies. Services increased by $10,965, or 30.5%, to $46,889 in the third quarter of fiscal 2003 from $35,924 in the third quarter of fiscal 2002. This increase was due to growth in equipment services and outsourcing and other services of approximately $5,200 combined with an increase of approximately $5,700 due to strengthened foreign currencies. Finance income increased by $657, or 12.8%, to $5,779 in the third quarter of fiscal 2003 from $5,122 in the third quarter of fiscal 2002, due to an increase of $628 due to strengthened foreign currencies. Operating income increased by $1,356, or 23.8%, to $7,043 in the third quarter of fiscal 2003 from $5,687 in the third quarter of fiscal 2002 due to reduced headcount as a result of infrastructure improvements.

Other

Net sales decreased by $502, or 79.1%, to $132 in the third quarter of fiscal 2003 from $634 in the third quarter of fiscal 2002. Services decreased by $6,092, or 57.1%, to $4,570 in the third quarter of fiscal 2003 from $10,662 in the third quarter of fiscal 2002. These declines are primarily due to the downsizing, sale, and closure of certain non-strategic businesses such as telephony, technology education and other technology-related operations. There was an operating loss of $678 in the third quarter of fiscal 2003 compared to an operating loss of $606 in the third quarter of fiscal 2002.

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Nine Months Ended June 30, 2003
Compared to the Nine Months Ended June 30, 2002

Results of operations for the nine months ended June 30, 2003, compared to the nine months ended June 30, 2002, were as follows:

Revenues for the nine months ended June 30, 2003 were $3,442,697, compared to $3,649,239 for the nine months ended June 30, 2002, representing a decrease of $206,542, or 5.7%, including a 1.2% benefit from foreign currency. Of this decrease, $136,020 resulted from the impact of our actions to exit, sell or downsize certain non-strategic businesses (telephony, education and technology hardware businesses, and certain digital print centers) during fiscal 2002. Excluding the impact of these actions, revenues for the nine months ended June 30, 2003, were down approximately 2.1%.

Net sales, which include revenues from the sale of copier/printer equipment, supplies and technology hardware, decreased by $142,581, or 8.1%, including a 1.7% benefit from foreign currency, compared to the nine months ended June 30, 2002. Nearly sixty percent of the decrease, or $84,519, was attributable to a decline in sales of technology-related hardware, as discussed above. Excluding the impact of technology-related hardware, net sales were down approximately 3.6%. Revenues from sales of copier/printer equipment decreased by 3.8%, or $46,888, compared to the nine months ended June 30, 2002 due to higher than average backorders at June 30, 2003, changes in product sales mix and lower average selling prices as new technologies were introduced at lower price points, particularly in color equipment.

Services, which include revenues from the servicing of copier/printer equipment, outsourcing and other services, decreased by $73,587, or 4.6%, including a 1.0% benefit from foreign currency, compared to the nine months ended June 30, 2002. Revenues from outsourcing and other service offerings were impacted by our actions to exit, sell or downsize certain non-strategic businesses during fiscal 2002, which accounted for $51,501 of the total services revenue decline. Excluding the impact of these actions, outsourcing and other services decreased approximately 1.4% compared to the prior year due to customers’ business downsizing, customer’s decisions to in-source and reduced demand for legal document services, arising from a slowdown in the legal business and fewer commercial transactions that utilize such services. Revenues from the servicing of copier/printer equipment decreased by approximately 1.7%, or $14,649, compared to the prior year primarily due to mix.

Finance income is generated by IKON’s wholly-owned leasing subsidiaries. IOSC, IKON’s leasing subsidiary in the United States, accounted for approximately 90% of IKON’s finance income for the nine months ended June 30, 2003. Finance income increased by $9,626, or 3.4%, including a 0.7% benefit from foreign currency, compared to the nine months ended June 30, 2002, primarily due to growth in the lease portfolio.

Overall gross margin increased to 39.2% from 38.9% for the nine months ended June 30, 2002. The gross margin on net sales decreased to 33.8% from 34.3%. This decrease is primarily due to the shift in the sales mix of copier/printer equipment sold during the period. The impact of these items was partially offset by reduced sales of lower-margin technology hardware. The gross margin on finance income increased to 61.2% from 58.0% during the nine months ended June 30, 2003, primarily due to the effect of lower average borrowing rates.

Selling and administrative expense decreased by $51,132, or 4.3%. The decrease was due to $47,957 from improved productivity, centralization and consolidation initiatives including headcount reductions and $29,636 from the downsizing or elimination of unprofitable businesses. The Company incurred $41,145 of increased pension costs and e-IKON expenses and $6,728 of higher bad debt expense, which were partially offset by a $15,412 decrease in expenses related to operational performance compensation costs. Furthermore, during the nine months ended June 30, 2002, the Company recorded a charge of $6,000 related to the expected settlement of the legal matter of Whetman, et al. v. IKON Office Solutions, Inc., et al, which was agreed to in the fourth quarter of 2002. As a result of declines in revenue, selling and administrative expense as a percentage of revenue was 33.4% for the nine months ended June 30, 2003, compared to 33.0% for the nine months ended June 30, 2002.

