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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 0-20405

IOS CAPITAL, LLC

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (478) 471-2300

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   [   ]      No  [X]

Registered debt outstanding as of August 12 , 2003 was $2,404,198,974.

The registrant meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing with the reduced format disclosure contemplated thereby.

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IOS CAPITAL, LLC

INDEX*

PART I.   FINANCIAL INFORMATION

PART II.   OTHER INFORMATION

SIGNATURES

* All amounts contained in this quarterly report on Form 10-Q are in thousands unless otherwise noted.

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FORWARD-LOOKING INFORMATION

This Report includes or incorporates by reference information which may constitute forward-looking statements within the meaning of the federal securities laws. Although IOS Capital, LLC (the “Company” or “IOSC”) believes the expectations contained in such forward-looking statements are reasonable, it can give no assurances that such expectations will prove correct. Such forward-looking information is based upon management’s current plans or expectations and is subject to a number of risks and uncertainties that could significantly affect current plans, anticipated actions and the future financial condition and results of the Company and IKON Office Solutions, Inc. (“IKON”). These risks and uncertainties, which apply to both the Company and IKON, include, but are not limited to, risks and uncertainties relating to: factors which may affect the Company’s ability to collect amounts due from lessees in order to make payments due in connection with the Company’s lease-backed notes (such as lessee defaults or factors impeding recovery efforts); 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 the 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 and IKON’s business segments and the anticipated benefits of operational synergies related thereto; and the Company’s and IKON’s ability to finance their current operations and its growth initiatives. As a consequence of these and other risks and uncertainties, current plans, anticipated actions and future financial condition and results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company or IKON.

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PART I.   FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

IOS Capital, LLC
Consolidated Balance Sheets

See notes to condensed consolidated financial statements.

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IOS Capital, LLC
Consolidated Statements of Income
(unaudited)

See notes to condensed financial statements.

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IOS Capital, LLC
Consolidated Statements of Cash Flows
(unaudited)

See notes to condensed consolidated financial statements.

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IOS Capital, LLC
Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 1:   Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of IOS Capital, LLC (“IOSC” or the “Company”) 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 of the interim periods 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.

Note 2:   Notes Payable and Lease-Backed Notes

In June 2003, the Company issued $350,000 of notes payable with an interest rate of 7.25% (7.43% yield including the original issue discount) which are due 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 $205,609 par value of its 9.75% notes due January 15, 2004, for $223,844 and deposited sufficient funds with an escrow agent to defease the remaining $34,891 of 9.75% notes not tendered. The remainder of the proceeds were used for general corporate purposes.

During the first quarter of fiscal 2003, the Company repurchased $9,500 par value of its 9.75% notes due 2004 for $9,598.

As a result of these repurchases, the Company recognized a loss, including the write-off of unamortized costs, of $20,292, 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 the Company) issued Series 2003-1 Lease-Backed Notes (the “2003-1 Notes”) 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 unsecured credit facility borrowings and increase the Company’s cash balance.

The 2003-1 Notes were issued pursuant to certain indentures between IKON Receivables Funding, LLC, the Company 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 the Company (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.

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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, the Company repaid $701,082 of lease-backed notes.

Note 3:   Asset Securitization Conduit Financing

During the nine months ended June 30, 2003, the Company pledged or transferred $652,978 in financing lease receivables for $551,145 in cash in connection with conduits. As of June 30, 2003, the Company had approximately $480,000 available under revolving asset securitization conduit financing agreements.

Note 4:   Comprehensive Income

Total comprehensive income is as follows:

Note 5:   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.

Item 2.       Management's Discussion and Analysis of Financial Condition and Results of Operations

Pursuant to General Instruction H(2)(a) of Form 10-Q, the following analysis of the results of operations is presented in lieu of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Critical Accounting Policies and Estimates

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 discuss these accounting policies at relevant sections in this discussion and analysis and in the notes to the consolidated financial statements contained in our 2002 Annual Report on Form 10-K. In addition, we believe our most critical accounting policies include the following:

Residual Values.     IKON and IOSC estimate 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 manufacturers suggested retail price, 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 the write-down of the value of the equipment.

Allowance for Lease Receivables.     IOSC maintains an allowance for lease defaults for estimated losses resulting from the inability of its lessess to make required payments. If the financial condition of the lessees were to deteriorate, resulting in an impairment of their ability to make required payments, increases to our allowance may be required.

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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 condensed consolidated financial statements and notes. Actual results could differ from those estimates and assumptions.

