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SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the Quarterly Period Ended September 28, 2003

OR

For the transition period from       to

Commission File Number: 333-49821

MSX International, Inc.

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 12(b)-2 of the Securities and Exchange Act of 1934). Yes [  ] No [X]

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MSX INTERNATIONAL, INC.
INDEX

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PART I. FINANCIAL INFORMATION

MSX INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial statements.

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MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
for the fiscal quarters and fiscal nine months ended September 28, 2003 and September 29, 2002

The accompanying notes are an integral part of the consolidated financial statements.

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MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
for the fiscal nine months ended September 28, 2003 and September 29, 2002

The accompanying notes are an integral part of the consolidated financial statements.

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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)
(dollars in thousands unless otherwise stated)

1. Organization and Basis of Presentation:

          The accompanying financial statements present the consolidated assets and liabilities and results of operations of MSX International, Inc. and its majority owned subsidiaries (“MSXI”). MSXI is a holding company owned by Citicorp and affiliates and certain members of management. We are principally engaged in providing technical business services to automobile manufacturers and suppliers and other industries primarily in North America and Europe. We utilize a 52-53 week fiscal year, which ends on the Sunday nearest December 31.

          All intercompany transactions and balances have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items, which are necessary for a fair presentation. The operating results for the fiscal quarters and fiscal nine months ended September 28, 2003 and September 29, 2002 are not necessarily indicative of the results of operations for the entire year. Reference should be made to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 29, 2002. Certain prior year amounts have been reclassified to conform to the presentation adopted during the current period.

2. Acquisition and Loss on Asset Impairment and Sale:

          Effective in December 2002 we acquired the remaining 25% of the outstanding common stock of Satiz Srl from Fiat SpA. The transaction had been contemplated as part of the original acquisition of 75% of the outstanding common stock of Satiz in December of 1999. The total purchase price was about $3.5 million based on formulas established at the time of the original 75% acquisition. The transaction was accounted for under the purchase method of accounting resulting in additional goodwill of $2.4 million. Satiz specializes in commercial and technical publishing in Europe and derives a significant portion of its sales from Fiat and related subsidiaries.

          Effective September 1, 2003, we completed the sale of selected assets of our translation management business in Europe for approximately $0.5 million. This transaction resulted in a loss on the sale of $1.1 million and was consummated as part of our restructuring efforts in response to forecasted operating losses generated by this business. As a result of the sale we also recorded a charge against goodwill associated with these assets totaling $0.7 million. The proforma effects of this transaction would not be materially different from the reported results for the periods presented.

3. Goodwill and Intangible Assets:

          Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142. Under the new standard, goodwill is no longer amortized but is tested periodically for impairment. Additionally, SFAS No. 142 changes the methodology of assessing goodwill impairment. Under the new standard, goodwill is considered impaired if the book value of an operating unit exceeds its estimated fair value. Upon adoption of SFAS No. 142 we recorded a one-time, non-cash charge of about $47.8 million ($38.1 million net of taxes), to reduce the carrying value of goodwill. The charge is reflected as a cumulative effect of an accounting change in our consolidated results of operations, net of taxes. In calculating the impairment charge, the fair value of the operating units underlying our business was estimated using a discounted cash flow methodology.

          The following summarizes the changes in our goodwill balances during the nine months ended September 28, 2003:

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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued
(dollars in thousands unless otherwise stated)

4. Restructuring and Severance:

          As of December 29, 2002, accrued restructuring and severance costs totaled $4.5 million. Additional charges of $2.0 million and $3.9 million were recorded during the third quarter and first nine months of 2003, respectively primarily for additional severance and termination benefits approved and communicated by management prior to September 28, 2003. Approximately $1.3 million and $6.1 million were charged to the restructuring and severance accrual during the third quarter and the first nine months of 2003, respectively. These charges were comprised of actual severance and termination benefits paid associated with the headcount reductions and other actions previously approved by management. Remaining accrued severance costs totaled $2.3 million as of September 28, 2003 and are expected to be paid during the remainder of 2003. The $2.3 million balance is substantially comprised of 2003 restructuring and severance costs.

5. Accounts Receivable:

          Accounts receivable includes both billed and unbilled receivables. Unbilled receivables amounted to $76.7 million and $66.8 million at September 28, 2003 and December 29, 2002, respectively. All such billings are expected to be collected within the ensuing year. Accounts receivable also include the portion of our billings for certain vendor management and supply chain management services attributable to services provided by our vendors which are passed on to our customers. These amounts totaled $62.4 million as of September 28, 2003 and $37.1 million as of December 29, 2002. A corresponding liability to our vendors for these amounts is recorded in accounts payable at the time the receivable is recognized.

6. Debt:

          Debt is comprised of the following:

          On August 1, 2003 we completed a private offering of senior secured notes totaling $100.5 million that mature October 15, 2007. The transaction included the issuance of $75.5 million aggregate principal amount of 11% senior secured notes, priced to yield 11.25%, and $25.0 million aggregate principal amount of 11.5% mezzanine term notes. The notes were issued by both MSX International, Inc. and MSX International Limited (MSXI Limited), a wholly-owned subsidiary in the United Kingdom. The $25.0 million of mezzanine term notes were issued to Citicorp Mezzanine III, L.P. Proceeds from the combined offering totaled $95.5 million, net of related expenses and discount and were used to repay all debt outstanding under our existing credit facility.

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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued
(dollars in thousands unless otherwise stated)

          Upon consummation of the offering, our second secured term note was amended and restated into a $14.7 million note issued by MSX International, Inc. and a $2.4 million note issued by MSXI Limited. The amendments to the note also include extending the maturity from June 7, 2007 to January 15, 2008, and resetting the covenants in the notes so that they are equivalent to the senior notes sold on August 1, 2003. The amended and restated notes are referred to as the “fourth lien term notes.” As of September 28, 2003 we have $41.2 million of outstanding debt with related parties comprised of mezzanine term notes and fourth lien term notes.

          Concurrent with the offering, we entered into an amended and restated credit facility with Bank One, N.A. Terms of the amendment allow for revolving advances up to $40.0 million on a secured basis through July 2006 plus an additional $5.0 million available exclusively for the issuance of letters of credit. Available borrowings are subject to accounts receivable balance requirements and certain customary covenants. As of September 28, 2003, $0.3 million was outstanding under the new credit facility and has been classified as long-term debt due to its maturity in 2006.

7. Mandatorily Redeemable Series A Preferred Stock:

          As of September 28, 2003 and December 29, 2002 there are 359,448 shares of 12% Series A Cumulative Mandatorily Redeemable Preferred Stock (the “Preferred Stock”) outstanding with a stated value of $100 per share or about $36 million in total. We are authorized to issue up to 1,500,000 shares of Preferred Stock, divided into two classes: 500,000 shares of Redeemable Series A Preferred Stock, par value $0.01, and 1,000,000 shares of New Preferred Stock, par value $0.01. As of September 28, 2003, we have not declared or paid any dividends. However, due to the mandatory redemption features of the preferred stock, dividends accrued totaled $43.5 million as of September 28, 2003. We may not declare or pay any dividends or other distribution with respect to any common stock or other class or series of stock ranking junior to the Preferred Stock without first complying with restrictions specified in the Amended and Restated Stockholders’ Agreement. Our ability to pay cash dividends, and to acquire or redeem the preferred stock, is subject to restrictions contained in our debt agreements.

          Prior results of operations reflect a change in the treatment of accumulated dividends on the Preferred Stock. Accumulated dividends on Preferred Stock, which had been disclosed in previous filings, have been deducted from shareholders’ deficit and included with the related Preferred Stock on the consolidated balance sheets. The change in treatment was adopted during the fourth quarter of 2002 and had no impact on cash flows for any of the periods presented.

8. Common Stock Purchase Warrants

          In connection with the issuance of the mezzanine term notes, discussed in Note 6, we granted to Citicorp Mezzanine III, L.P. the right to purchase 666,649 shares of our Class A common stock. The purchase warrants are exercisable at a price of $0.01 per share, subject to certain anti-dilution adjustments, through July 31, 2013. The stock purchase warrants were recorded at their estimated fair value upon issuance. Fair value of $750,000 was estimated using a discounted cash flow methodology.

9. Comprehensive Loss:

          Our comprehensive loss was:

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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued
(dollars in thousands unless otherwise stated)

10. Income Taxes:

          For the third quarter and nine months ended September 28, 2003 the effective tax rate reflects the establishment of valuation allowances against a substantial portion of our deferred tax assets. During the third quarter and nine months ended September 28, 2003 allowances totaling $17.0 million and $19.4 million were recorded against deferred tax assets, respectively.

11. Segment Information:

          MSXI is a global provider of technical business services to the automotive and other industries. Our business includes: collaborative engineering services, human capital management services, and technical and marketing services. Collaborative engineering offers a full range of total product, custom, or single point engineering solutions. Human capital management services include a full range of staffing solutions, including direct support of our engineering and other collaborative services. Our technical and marketing services include solutions to quality, supply chain, and communication related customer needs. Certain operations within each of our segments have been aggregated following the provisions of SFAS No. 131 due to the similar characteristics of their operations, including the nature of their service offerings, processes supporting the delivery of the services, customers, and marketing and sales processes.

          The accounting policies of our segments are the same as those for MSXI except that the financial results for each segment are presented using a management approach. We evaluate performance based on earnings before interest, taxes, amortization and non-cash charges (EBITA), including the Michigan Single Business Tax and other similar taxes. The results of each segment include certain allocations for general, administrative, and other shared costs. However, certain shared costs and termination and restructuring costs are not allocated to the segments.

          The following is a summary of selected data for each of our segments:

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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued
(dollars in thousands unless otherwise stated)

11. Segment Information: - continued

          A reconciliation of total segment EBITA to consolidated loss before income taxes, minority interests and equity in affiliates is as follows:

12. Stock-Based Compensation:

          We account for stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB 25”), “Accounting for Stock Issued to Employees,” and related interpretations. In June, 2003 we repriced selected outstanding stock options. In accordance with APB 25 we are now required to account for the options under variable plan accounting. Under APB 25, we have not recognized any expense related to employee stock options as the estimated fair value of the stock is below the exercise price of the options as of September 28, 2003. The following table illustrates the effect on net loss for the fiscal quarters and fiscal nine months ended September 28, 2003 and September 29, 2002 if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.

13. New Accounting Pronouncement:

          In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how companies classify and measure in their financial statements certain financial instruments with characteristics of both liabilities and equity. It requires that a company classify certain financial instruments as liabilities because they embody an obligation of the company. The company will adopt FAS 150 beginning in the first fiscal quarter of 2004. Once adopted we are likely to be required to classify preferred stock as a liability and the corresponding accrued dividends as a component of interest expense.

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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued
(dollars in thousands unless otherwise stated)

14. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.:

     The senior secured notes and senior subordinated notes issued by MSX International, Inc. are secured by security interests in substantially all of the assets of the company and its domestic subsidiaries, subject to permitted liens. Payment obligations under the senior secured notes and senior subordinated notes issued by MSX International, Inc. are guaranteed by all domestic subsidiaries of MSX International, Inc.

     The following presents condensed consolidating financial information for:

	•		MSXI—the parent company and issuer
	•		The guarantor subsidiaries
	•		The non-guarantor subsidiaries
	•		MSXI on a consolidated basis

     Investments in subsidiaries, if any, are accounted for under the equity method. The principal elimination entries are to eliminate the investments in subsidiaries and intercompany balances and transactions. Separate financial statements for the guarantor and non-guarantor subsidiaries are not presented because management has determined those would not be material to the holders of the senior subordinated or senior secured notes.

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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued
(dollars in thousands unless otherwise stated)

14. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. – continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of September 28, 2003