Our operating income decreased by $20,399 compared to the nine months ended June 30, 2002. Our operating margin was 5.8% for the nine months ended June 30, 2003 compared to 6.0% in the nine months ended June 30, 2002.

During the nine months ended June 30, 2003, the Company repurchased $215,109 par value of its 9.75% notes due 2004, $46,334 par value of its 6.75% notes due November 2004, $9,360 par value of its 6.75% notes due June 2025, and $55,000 par value private placement debt due November 2005 for $233,442, $47,384, $7,440 and $61,327, respectively. As a result of these financing actions, the Company recognized a loss from the early extinguishment of debt, including the write-off of unamortized costs, of $26,204 during the nine months ended June 30, 2003.

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Interest expense, net was $37,583 during the nine months ended June 30, 2003 compared to $41,551 during the nine months ended June 30, 2002 due to lower average outstanding debt during the nine months ended June 30, 2003.

The effective income tax rate was 37.8% during the nine months ended June 30, 2003 compared to 37.3% during the nine months ended June 30, 2002. The increase in the effective tax rate is primarily attributable to an increase in our state tax rates and our inability to record tax benefits from losses incurred in certain foreign jurisdictions.

Diluted earnings per common share were $0.54 for the nine months ended June 30, 2003 compared to $0.74 for the nine months ended June 30, 2002.

Review of Business Segments

IKON North America

Net sales decreased by $144,765, or 9.3%, to $1,408,997 during the nine months ended June 30, 2003 from $1,553,662 during the nine months ended June 30, 2002. Approximately $72,000 of the decrease was due to a decline in sales of technology-related hardware reflecting our strategy to de-emphasize certain low margin products. The remaining decrease was due to declines in supplies and sales of copier/printer equipment which have been impacted by higher than average backorders at June 30, 2003, changes in product sales mix and lower average selling prices as new technologies were introduced at lower price points, particularly in color equipment. Services decreased by $73,685, or 5.1%, to $1,383,886 during the nine months ended June 30, 2003 from $1,457,571 during the nine months ended June 30, 2002. Approximately $47,800 of the decline resulted from a decrease in revenue from outsourcing and other service offerings, of which approximately $25,500 was due to the impact of our actions to exit, sell or downsize certain non-strategic businesses during fiscal 2002. The remainder of the decline in revenue from outsourcing and other service offerings was due to customers’ business downsizing, customer’s decisions to in-source and reduced demand for legal document services, arising from a slowdown in the legal industry and fewer commercial transactions that utilize such services. The decrease in revenues from the servicing of copier/printer equipment was primarily due to mix. Finance income increased by $7,509, or 2.8%, to $272,017 during the nine months ended June 30, 2003 from $264,508 during the nine months ended June 30, 2002 primarily due to growth in the lease portfolio compared to the nine months ended June 30, 2002. Operating income decreased by $41,003, or 8.8%, to $424,035 during the nine months ended June 30, 2003 from $465,038 during the nine months ended June 30, 2002.

IKON Europe

Net sales increased by $9,206, or 4.6%, to $207,341 during the nine months ended June 30, 2003 from $198,135 during the nine months ended June 30, 2002. This primarily resulted from a decrease in sales of copier/printer equipment of approximately $10,200 and a decrease in technology-related hardware of approximately $5,600, offset by an increase in revenue of approximately $25,000 due to strengthened foreign currencies. Services increased by $26,122, or 23.4%, to $137,797 during the nine months ended June 30, 2003 from $111,675 during the nine months ended June 30, 2002. This increase was due to growth in outsourcing and other services of approximately $10,600 combined with an increase of approximately $15,500 due to strengthened foreign currencies. Finance income increased by $2,117, or 14.1%, to $17,101 during the nine months ended June 30, 2003 from $14,984 during the nine months ended June 30, 2002, due to an increase of approximately $1,800 due to strengthened foreign currencies. Operating income increased by $2,614, or 15.7%, to $19,252 during the nine months ended June 30, 2003 from $16,638 during the nine months ended June 30, 2002 due to reduced headcount as a result of infrastructure improvements.