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

Total revenues increased by $2,268, or 2.3%, in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002. Lease finance income increased by $473, or 0.6%, due to the increase in the lease portfolio in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002. This increase was partially offset by a decrease in the average yield of leases in the portfolio from the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002.

Office equipment placed on rental, with either cancelable or non-cancelable terms, by the IKON marketplaces to customers may be purchased by the Company. During the third quarter of fiscal 2003, the Company purchased operating lease equipment of $10,905 compared to $21,749 during the third quarter of fiscal 2002. The decrease in purchases is due to a decrease in operating rentals written by the IKON marketplaces. Since the Company can service operating rentals more efficiently than the IKON marketplaces, substantially all of the operating rentals written by the IKON marketplaces are purchased by the Company. Rental income increased by $1,501 or 18.4%, during the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002, primarily due to an increase in the lease portfolio on a year-to-year basis.

Other income consists primarily of late payment charges, various billing fees, and interest income on restricted cash. Overall, income from these sources increased by $294, or 6.0%, in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002. Various billing fees increased by $647 or 54.0%, which was off set by a decrease in interest income on restricted cash of $169, or 45.4%, in the third quarter of 2003 compared to the third quarter of fiscal 2002, due to the decline in short-term interest rates. Also offsetting the increase was a decrease in late payment charges of $184, or 5.5%, in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002, due to the improvement in the delinquency of the lease portfolio.

Total expenses increased by $25,671, or 45.6%, for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. Borrowings to finance the investment in leases in the form of convertible subordinated notes, asset securitization conduit financing, lease-backed notes in the public market net of intercompany receivables due from IKON were $2,659,043 outstanding at June 30, 2003 compared to $2,571,022 outstanding at June 30, 2002. This increase was primarily due to the issuance of $852,085 of lease-backed notes and $350,000 of notes payable offset by the early extinguishment of $205,609 of notes payable and the repayment of $701,082 of lease-backed notes. The Company paid a weighted average interest rate on all borrowings of 4.9% as of June 30, 2003 compared to 6.3% as of June 30, 2002. Primarily as a result of the decrease in the weighted average interest rate on all borrowings, interest expense decreased by $4,860, or 13.0%, in the third quarter of fiscal 2003 compared to the third quarter of fiscal 2002. In accordance with the 1996 Support Agreement between the Company and IKON, the Company’s debt to equity ratio, including amounts due from IKON, was 5.9 to 1 and 6.0 to 1, at June 30, 2003 and June 30, 2002, respectively.

Lease defaults, net of recoveries, increased by $8,047, or 226.9%, for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. Prior to October 1, 2002, the Company was involved in a shared recourse arrangement with the IKON marketplaces. Under that shared recourse arrangement, the Company recorded 35% of the total provision for lease defaults. Effective October 1, 2002, the shared recourse arrangement with IKON marketplaces was terminated, and the Company records 100% of the provision for lease defaults.

Depreciation expense on operating rentals decreased by $48, or 0.7%, for the three months ended June 30, 2003 compared to the three months ended June 30, 2002, due to the volume and mix of leased equipment. General and administrative expenses increased by $2,338, or 26.8%, for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. Effective fiscal 2003, the Company is responsible for the cost of the lease sales and marketing staff and certain credit investigation expenses, both of which were previously expensed by the IKON marketplaces.

During the three months ended June 30, 2003, the Company repurchased $205,609 par value of its 9.75% notes due January 15, 2004, for $223,844. As a result, the Company recognized a loss from the early extinguishment of debt, including the write-off of unamortized costs, of $20,194 during the three months ended June 30, 2003.

Income before taxes on income for the third quarter of fiscal 2003 decreased by $23,403, or 54.9%, compared to the third quarter of fiscal 2002 as a result of the items above.

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Taxes on income for the third quarter of fiscal 2003 decreased by $13,127, or 77.0%, compared to the third quarter of fiscal 2002. The effective income tax rate was 20% for the three months ended June 30, 2003 and 40% for the three months ended June 30, 2002. The decrease in taxes on income is attributable to the decrease in income before taxes on income for the third quarter of fiscal 2003 as compared to the third quarter of fiscal 2002. Also, the Company’s annual effective income tax rate was decreased from 40% to 36% during the quarter ended June 30, 2003.

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

Total revenues increased by $3,957, or 1.3%, for the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002. Lease finance income increased by $1,693, or 0.7%, due to the increase in the lease portfolio for the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002. This increase was partially offset by a decrease in the average yield of leases in the portfolio for the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002.

Office equipment placed on rental, with either cancelable or non-cancelable terms, by the IKON marketplaces to customers, may be purchased by the Company. During the nine months ended June 30, 2003, the Company purchased operating lease equipment of $35,339 compared to $41,663 during the nine months ended June 30, 2002. The decrease in purchases is due to a decrease in operating rentals written by the IKON marketplaces. Since the Company can service operating rentals more efficiently than the IKON marketplaces, substantially all of the operating rentals written by the IKON marketplaces are purchased by the Company. Rental income increased by $4,110, or 16.9% during the nine months ended June 30, 2003, compared to the nine months ended June 30, 2002, due to an increase in the lease portfolio.

Other income consists primarily of late payment charges, various billing fees, and interest income on restricted cash. Overall, income from these sources decreased by $1,846, or 11.6%, in the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002. Interest income on restricted cash decreased by $752, or 49.5%, compared to the nine months ended June 30, 2002, due to the decline in short-term interest rates. Late payment charges decreased by $1,306, or 12.3%, compared to the nine months ended June 30, 2002, primarily due to the improvement in the delinquency of the lease portfolio.

Total expenses increased by $37,455, or 21.9%, during the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002. Borrowings to finance the investment in leases in the form of convertible subordinated notes, asset securitization conduit financing, lease-backed notes in the public market net of intercompany receivables from IKON were $2,659,043 outstanding at June 30, 2003 compared to $2,571,022 outstanding at June 30, 2002. This increase is due primarily to the issuance of $852,085 of lease-backed notes and $350,000 of notes payable offset by the early extinguishment of $215,109 of notes payable and the repayment of $701,082 of lease-backed notes. The Company paid a weighted average interest rate on all borrowings of 4.9% as of June 30, 2003 compared to 6.3% as of June 30, 2002. Primarily as a result of the decrease in the weighted average interest rate on all borrowings, interest expense decreased by $13,145, or 11.5%, during the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002.

Lease defaults, net of recoveries, increased by $23,388, or 204.2%, during the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002. Prior to October 1, 2002, the Company was involved in a shared recourse arrangement with the IKON marketplaces. This arrangement provided for net losses resulting from lease defaults to be shared equally. Effective October 1, 2002, the shared recourse arrangement with IKON marketplaces was terminated, and the Company records the entire provision for lease defaults.

Depreciation expense on operating rentals increased by $2,104, or 10.4%, during the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002, due to the volume and mix of leased equipment. General and administrative expenses increased by $4,816, or 18.9%, during the nine months ended June 30, 2003 compared to the nine months ended June 30, 2002. Effective fiscal 2003, the Company is responsible for the cost of the lease sales and marketing staff and certain credit investigation expenses, both of which were previously expensed by the IKON marketplaces.

During the nine months ended June 30, 2003, the Company repurchased $215,109 par value of its 9.75% notes due January 15, 2004, for $233,442. As a result, the Company recognized a loss from the early extinguishment of debt, including the write-off of unamortized costs, of $20,292 during the nine months ended June 30, 2003.

Income before taxes on income for the nine months ended June 30, 2003 decreased by $33,498, or 26.2%, compared to the nine months ended June 30, 2002 as a result of the items above.

Taxes on income for the nine months ended June 30, 2003 decreased by $17,166, or 33.6%, compared to the nine months ended June 30, 2002. The decrease in income taxes is attributable to the decrease in income before taxes on income for the nine months ended June 30, 2003 as compared to the nine months ended June 30, 2002. In addition, the effective income tax rate was 36% for the nine months ended June 30, 2003 and 40% for the nine months ended June 30, 2002.

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Contractual Obligations

The following summarizes IOSC’s significant contractual obligations and commitments as of June 30, 2003:

Payments on our debt generally are made from collections of our finance receivables. At June 30, 2003, the Company’s debt was $2,774,805 and net finance receivables were $3,084,978.

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures.     The Company’s Principal Executive Officer and Principal Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, they have concluded that, as of the evaluation date, the Company’s disclosure controls and procedures are reasonably designed to alert them on a timely basis to material information relating to the Company (including its consolidated subsidiaries) required to be included in its reports filed or submitted under the Exchange Act.

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PART II.  OTHER INFORMATION

On April 24, 2003 the Company filed a Current Report on Form 8-K to file, under Item 5 of the Form, information contained in its parent's press release dated April 24, 2003 regarding its results for the third quarter of fiscal 2003.

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. This report has also been signed by the undersigned in his capacity as the chief accounting officer of the Registrant.

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