Other

Net sales decreased by $7,022, or 95.7%, to $317 during the nine months ended June 30, 2003 from $7,339 during the nine months ended June 30, 2002. Services decreased by $26,024, or 62.9%, to $15,341 during the nine months ended June 30, 2003 from $41,365 during the nine months ended June 30, 2002. These declines are primarily due to the downsizing, sale, and closure of certain non-strategic businesses such as telephony, technology education and other technology-related operations. There was an operating loss of $1,556 during the nine months ended June 30, 2003 compared to an operating loss of $8,572 during the nine months ended June 30, 2002. The decrease in operating loss reflects the impact of the actions described above concerning the downsizing, sale or closure of certain non-strategic businesses.

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Restructuring and Asset Impairment Charges

In the fourth quarter of fiscal 2001, the Company announced the acceleration of certain cost cutting and infrastructure improvements (as described below) and recorded a pre-tax restructuring and asset impairment charge of $60,000, and reserve adjustments related primarily to the exit of the Company’s telephony operations of $5,300. The related reserve adjustments were included in cost of goods sold for the write-off of obsolete inventory, and selling and administrative expense for the write-off of accounts receivable in the consolidated statement of income. The asset impairments included fixed asset write-offs totaling $6,078 as follows: $100 from technology services businesses closures; $897 from digital print center business closures; $338 from digital print center business sales; and $4,743 relating to IKON infrastructure. The asset impairments also included goodwill write-offs totaling $19,422 as follows: $955 from technology services businesses closures; $6,591 from digital print center business sales; and $11,876 relating to telephony business sales. The Company developed this plan as part of our continuing effort to streamline IKON’s infrastructure to increase future productivity, and to address economic changes within specific marketplaces. This resulted in a charge of $65,300 ($49,235 after-tax). These actions addressed the sale of the Company’s telephony operations and the closing of twelve nonstrategic digital print centers as the Company shifts its focus from transactional work toward contract print work and the support of major accounts. These actions also addressed further downsizing of operational infrastructures throughout the organization as the Company leverages and intensifies prior standardization and centralization initiatives. These actions included the ongoing centralization and consolidation of many selling and administrative functions, including marketplace consolidation, supply chain, finance, customer service, sales support and the realignment of sales coverage against our long-term growth objectives. Additionally, the Company recorded an asset impairment charge of $3,582 ($3,300 after-tax) related to the sale of the Company’s technology education operations. The asset impairments included fixed asset write-offs totaling $828. The asset impairments also included goodwill write-offs totaling $2,754. Therefore, the aggregate charge recorded in fiscal 2001 (the “Fiscal 2001 Charge”) was $68,882 ($52,535 after-tax).

In the first quarter of fiscal 2000, the Company announced plans to improve performance and efficiency and incurred a total pre-tax restructuring and asset impairment charge (the “First Quarter 2000 Charge”) of $105,340 ($78,479 after-tax). The asset impairments included fixed asset write-offs totaling $12,668 as follows: $631 from technology services integration and education business closures; $2,530 from technology services integration and education business downsizing; $1,269 from digital print center business closures; $588 from digital print center business downsizing; $1,405 from document services excess equipment; $1,244 from a technology services business sale; and $5,001 relating to IKON infrastructure. The asset impairments included goodwill write-offs totaling $38,880 as follows: $3,279 from technology services integration business sales; $10,156 from technology services integration and education business closures; $9,566 from digital print center business closures; $14,950 from a technology services business sale; and $929 relating to an IKON Europe closure. These actions addressed under-performance in certain technology services operations, business document services, and business information services locations as well as the Company’s desire to strategically position these businesses for integration and profitable growth. Plans included consolidating or disposing of certain under-performing and non-core locations; implementing productivity enhancements through the consolidation and centralization of activities in inventory management, purchasing, finance/accounting and other administrative functions; and consolidating real estate through the co-location of business units as well as the disposition of unproductive real estate. In the fourth quarter of fiscal 2000, the Company determined that some first quarter restructuring initiatives would not require the level of spending that had been originally estimated, and certain other initiatives would not be implemented due to changing business dynamics. Previously targeted sites were maintained based on their potential for improvement as well as their relationship to IKON’s overall strategic direction. As a result of our integration efforts, locations originally identified for sale or closure were combined with other IKON businesses. As a result, $15,961 was reversed from the First Quarter 2000 Charge, and the total amount of the First Quarter 2000 Charge was reduced to $89,379 ($66,587 after-tax). The components of the reversal were: 538 fewer positions eliminated reduced severance by $1,784, real estate lease payments reduced by $13,426, and contractual commitments reduced by $751. The severance reversal resulted from successfully negotiating business sales whereby affected employees assumed positions with the acquiring companies, higher-than-expected voluntary resignations, and our decision not to implement certain supply chain and shared service center consolidation efforts. The real estate lease payment reversal was primarily the result of our decision not to close certain sites. Also, in the fourth quarter of fiscal 2000, the Company announced other specific actions designed to address the changing market conditions impacting technology services, IKON North America, and outsourcing locations and incurred a total pre-tax restructuring and asset impairment charge (the “Fourth Quarter 2000 Charge”) of $15,789 ($12,353 after-tax). The asset impairments consisted of fixed asset write-offs totaling $2,371 as follows: $1,371 from technology services integration and education business closures; $721 from digital print center business closures; and $279 relating to IKON infrastructure. The First Quarter 2000 Charge (as reduced) and Fourth Quarter 2000 Charge resulted in a net fiscal 2000 charge (the “Fiscal 2000 Charge”) of $105,168 ($78,940 after-tax).

In the fourth quarter of fiscal 2002, the Company reversed $10,497 ($6,823 after-tax) of its restructuring charges described above. The reversed charges consisted of $7,418 related to severance, $1,667 related to leasehold termination costs and $1,412 related to contractual commitments. The severance reversal was the result of the average cost of severance per employee being less than estimated and 188 fewer positions eliminated than estimated due to voluntary resignations and our decision not to close a digital print center due to changing business dynamics. The reversal of leasehold termination costs and contractual commitments resulted from our decision not to close a digital print center. Additionally, we were also able to reduce our liability through successful equipment and real property lease termination negotiations.

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The pre-tax components of the restructuring, net, and asset impairment charges for fiscal 2002, 2001 and 2000 were as follows:

The Company calculated the asset and goodwill impairments as required by SFAS 121 “Accounting for the Impairment of Long-Lived Assets and Assets to be Disposed of.” The proceeds received for businesses sold were not sufficient to cover the fixed asset and goodwill balances. As such, those balances were written-off. Goodwill directly associated with businesses that were closed was also written-off.

The following presents a rollforward of the restructuring components of the Fiscal 2001 Charge, Fourth Quarter 2000 Charge and First Quarter 2000 Charge (collectively the “Charges”) from September 30, 2002 to the balance remaining at June 30, 2003, which is included in other accrued expenses in the consolidated balance sheets:

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The projected payments of the remaining balances of the Charges are as follows:

The Company determined its probable sub-lease income through the performance of local commercial real estate market valuations by our external regional real estate brokers. All lease termination amounts are shown net of projected sub-lease income. Projected sub-lease income as of June 30, 2003 was $595, $3,785 and $3,420 for the Fiscal 2001 Charge, Fourth Quarter 2000 Charge and First Quarter 2000 Charge, respectively.

All actions related to our restructuring are complete. Severance payments to terminated employees are made in installments. The charges for leasehold termination costs relate to real estate lease contracts where the Company has exited certain locations and is required to make payments over the remaining lease term.

All locations affected by the Charges (23, 5 and 22 locations for the Fiscal 2001 Charge, Fourth Quarter 2000 Charge and First Quarter 2000 Charge, respectively) have been closed and all employees affected by the Charges (1,412, 386 and 1,394 employees for the Fiscal 2001 Charge, Fourth Quarter 2000 Charge and First Quarter 2000 Charge, respectively) have been terminated.

Financial Condition and Liquidity

Net cash provided by operating activities for the nine months of fiscal 2003 was $124,822. During the same period, the Company used $142,744 of cash for investing activities, which included net finance subsidiary use of $66,798, capital expenditures for property and equipment of $58,054 and capital expenditures for equipment on operating leases of $46,294. Cash used in financing activities of $48,269, includes net repayments of $122,342 of non-finance subsidiaries’ long-term debt, net repayments of $14,102 of short-term debt and net borrowings of $153,934 of finance subsidiaries’ debt.

Total debt was $3,491,740 at June 30, 2003, an increase of $70,882 from the total debt balance of $3,420,858 at September 30, 2002. Debt, excluding finance subsidiaries, was $491,819 at June 30, 2003, a decrease of $121,178 from the debt balance of $612,997 at September 30, 2002. Excluding finance subsidiaries’ debt, our debt to capital ratio was 22.8% at June 30, 2003 compared to 28.5% at September 30, 2002. Finance subsidiaries’ debt is excluded from the calculation because a significant amount of this debt is backed by a portion of the lease receivables portfolio. Including finance subsidiaries’ debt, our debt to capital ratio was 67.7% at June 30, 2003 compared to 69.0% at September 30, 2002.

In June 2003, IOSC issued $350,000 of notes payable with an interest rate of 7.25% (7.43% yield including the original issue discount) which matures on June 30, 2008. Interest is paid on the notes semi-annually in June and December beginning December 30, 2003. With the proceeds from the issuance, the Company tendered its 9.75% notes due June 15, 2004, deposited sufficient funds with an escrow agent to defease the remaining $34,891 of 9.75% notes not tendered and used the remainder of the proceeds for general corporate purposes.

During the nine months ended June 30, 2003, the Company repurchased the following notes payable: