Back to GetFilings.com



Table of Contents



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 September 28, 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: 333-49821

MSX International, Inc.

(Exact name of registrant as specified in its charter)
     
Delaware   38-3323099
(State or other jurisdiction   (I.R.S. Employer Identification No.)
of incorporation or organization)    
     
22355 W. Eleven Mile, Southfield, Michigan   48034
(Address of principal executive offices)   (Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [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]



 


TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Notes to Consolidated Financial Statements
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURE
10-Q EXHIBIT INDEX
302 Certification of Chief Executive Officer
302 Certification of Chief Financial Officer
906 Certification of CEO & CFO
Press Release


Table of Contents

MSX INTERNATIONAL, INC.
INDEX

             
        Pages
PART I. FINANCIAL INFORMATION
       
             
 
ITEM 1. Financial Statements:
       
             
   
Consolidated Balance Sheets (unaudited) as of September 28, 2003 and December 29, 2002
    2  
             
   
Consolidated Statements of Operations (unaudited) for the fiscal quarters and fiscal nine months ended September 28, 2003 and September 29, 2002
    3  
             
   
Consolidated Statements of Cash Flows (unaudited) for the fiscal nine months ended September 28, 2003 and September 29, 2002
    4  
             
   
Notes to Consolidated Financial Statements (unaudited)
    5  
             
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
    24  
             
 
ITEM 3. Quantitative and Qualitative Disclosure about Market Risk
    29  
             
 
ITEM 4. Controls and Procedures
    29  
             
PART II. OTHER INFORMATION
       
             
 
ITEM 1. Legal Proceedings
    30  
             
 
ITEM 6. Exhibits and Reports on Form 8-K
    30  
             
SIGNATURE
    31  

1


Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MSX INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

as of September 28, 2003 and December 29, 2002
                         
            September 28,        
            2003   December 29,
            (Unaudited)   2002
           
 
            (dollars in thousands)
ASSETS
               
Current assets:
               
 
Cash and cash equivalents
  $ 8,647     $ 10,935  
 
Accounts receivable, net (Note 5)
    226,307       211,957  
 
Inventory
    6,468       4,824  
 
Prepaid expenses and other assets
    8,217       7,277  
 
Deferred income taxes, net (Note 10)
    4,899       6,557  
 
   
     
 
   
Total current assets
    254,538       241,550  
                         
Property and equipment, net
    28,838       39,186  
Goodwill, net (Note 3)
    130,000       127,254  
Other assets
    13,639       11,732  
Deferred income taxes, net (Note 10)
    2,279       12,820  
 
 
   
     
 
   
Total assets
  $ 429,294     $ 432,542  
 
   
     
 
LIABILITIES AND SHAREHOLDERS’ DEFICIT
               
Current liabilities:
               
 
Notes payable and current portion of long-term debt (Note 6)
  $ 4,764     $ 14,671  
 
Accounts payable and drafts
    138,386       132,358  
 
Accrued payroll and benefits
    28,222       28,252  
 
Other accrued liabilities
    55,760       61,786  
 
 
   
     
 
   
Total current liabilities
    227,132       237,067  
                         
Long-term debt (Note 6)
    249,052       220,003  
Long-term deferred compensation and other liabilities
    11,448       11,494  
 
 
   
     
 
 
Total liabilities
    487,632       468,564  
                         
Minority interests
    25       166  
Mandatorily Redeemable Series A Preferred Stock (Note 7)
    79,413       72,629  
Shareholders’ deficit:
               
 
Common Stock, $.01 par value, 200,000,000 aggregate shares of Class A and Class B Common Stock authorized; 20,054,000 shares of Class A Common Stock issued and outstanding
    201       201  
 
Additional paid-in-capital
    (21,879 )     (21,879 )
 
Common stock purchase warrants (Note 8)
    750        
 
Note receivable from officer
    (3,198 )     (3,198 )
 
Accumulated other comprehensive loss
    (3,916 )     (9,303 )
 
Retained deficit
    (109,734 )     (74,638 )
 
 
   
     
 
   
Total shareholders’ deficit
    (137,776 )     (108,817 )
 
 
   
     
 
   
Total liabilities and shareholders’ deficit
  $ 429,294     $ 432,542  
 
   
     
 

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

2


Table of Contents

MSX INTERNATIONAL, INC.

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

                                   
      Fiscal Quarter Ended   Fiscal Nine Months Ended
     
 
              September 29,           September 29,
      September 28,   2002   September 28,   2002
      2003   (as restated)   2003   (as restated)
     
 
 
 
      (in thousands)
Net sales
  $ 167,860     $ 200,556     $ 536,946     $ 618,170  
Cost of sales
    149,870       173,119       475,679       537,479  
 
   
     
     
     
 
 
Gross profit
    17,990       27,437       61,267       80,691  
Selling, general and administrative expenses
    14,842       19,432       46,267       59,981  
Restructuring and severance costs (Note 4)
    2,002       1,314       3,902       1,739  
Loss on asset impairment and sale (Note 2)
    1,797             1,893        
 
   
     
     
     
 
 
Operating income (loss)
    (651 )     6,691       9,205       18,971  
Interest expense, net
    9,406       6,892       22,713       19,459  
 
   
     
     
     
 
 
Loss before income taxes, minority interests, and equity in affiliates
    (10,057 )     (201 )     (13,508 )     (488 )
Income tax provision (Note 10)
    14,764       229       14,998       1,896  
Less minority interests and equity in affiliates, net of taxes
    40       (94 )     (195 )     522  
 
   
     
     
     
 
 
Loss before cumulative effect of accounting change for goodwill impairment
    (24,861 )     (336 )     (28,311 )     (2,906 )
Cumulative effect of accounting change for goodwill impairment, net of taxes of $9,745 (Note 3)
                      (38,102 )
 
   
     
     
     
 
 
Net loss
    (24,861 )     (336 )     (28,311 )     (41,008 )
Preferred stock dividends (Note 7)
    (2,329 )     (2,067 )     (6,784 )     (6,023 )
 
   
     
     
     
 
 
Net loss available to common shareholders
  $ (27,190 )   $ (2,403 )   $ (35,095 )   $ (47,031 )
 
   
     
     
     
 

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

3


Table of Contents

MSX INTERNATIONAL, INC.

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

                     
        Fiscal Nine Months Ended
       
        September 28,   September 29,
        2003   2002
       
 
        (in thousands)
Cash flows from operating activities:
               
 
Net loss
  $ (28,311 )   $ (41,008 )
 
Adjustments to reconcile net loss to net cash provided by (used for) operating activities:
               
   
Cumulative effect of accounting change for goodwill impairment
          38,102  
   
Minority interests and equity in affiliates
    (195 )     522  
   
Loss on asset impairment and sale
    1,893        
   
Depreciation
    13,653       13,921  
   
Amortization of debt issuance costs
    5,260       1,332  
   
Deferred taxes
    12,188       (2,116 )
   
Loss on sale/disposal of property and equipment
    627       264  
   
(Increase) decrease in receivables, net
    (14,919 )     13,254  
   
(Increase) decrease in inventory
    (1,642 )     2,010  
   
(Increase) decrease in prepaid expenses and other assets
    (991 )     (937 )
   
Increase (decrease) in current liabilities
    15,229       (11,403 )
   
Other, net
    (334 )     86  
 
 
   
     
 
Net cash provided by operating activities
    2,458       14,027  
 
   
     
 
Cash flows from investing activities:
               
 
Capital expenditures
    (4,465 )     (7,861 )
 
Acquisition of businesses, net of cash acquired
          (3,132 )
 
Proceeds from sale/disposal of property and equipment
    2,150       170  
 
Other, net
    (342 )     1,857  
 
   
     
 
Net cash used for investing activities
    (2,657 )     (8,966 )
 
   
     
 
Cash flows from financing activities:
               
 
Proceeds from issuance of debt
    99,854       15,450  
 
Repayment of debt
    (65,798 )     (28,746 )
 
Debt issuance costs
    (6,014 )     (1,445 )
 
Changes in revolving debt, net
    (15,510 )     19,657  
 
Changes in book overdrafts, net
    (15,241 )     (8,421 )
 
Repurchase of common and preferred stock
          (209 )
 
 
   
     
 
Net cash used for financing activities
    (2,709 )     (3,714 )
 
   
     
 
Effect of foreign exchange rate changes on cash and cash equivalents
    620       244  
 
   
     
 
Cash and cash equivalents:
               
 
(Decrease) increase for the period
    (2,288 )     1,591  
 
Balance, beginning of period
    10,935       4,924  
 
 
   
     
 
 
Balance, end of period
  $ 8,647     $ 6,515  
 
   
     
 

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

4


Table of Contents

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:

                                 
    Collaborative   Human Capital   Technical and        
    Engineering   Management   Marketing        
    Management   Services   Services   Total
   
 
 
 
Balance at December 29, 2002
  $     $ 97,603     $ 29,651     $ 127,254  
Goodwill impairment from asset sale
                (700 )     (700 )
Translation changes and other
          132       3,314       3,446  
 
   
     
     
     
 
Balance at September 28, 2003
  $     $ 97,735     $ 32,265     $ 130,000  
 
   
     
     
     
 

5


Table of Contents

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:

                                     
        Interest Rates at   Outstanding at
       
 
        September 28,   December 29,   September 28,   December 29,
        2003   2002   2003   2002
       
 
 
 
Outstanding Debt:
                               
 
New credit facility
    8.05 %         $ 297     $  
 
Senior secured notes, net of unamortized discount
    11.00 %           74,878        
 
Mezzanine term notes, net of unamortized discount
    11.50 %           24,281        
 
Senior subordinated notes
    11.375 %     11.375 %     130,000       130,000  
 
Fourth lien term notes
    10.00 %     10.00 %     17,363       16,109  
 
Satiz facility
    5.03 %     4.12 %     4,764       4,954  
 
Other
    7.00 %     7.00-9.00 %     2,233       5,273  
Refinanced Debt:
                               
 
Credit facility, as amended and restated:
                               
   
Revolving line of credit notes
          4.42 %           4,000  
   
Swingline notes
          4.46-11.15 %           8,559  
   
Term notes
          5.64-6.26 %           65,779  
 
                   
     
 
 
                    253,816       234,674  
Less current portion
                    4,764       14,671  
 
                   
     
 
Total long-term debt
                  $ 249,052     $ 220,003  
 
                   
     
 

          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.

6


Table of Contents

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:

                                 
    Fiscal Quarter Ended   Fiscal Nine Months Ended
   
 
    September 28,   September 29,   September 28,   September 29,
    2003   2002   2003   2002
   
 
 
 
Net loss
  $ (24,861 )   $ (336 )   $ (28,311 )   $ (41,008 )
Other comprehensive income - foreign currency translation adjustments
    188       119       5,387       2,954  
 
   
     
     
     
 
Comprehensive loss
  $ (24,673 )   $ (217 )   $ (22,924 )   $ (38,054 )
 
   
     
     
     
 

7


Table of Contents

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:

                                             
                Human                        
        Collaborative   Capital   Technical and                
        Engineering   Management   Marketing                
        Management   Services   Services   Other   Total
       
 
 
 
 
Quarter Ended September 28, 2003
                                       
   
Net sales – external
  $ 43,272     $ 57,421     $ 67,167     $     $ 167,860  
   
Net intercompany sales
    86       (53 )     1,920       (1,953 )      
   
Segment EBITA
    (1,054 )     2,369       3,789             5,104  
Quarter Ended September 29, 2002
                                       
   
Net sales – external
    55,312       79,662       65,582             200,556  
   
Net intercompany sales
    634       218       2,109       (2,961 )      
   
Segment EBITA
    1,514       3,763       2,980             8,257  
                                             
                Human                        
        Collaborative   Capital   Technical and                
        Engineering   Management   Marketing                
        Management   Services   Services   Other   Total
       
 
 
 
 
Nine Months Ended September 28, 2003
                                       
 
Net sales – external
  $ 144,595     $ 184,432     $ 207,919     $     $ 536,946  
 
Net intercompany sales
    377       262       5,859       (6,498 )      
 
Segment EBITA
    (3,095 )     10,520       13,529             20,954  
Nine Months Ended September 29, 2002
                                       
 
Net sales – external
    172,564       249,789       195,817             618,170  
 
Net intercompany sales
    1,810       960       6,550       (9,320 )      
 
Segment EBITA
    2,055       11,587       13,306             26,948  

8


Table of Contents

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:

                                 
    Fiscal Quarter Ended   Fiscal Nine Months Ended
   
 
    September 28,   September 29,   September 28,   September 29,
    2003   2002   2003   2002
   
 
 
 
Total segment EBITA
  $ 5,104     $ 8,257     $ 20,954     $ 26,948  
Net costs not allocated to segments
    (3,233 )     (849 )     (7,357 )     (5,467 )
Loss on asset impairment and sale
    (1,797 )           (1,893 )      
Interest expense, net
    (9,406 )     (6,892 )     (22,713 )     (19,459 )
Michigan single business tax and other similar taxes
    (725 )     (717 )     (2,499 )     (2,510 )
 
   
     
     
     
 
Consolidated loss before taxes, minority interests and equity in affiliates
  $ (10,057 )   $ (201 )   $ (13,508 )   $ (488 )
 
   
     
     
     
 

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.

                                 
    Fiscal Quarter Ended   Fiscal Nine Months Ended
   
 
    September 28,   September 29,   September 28,   September 29,
    2003   2002   2003   2002
   
 
 
 
Net loss as reported
  $ (24,861 )   $ (336 )   $ (28,311 )   $ (41,008 )
Deduct: Total employee stock-based compensation determined under the fair value method, net of taxes
    (12 )     (18 )     (49 )     (52 )
 
   
     
     
     
 
Pro forma net loss
  $ (24,873 )   $ (354 )   $ (28,360 )   $ (41,060 )
 
   
     
     
     
 

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.

          

9


Table of Contents

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.

10


Table of Contents

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

                                             
        MSXI   Guarantor   Non-Guarantor           MSXI
        (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
ASSETS
                                       
Current assets:
                                       
 
Cash and cash equivalents
  $ 2,400     $ 759     $ 5,488     $     $ 8,647  
 
Accounts receivable, net
    46       114,578       111,683             226,307  
 
Inventory
          4,052       2,416             6,468  
 
Prepaid expenses and other assets
          5,247       2,970             8,217  
 
Deferred income taxes, net
          1,510       5,118       (1,729 )     4,899  
 
   
     
     
     
     
 
   
Total current assets
    2,446       126,146       127,675       (1,729 )     254,538  
                                             
Property and equipment, net
          16,026       12,812             28,838  
Goodwill, net
          112,576       17,424             130,000  
Investment in subsidiaries
    112,559       31,629             (142,390 )     1,798  
Other assets
    7,542       3,537       762             11,841  
Deferred income taxes, net
          4,059       2,053       (3,833 )     2,279  
 
   
     
     
     
     
 
   
Total assets
  $ 122,547     $ 293,973     $ 160,726     $ (147,952 )   $ 429,294  
 
   
     
     
     
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
                               
Current liabilities:
                                       
 
Notes payable and current portion of long-term debt
  $     $     $ 4,764     $     $ 4,764  
 
Accounts payable and drafts
          82,593       55,793             138,386  
 
Accrued liabilities
    486       43,303       40,193             83,982  
 
Deferred income taxes, net
    1,729                   (1,729 )      
 
 
   
     
     
     
     
 
   
Total current liabilities
    2,215       125,896       100,750       (1,729 )     227,132  
                                             
Long-term debt
    230,111             18,941             249,052  
Intercompany accounts
    (55,249 )     52,478       2,771              
Long-term deferred compensation and other liabilities
          3,039       8,409             11,448  
Deferred income taxes, net
    3,833                   (3,833 )      
 
 
   
     
     
     
     
 
   
Total liabilities
    180,910       181,413       130,871       (5,562 )     487,632  
                                             
Minority interests
                25             25  
Mandatorily Redeemable Series A Preferred Stock
    79,413                         79,413  
Shareholders’ equity (deficit)
    (137,776 )     112,560       29,830       (142,390 )     (137,776 )
 
   
     
     
     
     
 
   
Total liabilities and shareholders’ equity (deficit)
  $ 122,547     $ 293,973     $ 160,726     $ (147,952 )   $ 429,294  
 
   
     
     
     
     
 

11


Table of Contents

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 December 29, 2002

                                             
                        Non-                
        MSXI   Guarantor   Guarantor           MSXI
        (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
ASSETS
                                       
Current assets:
                                       
 
Cash and cash equivalents
  $     $ 154     $ 10,781     $     $ 10,935  
 
Accounts receivable, net
    181       110,799       100,977             211,957  
 
Inventory
          3,405       1,419             4,824  
 
Prepaid expenses and other assets
    7       3,499       3,771             7,277  
 
Deferred income taxes, net
          2,195       4,362             6,557  
 
 
   
     
     
     
     
 
   
Total current assets
    188       120,052       121,310             241,550  
                                             
Property and equipment, net
          21,117       18,069             39,186  
Goodwill, net
          112,502       14,752             127,254  
Investment in subsidiaries
    108,502       44,836       614       (151,580 )     2,372  
Other assets
    5,972       3,179       209             9,360  
Deferred income taxes, net
    4,661       6,006       2,153             12,820  
 
 
   
     
     
     
     
 
   
Total assets
  $ 119,323     $ 307,692     $ 157,107     $ (151,580 )   $ 432,542  
 
 
   
     
     
     
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
                                       
Current liabilities:
                                       
 
Notes payable and current portion of long-term debt
  $ 6,461     $     $ 8,210     $     $ 14,671  
 
Accounts payable and drafts
          79,271       53,087             132,358  
 
Accrued liabilities
    3,287       51,126       35,625             90,038  
 
 
   
     
     
     
     
 
   
Total current liabilities
    9,748       130,397       96,922             237,067  
                                             
Long-term debt
    217,445             2,558             220,003  
Intercompany accounts
    (71,682 )     65,110       6,572              
Long-term deferred compensation and other liabilities
          3,688       7,806             11,494  
 
 
   
     
     
     
     
 
   
Total liabilities
    155,511       199,195       113,858             468,564  
                                             
Minority interests
                166             166  
Redeemable Series A Preferred Stock
    72,629                         72,629  
Shareholders’ equity (deficit)
    (108,817 )     108,497       43,083       (151,580 )     (108,817 )
 
 
   
     
     
     
     
 
   
Total liabilities and shareholders’ equity (deficit)
  $ 119,323     $ 307,692     $ 157,107     $ (151,580 )   $ 432,542  
 
 
   
     
     
     
     
 

12


Table of Contents

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 STATEMENTS OF OPERATIONS
For the fiscal quarters ended September 28, 2003 and September 29, 2002

                                             
        MSXI   Guarantor   Non-Guarantor           MSXI
        (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
Fiscal Quarter Ended September 28, 2003:
                                       
Net sales
  $     $ 98,671     $ 71,142     $ (1,953 )   $ 167,860  
Cost of sales
          86,467       65,356       (1,953 )     149,870  
 
   
     
     
     
     
 
 
Gross profit
          12,204       5,786             17,990  
Selling, general and administrative expenses
          8,691       6,151             14,842  
Restructuring and severance costs
          1,450       552             2,002  
Loss on asset impairment and sale
                1,797             1,797  
 
   
     
     
     
     
 
 
Operating income (loss)
          2,063       (2,714 )           (651 )
Interest expense, net
    7,697       1,581       128             9,406  
 
   
     
     
     
     
 
 
Income (loss) before income taxes, minority interests, and equity in affiliates
    (7,697 )     482       (2,842 )           (10,057 )
Income tax provision
    12,034       1,561       1,169             14,764  
Minority interests and equity in affiliates
    (4,819 )     (3,741 )     35       8,485       (40 )
 
   
     
     
     
     
 
 
Income (loss) before cumulative effect of accounting change for goodwill impairment
    (24,550 )     (4,820 )     (3,976 )     8,485       (24,861 )
Cumulative effect of accounting change for goodwill impairment, net of taxes
                             
 
   
     
     
     
     
 
 
Net income (loss)
  $ (24,550 )   $ (4,820 )   $ (3,976 )   $ 8,485     $ (24,861 )
 
   
     
     
     
     
 
Fiscal Quarter Ended September 29, 2002:
                                       
Net sales
  $     $ 113,212     $ 90,305     $ (2,961 )   $ 200,556  
Cost of sales
          98,747       77,333       (2,961 )     173,119  
 
   
     
     
     
     
 
 
Gross profit
          14,465       12,972             27,437  
Selling, general and administrative expenses
          10,308       9,124             19,432  
Restructuring and severance costs
          825       489             1,314  
 
   
     
     
     
     
 
 
Operating income
          3,332       3,359             6,691  
Interest expense, net
    4,012       2,516       364             6,892  
 
   
     
     
     
     
 
 
Income (loss) before income taxes, minority interests, and equity in affiliates
    (4,012 )     816       2,995             (201 )
Income tax provision (benefit)
    (1,389 )     1,157       461             229  
Minority interests and equity in affiliates
    2,287       2,628       43       (4,864 )     94  
 
   
     
     
     
     
 
 
Income (loss) before cumulative effect of accounting change for goodwill impairment
    (336 )     2,287       2,577       (4,864 )     (336 )
Cumulative effect of accounting change for goodwill impairment, net of taxes
                               
 
   
     
     
     
     
 
   
Net income (loss)
  $ (336 )   $ 2,287     $ 2,577     $ (4,864 )   $ (336 )
 
   
     
     
     
     
 

13


Table of Contents

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 STATEMENTS OF OPERATIONS
For the fiscal nine months ended September 28, 2003 and September 29, 2002

                                             
        MSXI   Guarantor   Non-Guarantor           MSXI
        (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
Fiscal Nine Months Ended September 28, 2003
                                       
Net sales
  $     $ 316,556     $ 226,888     $ (6,498 )   $ 536,946  
Cost of sales
          275,922       205,944       (6,187 )     475,679  
 
   
     
     
     
     
 
   
Gross profit
          40,634       20,944       (311 )     61,267  
Selling, general and administrative expenses
          26,028       20,239             46,267  
Restructuring and severance costs
          2,407       1,495             3,902  
Loss on asset impairment and sale
                1,893             1,893  
 
   
     
     
     
     
 
   
Operating income (loss)
          12,199       (2,683 )     (311 )     9,205  
Interest expense, net
    16,391       5,708       614             22,713  
 
   
     
     
     
     
 
   
Income (loss) before income taxes, minority interests, and equity in affiliates
    (16,391 )     6,491       (3,297 )     (311 )     (13,508 )
Income tax provision
    10,591       2,428       1,979             14,998  
Minority interests and equity in affiliates
    (1,018 )     (5,082 )     155       6,140       195  
 
   
     
     
     
     
 
   
Income (loss) before cumulative effect of accounting change for goodwill impairment
    (28,000 )     (1,019 )     (5,121 )     5,829       (28,311 )
Cumulative effect of accounting change for goodwill impairment, net of taxes
                             
 
   
     
     
     
     
 
   
Net income (loss)
  $ (28,000 )   $ (1,019 )   $ (5,121 )   $ 5,829     $ (28,311 )
 
   
     
     
     
     
 
Fiscal Nine Months Ended September 29, 2002
                                       
Net sales
  $     $ 362,153     $ 265,337     $ (9,320 )   $ 618,170  
Cost of sales
          316,222       230,577       (9,320 )     537,479  
 
   
     
     
     
     
 
   
Gross profit
          45,931       34,760             80,691  
Selling, general and administrative expenses
          35,941       24,040             59,981  
Restructuring and severance costs
          1,207       532             1,739  
 
   
     
     
     
     
 
   
Operating income
          8,783       10,188             18,971  
Interest expense, net
    10,216       8,026       1,217             19,459  
 
   
     
     
     
     
 
   
Income (loss) before income taxes, minority interests, and equity in affiliates
    (10,216 )     757       8,971             (488 )
Income tax provision (benefit)
    (3,558 )     2,366       3,088             1,896  
Minority interests and equity in affiliates
    3,752       5,361       (334 )     (9,301 )     (522 )
 
   
     
     
     
     
 
   
Income (loss) before cumulative effect of accounting change for goodwill impairment
    (2,906 )     3,752       5,549       (9,301 )     (2,906 )
Cumulative effect of accounting change for goodwill impairment, net of taxes
    (38,102 )     (38,102 )     (20,004 )     58,106       (38,102 )
 
   
     
     
     
     
 
   
Net income (loss)
  $ (41,008 )   $ (34,350 )   $ (14,455 )   $ 48,805     $ (41,008 )
 
   
     
     
     
     
 

14


Table of Contents

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 STATEMENT OF CASH FLOWS
for the nine months ended September 28, 2003

                                             
        MSXI   Guarantor   Non-Guarantor           MSXI
        (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
Cash flows from operating activities:
                                       
 
Net income (loss)
  $ (28,000 )   $ (1,018 )   $ (5,122 )   $ 5,829     $ (28,311 )
 
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
                                       
   
Equity in affiliates
    1,018       5,082       (155 )     (6,140 )     (195 )
   
Loss on asset impairment and sale
                1,893             1,893  
   
Depreciation
          6,974       6,679             13,653  
   
Amortization of debt issuance costs
    5,217             43             5,260  
   
Deferred taxes
    10,223       2,631       (666 )           12,188  
   
Loss on sale/disposal of property and equipment
          98       529             627  
   
(Increase) decrease in receivables, net
    135       (3,778 )     (11,276 )           (14,919 )
   
(Increase) decrease in inventory
          (646 )     (996 )           (1,642 )
   
(Increase) decrease in prepaid expenses and other assets
    7       (1,748 )     750             (991 )
   
Increase (decrease) in current liabilities
    (2,800 )     10,690       7,339             15,229  
   
Other, net
    (55 )     (829 )     550             (334 )
 
   
     
     
     
     
 
Net cash provided by (used for) operating activities
    (14,255 )     17,456       (432 )     (311 )     2,458  
 
   
     
     
     
     
 
Cash flows from investing activities:
                                       
 
Capital expenditures
          (2,438 )     (2,027 )           (4,465 )
 
Proceeds from sale/disposal of property and equipment
          545       1,605             2,150  
 
Other, net
          (341 )     (1 )           (342 )
 
   
     
     
     
     
 
Net cash used for investing activities
          (2,234 )     (423 )           (2,657 )
 
   
     
     
     
     
 
Cash flows from financing activities:
                                       
 
Transactions with subsidiaries
    11,051       (4,810 )     (17,339 )     11,098        
 
Proceeds from issuance of debt
    83,482             16,372             99,854  
 
Repayment of debt
    (65,798 )                       (65,798 )
 
Debt issuance costs
    (5,518 )           (496 )           (6,014 )
 
Changes in revolving debt, net
    (11,946 )           (3,564 )           (15,510 )
 
Changes in book overdrafts, net
          (15,189 )     (52 )           (15,241 )
 
   
     
     
     
     
 
Net cash provided by (used for) financing activities
    11,271       (19,999 )     (5,079 )     11,098       (2,709 )
 
   
     
     
     
     
 
Effect of foreign exchange rate changes on cash and cash equivalents
    5,384       5,381       642       (10,787 )     620  
 
   
     
     
     
     
 
Cash and cash equivalents:
                                       
 
Increase (decrease) for the period
    2,400       604       (5,292 )           (2,288 )
 
Balance, beginning of period
          154       10,781             10,935  
 
   
     
     
     
     
 
 
Balance, end of period
  $ 2,400     $ 758     $ 5,489     $     $ 8,647  
 
   
     
     
     
     
 

15


Table of Contents

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 STATEMENT OF CASH FLOWS
for the nine months ended September 29, 2002

                                             
        MSXI   Guarantor   Non-Guarantor           MSXI
        (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
Cash flows from operating activities:
                                       
 
Net income (loss)
  $ (41,008 )   $ (34,350 )   $ (14,455 )   $ 48,805     $ (41,008 )
 
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
                                       
 
Cumulative effect of accounting change for goodwill impairment
    38,102       38,102       20,004       (58,106 )     38,102  
 
Equity in affiliates
    (3,752 )     (5,361 )     334       9,301       522  
 
Depreciation
          6,801       7,120             13,921  
 
Amortization of debt issuance costs
    1,332                         1,332  
 
Deferred taxes
    (4,078 )     2,391       (429 )           (2,116 )
 
Loss on sale/disposal of property and equipment
          26       238             264  
 
(Increase) decrease in receivables, net
    (154 )     13,024       384             13,254  
 
(Increase) decrease in inventory
          2,289       (279 )           2,010  
 
(Increase) decrease in prepaid expenses and other assets
    95       1,538       (2,570 )           (937 )
 
Increase (decrease) in current liabilities
    (3,527 )     (23,938 )     16,062             (11,403 )
 
Other, net
    (75 )     (356 )     517             86  
 
   
     
     
     
     
 
Net cash provided by (used for) operating activities
    (13,065 )     166       26,926             14,027  
 
   
     
     
     
     
 
Cash flows from investing activities:
                                       
 
Capital expenditures
          (5,694 )     (2,167 )           (7,861 )
 
Acquisition of businesses, net of cash acquired
          (199 )     (2,933 )           (3,132 )
 
Proceeds from sale/disposal of property and equipment
          36       134             170  
 
Other, net
          1,857                   1,857  
 
   
     
     
     
     
 
Net cash used for investing activities
          (4,000 )     (4,966 )           (8,966 )
 
   
     
     
     
     
 
Cash flows from financing activities:
                                       
 
Transactions with subsidiaries
    (8,702 )     8,953       (6,135 )     5,884        
 
Proceeds from issuance of debt
    15,450                         15,450  
 
Repayment of debt
    (28,746 )                       (28,746 )
 
Debt issuance costs
    (1,445 )                       (1,445 )
 
Changes in revolving debt, net
    33,762             (14,105 )           19,657  
 
Changes in book overdrafts, net
          (8,469 )     48             (8,421 )
 
Repurchase of common and preferred stock
    (209 )                       (209 )
 
   
     
     
     
     
 
Net cash provided by (used for) financing activities
    10,110       484       (20,192 )     5,884       (3,714 )
 
   
     
     
     
     
 
Effect of foreign exchange rate changes on cash and cash equivalents
    2,955       2,953       220       (5,884 )     244  
 
   
     
     
     
     
 
 
Cash and cash equivalents:
                                       
 
Increase (decrease) for the period
          (397 )     1,988             1,591  
 
Balance, beginning of period
          647       4,277             4,924  
 
   
     
     
     
     
 
 
Balance, end of period
  $     $ 250     $ 6,265     $     $ 6,515  
 
   
     
     
     
     
 

16


Table of Contents

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued

(dollars in thousands unless otherwise stated)

15. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited:

     The senior secured notes issued by MSXI Limited are secured by the accounts receivable of MSXI Limited and substantially all of the assets of MSXI and its domestic subsidiaries, subject to permitted liens. Payment obligations under the senior secured notes issued by MSXI Limited are guaranteed jointly and severally by MSX International, Inc. and all of its domestic subsidiaries. Because of the parent and subsidiary guarantee structure we are required to present the following condensed consolidating financial information for:

    MSXI — the parent company
 
    MSXI Limited — the 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 secured notes.

17


Table of Contents

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued

(dollars in thousands unless otherwise stated)

15. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited– continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of September 28, 2003

                                                     
                MSXI                                
        MSXI   Limited   Guarantor   Non-Guarantor           MSXI
        (Parent)   (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
 
ASSETS
                                               
Current assets:
                                               
 
Cash and cash equivalents
  $ 2,400     $ 158     $ 759     $ 5,330     $     $ 8,647  
 
Accounts receivable, net
    46       25,109       114,578       86,574             226,307  
 
Inventory
          25       4,052       2,391             6,468  
 
Prepaid expenses and other assets
          1,139       5,247       1,831             8,217  
 
Deferred income taxes, net
          (113 )     1,510       5,231       (1,729 )     4,899  
 
   
     
     
     
     
     
 
   
Total current assets
    2,446       26,318       126,146       101,357       (1,729 )     254,538  
 
Property and equipment, net
          3,897       16,026       8,915             28,838  
Goodwill, net
          505       112,576       16,919             130,000  
Investment in subsidiaries
    112,559       10       31,629       3,804       (146,204 )     1,798  
Other assets
    7,542       555       3,537       207             11,841  
Deferred income taxes, net
          161       4,059       1,892       (3,833 )     2,279  
 
   
     
     
     
     
     
 
   
Total assets
  $ 122,547     $ 31,446     $ 293,973     $ 133,094     $ (151,766 )   $ 429,294  
 
   
     
     
     
     
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
                                           
Current liabilities:
                                               
 
Notes payable and current portion of long-term debt
  $     $     $     $ 4,764     $     $ 4,764  
 
Accounts payable and drafts
          9,464       82,593       46,329             138,386  
 
Accrued liabilities
    486       10,157       43,303       30,036             83,982  
 
Deferred income taxes, net
    1,729                         (1,729 )      
 
   
     
     
     
     
     
 
   
Total current liabilities
    2,215       19,621       125,896       81,129       (1,729 )     227,132  
 
Long-term debt
    230,111       16,411             2,530             249,052  
Intercompany accounts
    (55,249 )     (8,401 )     52,478       11,172              
Long-term deferred compensation and other liabilities
                3,039       8,409             11,448  
Deferred income taxes, net
    3,833                         (3,833 )      
 
   
     
     
     
     
     
 
   
Total liabilities
    180,910       27,631       181,413       103,240       (5,562 )     487,632  
 
Minority interests
                      25             25  
Mandatorily Redeemable Series A Preferred Stock
    79,413                               79,413  
Shareholders’ equity (deficit)
    (137,776 )     3,815       112,560       29,829       (146,204 )     (137,776 )
 
   
     
     
     
     
     
 
   
Total liabilities and shareholders’ equity (deficit)
  $ 122,547     $ 31,446     $ 293,973     $ 133,094     $ (151,766 )   $ 429,294  
 
   
     
     
     
     
     
 

18


Table of Contents

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued

(dollars in thousands unless otherwise stated)

15. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited – continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of December 29, 2002

                                                     
                MSXI                                
        MSXI   Limited   Guarantor   Non-Guarantor           MSXI
        (Parent)   (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
 
ASSETS
                                               
Current assets:
                                               
 
Cash and cash equivalents
  $     $ 116     $ 154     $ 10,665     $     $ 10,935  
 
Accounts receivable, net
    181       29,883       110,799       71,094             211,957  
 
Inventory
          19       3,405       1,400             4,824  
 
Prepaid expenses and other assets
    7       1,427       3,499       2,344             7,277  
 
Deferred income taxes, net
          36       2,195       4,326             6,557  
 
   
     
     
     
     
     
 
   
Total current assets
    188       31,481       120,052       89,829             241,550  
 
Property and equipment, net
          7,045       21,117       11,024             39,186  
Goodwill, net
          373       112,502       14,379             127,254  
Investment in subsidiaries
    108,502             44,836       9,166       (160,132 )     2,372  
Other assets
    5,972             3,179       209             9,360  
Deferred income taxes, net
    4,661       (1,069 )     6,006       3,222             12,820  
 
   
     
     
     
     
     
 
   
Total assets
  $ 119,323     $ 37,830     $ 307,692     $ 127,829     $ (160,132 )   $ 432,542  
 
   
     
     
     
     
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
 
Notes payable and current portion of long-term debt
  $ 6,461     $     $     $ 8,210     $     $ 14,671  
 
Accounts payable and drafts
          11,644       79,271       41,443             132,358  
 
Accrued liabilities
    3,287       6,791       51,126       28,834             90,038  
 
   
     
     
     
     
     
 
   
Total current liabilities
    9,748       18,435       130,397       78,487             237,067  
 
Long-term debt
    217,445       339             2,219             220,003  
Intercompany accounts
    (71,682 )     10,504       65,110       (3,932 )            
Long-term deferred compensation and other liabilities
                3,688       7,806             11,494  
 
   
     
     
     
     
     
 
   
Total liabilities
    155,511       29,278       199,195       84,580             468,564  
 
Minority interests
                      166             166  
Mandatorily Redeemable Series A Preferred Stock
    72,629                               72,629  
Shareholders’ equity (deficit)
    (108,817 )     8,552       108,497       43,083       (160,132 )     (108,817 )
 
   
     
     
     
     
     
 
   
Total liabilities and shareholders’ equity (deficit)
  $ 119,323     $ 37,830     $ 307,692     $ 127,829     $ (160,132 )   $ 432,542  
 
   
     
     
     
     
     
 

19


Table of Contents

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued

(dollars in thousands unless otherwise stated)

15. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited– continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended September 28, 2003 and September 29, 2002

                                                   
              MSXI                                
      MSXI   Limited   Guarantor   Non-Guarantor           MSXI
      (Parent)   (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
     
 
 
 
 
 
Fiscal Quarter Ended September 28, 2003
                                               
Net sales
  $     $ 19,777     $ 98,671     $ 51,365     $ (1,953 )   $ 167,860  
Cost of sales
          18,285       86,467       47,071       (1,953 )     149,870  
 
   
     
     
     
     
     
 
 
Gross profit
          1,492       12,204       4,294             17,990  
Selling, general and administrative expenses
          1,604       8,691       4,547             14,842  
Restructuring and severance costs
          58       1,450       494             2,002  
Loss on asset impairment and sale
          787             1,010             1,797  
 
   
     
     
     
     
     
 
 
Operating income (loss)
          (957 )     2,063       (1,757 )           (651 )
Interest expense, net
    7,697       53       1,581       75             9,406  
 
   
     
     
     
     
     
 
 
Income (loss) before income taxes, minority interests and equity in affiliates
    (7,697 )     (1,010 )     482       (1,832 )           (10,057 )
Income tax provision
    12,034       296       1,561       873             14,764  
Minority interests and equity in affiliates
    (4,819 )           (3,741 )     (1,271 )     9,791       (40 )
 
   
     
     
     
     
     
 
 
Income (loss) before cumulative effect of accounting change for goodwill impairment
    (24,550 )     (1,306 )     (4,820 )     (3,976 )     9,791       (24,861 )
Cumulative effect of accounting change for goodwill impairment, net of taxes
                                   
 
   
     
     
     
     
     
 
 
Net income (loss)
  $ (24,550 )   $ (1,306 )   $ (4,820 )   $ (3,976 )   $ 9,791     $ (24,861 )
 
   
     
     
     
     
     
 
Fiscal Quarter Ended September 29, 2002
                                               
Net sales
  $     $ 30,068     $ 113,212     $ 60,237     $ (2,961 )   $ 200,556  
Cost of sales
          21,602       98,747       55,731       (2,961 )     173,119  
 
   
     
     
     
     
     
 
 
Gross profit
          8,466       14,465       4,506             27,437  
Selling, general and administrative expenses
          5,232       10,308       3,892             19,432  
Restructuring and severance costs
          301       825       188             1,314  
 
   
     
     
     
     
     
 
 
Operating income
          2,933       3,332       426             6,691  
Interest expense (income), net
    4,012       304       2,516       60             6,892
 
   
     
     
     
     
     
 
 
Income (loss) before income taxes, minority interests and equity in affiliates
    (4,012 )     2,629       816       366             (201 )
Income tax provision (benefit)
    (1,389 )     571       1,157       (110 )           229  
Minority interests and equity in affiliates
    2,287             2,628       2,101       (6,922 )     94  
 
   
     
     
     
     
     
 
 
Income (loss) before cumulative effect of accounting change for goodwill impairment
    (336 )     2,058       2,287       2,577       (6,922 )     (336 )
Cumulative effect of accounting change for goodwill impairment, net of taxes
                                   
 
   
     
     
     
     
     
 
 
Net income (loss)
  $ (336 )   $ 2,058     $ 2,287     $ 2,577     $ (6,922 )   $ (336 )
 
   
     
     
     
     
     
 

20


Table of Contents

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued

(dollars in thousands unless otherwise stated)

15. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited– continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal nine months ended September 28, 2003 and September 29, 2002

                                                     
                MSXI                                
        MSXI   Limited   Guarantor   Non-Guarantor           MSXI
        (Parent)   (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
 
Fiscal Nine Months Ended September 28, 2003
                                               
Net sales
  $     $ 64,209     $ 316,556     $ 162,679     $ (6,498 )   $ 536,946  
Cost of sales
          61,579       275,922       144,365       (6,187 )     475,679  
 
   
     
     
     
     
     
 
   
Gross profit
          2,630       40,634       18,314       (311 )     61,267  
Selling, general and administrative expenses
          5,452       26,028       14,787             46,267  
Restructuring and severance costs
          792       2,407       703             3,902  
Loss on asset impairment and sale
          787             1,106             1,893  
 
   
     
     
     
     
     
 
   
Operating income
          (4,401 )     12,199       1,718       (311 )     9,205  
Interest expense, net
    16,391       598       5,708       16             22,713  
 
   
     
     
     
     
     
 
 
Income (loss) before income taxes, minority interests, and equity in affiliates
    (16,391 )     (4,999 )     6,491       1,702       (311 )     (13,508 )
Income tax provision (benefit)
    10,591       (871 )     2,428       2,850             14,998  
Minority interests and equity in affiliates
    (1,018 )           (5,082 )     (3,974 )     10,269       195  
 
   
     
     
     
     
     
 
   
Income (loss) before cumulative effect of accounting change for goodwill impairment
    (28,000 )     (4,128 )     (1,019 )     (5,122 )     9,958       (28,311 )
Cumulative effect of accounting change for goodwill impairment, net of taxes
                                   
 
   
     
     
     
     
     
 
   
Net income (loss)
  $ (28,000 )   $ (4,128 )   $ (1,019 )   $ (5,122 )   $ 9,958     $ (28,311 )
 
   
     
     
     
     
     
 
Fiscal Nine Months Ended September 29, 2002
                                               
Net sales
  $     $ 86,455     $ 362,153     $ 178,882     $ (9,320 )   $ 618,170  
Cost of sales
          73,030       316,222       157,547       (9,320 )     537,479  
 
   
     
     
     
     
     
 
   
Gross profit
          13,425       45,931       21,335             80,691  
Selling, general and administrative expenses
          7,660       35,941       16,380             59,981  
Restructuring and severance costs
          301       1,207       231             1,739  
 
   
     
     
     
     
     
 
   
Operating income
          5,464       8,783       4,724             18,971  
Interest expense, net
    10,216       992       8,026       225             19,459  
 
   
     
     
     
     
     
 
 
Income (loss) before income taxes, minority interests, and equity in affiliates
    (10,216 )     4,472       757       4,499             (488 )
Income tax provision (benefit)
    (3,558 )     630       2,366       2,458             1,896  
Minority interests and equity in affiliates
    3,752             5,361       3,508       (13,143 )     (522 )
 
   
     
     
     
     
     
 
   
Income (loss) before cumulative effect of accounting change for goodwill impairment
    (2,906 )     3,842       3,752       5,549       (13,143 )     (2,906 )
Cumulative effect of accounting change for goodwill impairment, net of taxes
    (38,102 )     (2,869 )     (38,102 )     (20,004 )     60,975       (38,102 )
 
   
     
     
     
     
     
 
   
Net income (loss)
  $ (41,008 )   $ 973     $ (34,350 )   $ (14,455 )   $ 47,832     $ (41,008 )
 
   
     
     
     
     
     
 

21


Table of Contents

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued

(dollars in thousands unless otherwise stated)

15. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited– continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the nine months ended September 28, 2003

                                                     
                MSXI                                
        MSXI   Limited   Guarantor   Non-Guarantor           MSXI
        (Parent)   (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
       
 
 
 
 
 
Cash flows from operating activities:
                                               
 
Net income (loss)
  $ (28,000 )   $ (4,129 )   $ (1,018 )   $ (5,122 )   $ 9,958     $ (28,311 )
 
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
                                               
 
Cumulative effect of accounting change for goodwill impairment
                                     
 
Equity in affiliates
    1,018             5,082       3,974       (10,269 )     (195 )
 
Loss on asset impairment and sale
          787             1,106             1,893  
 
Depreciation
          2,599       6,974       4,080             13,653  
 
Amortization of debt issuance costs
    5,217       43                         5,260  
 
Deferred taxes
    10,223       (1,081 )     2,631       415             12,188  
 
(Gain) loss on sale/disposal of property and equipment
          358       98       171             627  
 
(Increase) decrease in receivables, net
    135       4,774       (3,778 )     (16,050 )           (14,919 )
 
(Increase) decrease in inventory
          (5 )     (646 )     (991 )           (1,642 )
 
(Increase) decrease in prepaid expenses and other assets
    7       288       (1,748 )     462             (991 )
 
Increase (decrease) in current liabilities
    (2,800 )     1,185       10,690       6,154             15,229  
 
Other, net
    (55 )     (74 )     (829 )     624             (334 )
 
   
     
     
     
     
     
 
Net cash provided by (used for) operating activities
    (14,255 )     4,745       17,456       (5,177 )     (311 )     2,458  
 
   
     
     
     
     
     
 
Cash flows from investing activities:
                                               
 
Capital expenditures
          (617 )     (2,438 )     (1,410 )           (4,465 )
 
Proceeds from sale/disposal of property and equipment
          564       545       1,041             2,150  
 
Other, net
                (341 )     (1 )           (342 )
 
   
     
     
     
     
     
 
Net cash used for investing activities
          (53 )     (2,234 )     (370 )           (2,657 )
 
   
     
     
     
     
     
 
Cash flows from financing activities:
                                               
 
Transactions with subsidiaries
    11,051       (19,212 )     (4,810 )     1,873       11,098        
 
Proceeds from issuance of debt
    83,482       16,372                         99,854  
 
Repayment of debt
    (65,798 )                             (65,798 )
 
Debt issuance costs
    (5,518 )     (496 )                       (6,014 )
 
Changes in revolving debt, net
    (11,946 )     (429 )           (3,135 )           (15,510 )
 
Changes in book overdrafts, net
                (15,189 )     (52 )           (15,241 )
 
   
     
     
     
     
     
 
Net cash provided by (used for) financing activities
    11,271       (3,765 )     (19,999 )     (1,314 )     11,098       (2,709 )
 
   
     
     
     
     
     
 
Effect of foreign exchange rate changes on cash and cash equivalents
    5,384       (884 )     5,381       1,526       (10,787 )     620  
 
   
     
     
     
     
     
 
Cash and cash equivalents:
                                               
 
Increase (decrease) for the period
    2,400       43       604       (5,335 )           (2,288 )
 
Balance, beginning of period
          116       154       10,665             10,935  
 
   
     
     
     
     
     
 
 
Balance, end of period
  $ 2,400     $ 159     $ 758     $ 5,330     $     $ 8,647  
 
   
     
     
     
     
     
 

22


Table of Contents

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) - continued

(dollars in thousands unless otherwise stated)

15. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited– continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the nine months ended September 29, 2002

                                                       
                  MSXI                                
          MSXI   Limited   Guarantor   Non-Guarantor           MSXI
          (Parent)   (Issuer)   Subsidiaries   Subsidiaries   Eliminations   Consolidated
         
 
 
 
 
 
Cash flows from operating activities:
                                               
 
Net income (loss)
  $ (41,008 )   $ 973     $ (34,350 )   $ (14,455 )   $ 47,832     $ (41,008 )
   
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
                                               
     
Cumulative effect of accounting change for goodwill impairment
    38,102       2,869       38,102       20,004       (60,975 )     38,102  
     
Equity in affiliates
    (3,752 )           (5,361 )     (3,508 )     13,143       522  
     
Depreciation
          2,449       6,801       4,671             13,921  
     
Amortization of debt issuance costs
    1,332                               1,332  
     
Deferred taxes
    (4,078 )     (34 )     2,391       (395 )           (2,116 )
     
Loss on sale/disposal of property and equipment
          81       26       157             264  
     
(Increase) decrease in receivables, net
    (154 )     (4,959 )     13,024       5,343             13,254  
     
(Increase) decrease in inventory
          2       2,289       (281 )           2,010  
     
(Increase) decrease in prepaid expenses and other assets
    96       (949 )     1,537       (1,621 )           (937 )
     
Increase (decrease) in current liabilities
    (3,528 )     8,391       (23,937 )     7,671             (11,403 )
     
Other, net
    (75 )     (256 )     (356 )     773             86  
 
   
     
     
     
     
     
 
Net cash provided by (used for) operating activities
    (13,065 )     8,567       166       18,359             14,027  
 
   
     
     
     
     
     
 
Cash flows from investing activities:
                                               
 
Capital expenditures
          (320 )     (5,694 )     (1,847 )           (7,861 )
 
Acquisition of business, net of cash received
          (1,670 )     (199 )     (1,263 )           (3,132 )
 
Proceeds from sale/disposal of property and equipment
                36       134             170  
 
Other, net
                1,857                   1,857  
 
   
     
     
     
     
     
 
Net cash used for investing activities
          (1,990 )     (4,000 )     (2,976 )           (8,966 )
 
   
     
     
     
     
     
 
Cash flows from financing activities:
                                               
 
Transactions with subsidiaries
    (8,702 )     (1,925 )     8,953       (4,210 )     5,884        
 
Proceeds from issuance of debt
    15,450                               15,450  
 
Repayment of debt
    (28,746 )                             (28,746 )
 
Debt issuance costs
    (1,445 )                             (1,445 )
 
Changes in revolving debt, net
    33,762       (4,847 )           (9,258 )           19,657  
 
Changes in book overdrafts, net
                (8,469 )     48             (8,421 )
 
Repurchase of common and preferred stock
    (209 )                             (209 )
 
   
     
     
     
     
     
 
Net cash provided by (used for) financing activities
    10,110       (6,772 )     484       (13,420 )     5,884       (3,714 )
 
   
     
     
     
     
     
 
Effect of foreign exchange rate changes on cash and cash equivalents
    2,955       259       2,953       (39 )     (5,884 )     244  
 
   
     
     
     
     
     
 
Cash and cash equivalents:
                                               
 
Increase (decrease) for the period
          64       (397 )     1,924             1,591  
 
Balance, beginning of period
          46       647       4,231             4,924  
 
   
     
     
     
     
     
 
 
Balance, end of period
  $     $ 110     $ 250     $ 6,155           $ 6,515  
 
   
     
     
     
     
     
 

23


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

          Outlook

          As reflected in year over year operating results, our business was impacted by lower demand for information technology staffing solutions, cost containment actions at major customers and deferrals of product development initiatives in the automotive industry. More recently, performance has been challenged by additional cost containment actions at several of our largest customers. Such actions affecting our business have included extended seasonal shutdowns in the third quarter beyond normal seasonal variances, contract staffing reductions, and a fee reduction that enabled us to secure a three-year contract with a first tier automotive supplier.

          To mitigate the anticipated impact of these emerging trends on future operating performance, we developed and began implementing an additional cost reduction plan in the third quarter. This plan will further reduce indirect and overhead costs while maintaining disciplined cash flow management. During the third quarter of 2003 we incurred about $2.0 million of restructuring and severance costs and realized a $1.8 million non-cash loss related to the sale of selected assets of our translation management business. The cost reduction plan is expected to be completed by the end of the fourth quarter of 2003 and will result in additional severance, restructuring, and non-cash charges as we complete the implementation. In total the plan includes an aggregate headcount reduction of approximately 300 employees and the consolidation of selected facilities in the United States and Europe. When fully implemented annualized savings of approximately $30.0 million are anticipated.

          We remain focused on building our customized services into standardized and scalable product offerings. We believe that this positioning of our services as integrated solutions will improve our value proposition to existing and prospective customers. Our strategy is to sell high value solutions by leveraging our global organization and existing customer base. Although we cannot provide assurance about the future, our actions are expected to enhance profitability on existing business and increase operating efficiencies while we work to expand our customer base, including growth in non-automotive markets.

          Net Sales

          For the first nine months of fiscal 2003, consolidated net sales decreased $81.2 million, or 13.1%, from $618.1 million during fiscal 2002 to $536.9 million during fiscal 2003. For the third quarter of fiscal 2003, consolidated net sales decreased $32.7 million, or 16.3%, from $200.6 million in fiscal 2002 to $167.9 million during fiscal 2003. Overall, the decline in sales reflects lower demand for automotive engineering and human capital management services and reductions from the closure/sale of certain unprofitable operations. Our sales by segment, net of intercompany sales, were as follows:

                                     
                        Change
                       
        2003   2002   $   %
       
 
 
 
        (dollars in thousands)
Fiscal Quarter:
                               
 
Collaborative Engineering Management
  $ 43,272     $ 55,312     $ (12,040 )     (21.8 %)
 
Human Capital Management Services
    57,421       79,662       (22,241 )     (27.9 %)
 
Technical and Marketing Services
    67,167       65,582       1,585       2.4 %
 
   
     
     
         
   
Total net sales
  $ 167,860     $ 200,556     $ (32,696 )     (16.3 %)
 
   
     
     
         
Fiscal Nine Months:
                               
 
Collaborative Engineering Management
  $ 144,595     $ 172,564     $ (27,969 )     (16.2 %)
 
Human Capital Management Services
    184,432       249,789       (65,357 )     (26.2 %)
 
Technical and Marketing Services
    207,919       195,817       12,102       6.2 %
 
   
     
     
         
   
Total net sales
  $ 536,946     $ 618,170     $ (81,224 )     (13.1 %)
 
   
     
     
         

          Sales of collaborative engineering services reflect declining volumes in our European operations partially offset by favorable exchange rates on sales resulting in a net decrease of $12.5 million and $32.5 million in Europe versus the third quarter and first nine months of 2002, respectively. Our sales were relatively flat for our North American engineering operations. Our European engineering operations have been challenged by cost reduction programs and reduced product development activities at key automotive customers. The decline in human

24


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

capital management services reflects reduced volumes in our engineering staffing in North America and Europe and reduced volumes of information technology and technical staffing services in our North American markets. The decrease in human capital management sales during the third quarter and the first nine months of 2003 includes $7.2 million and $18.9 million, respectively, of reductions as a result of the closure/sale of certain unprofitable operations as part of our ongoing cost reduction plans. In addition, our vendor management programs have been impacted by price reductions negotiated with customers to secure contract extensions. Sales of technical and marketing services improved versus 2002 as a result of favorable exchange rate changes affecting our European operations. The net impact of year over year exchange rate changes was to increase sales of technical and marketing services by about $5.4 million and $21.5 million for the third quarter and first nine months of 2003, respectively. Excluding the impact of foreign exchange rate changes, sales of technical and marketing services for the third quarter and the first nine months of 2003 decreased about $3.9 million, or 5.9% and $9.4 million or 4.8%, respectively, versus 2002. The decrease primarily reflects reduced demand for custom communication services in Italy due to program delays by our automotive customers and lower volumes in North America.

          Operating Profit

          Our consolidated gross profit and operating income for the periods presented were:

                                     
                        Change
                       
        2003   2002   $   %
       
 
 
 
        (dollars in thousands)
Fiscal Quarter:
                               
 
Gross profit
  $ 17,990     $ 27,437     $ (9,447 )     (34.4 %)
   
% of net sales
    10.7 %     13.7 %     n/a       n/a  
 
Operating income (loss)
  $ (651 )   $ 6,691     $ (7,342 )     (109.7 %)
   
% of net sales
    0.0 %     3.3 %     n/a       n/a  
Fiscal Nine Months:
                               
 
Gross profit
  $ 61,267     $ 80,691     $ (19,424 )     (24.1 %)
   
% of net sales
    11.4 %     13.1 %     n/a       n/a  
 
Operating income
  $ 9,205     $ 18,971     $ (9,766 )     (51.5 %)
   
% of net sales
    1.7 %     3.1 %     n/a       n/a  

          Overall, gross profit declined year over year as a result of reduced volumes and pricing pressures, primarily in our collaborative engineering and human capital management services. The impact of reduced volumes and pricing pressures was partially offset by cost reductions implemented throughout the company. Our cost reduction programs have focused primarily on indirect labor and related fringe benefit costs, elimination of unprofitable operations, consolidation of facilities and reductions of other indirect operating costs. These initiatives resulted in overall savings in excess of $8.0 million for the first nine months of 2003. Gross profit as a percentage of sales declined to 10.7% for the third quarter and 11.4% for the first nine months of 2003 compared to 13.7% and 13.1% during the corresponding periods of 2002. The decrease as a percent of sales for the first nine months of 2003 reflects unfavorable absorption of certain fixed costs, including underutilized facilities.

          Selling, general and administrative expenses decreased $4.5 million and $13.6 million compared to the third quarter and first nine months of 2002, respectively. Selling, general and administrative expenses, as a percentage of net sales, were 8.6% during the first nine months of fiscal 2003 compared to 9.7% in the comparable period of fiscal 2002. The decreases reflect ongoing cost reduction programs implemented across the company in late 2001 and throughout 2002. These reductions implemented prior to 2003 are expected to result in annualized savings of approximately $16 million. Cost savings achieved during the first nine months of 2003 were partially offset by charges resulting from additional cost reduction initiatives totaling $5.8 million. Restructuring and severance costs primarily include severance charges for targeted areas in North America and Europe in response to reduced levels of business. In addition, we recognized losses totaling $1.9 million primarily on the sale of certain assets of our European translation business and impairment of related goodwill.

          Interest expense

          Interest expense increased from $6.9 million during the third quarter of 2002 to $9.4 million during the third quarter of 2003, a $2.5 million increase. For the first nine months of 2003, interest expense increased $3.2 million versus 2002. Interest expense during 2003 includes charges totaling $2.4 million as a result of the refinancing of our bank debt outstanding as of August 1, 2003. The refinancing was

25


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

treated as a debt extinguishment, requiring recognition of the loss, due to the extent of changes in terms and conditions of our outstanding debt. Under the debt extinguishment rules, certain prior and current financing costs must be expensed upon completion of the refinancing. The remaining increase in interest expense compared to 2002 primarily resulted from increased interest rates on debt outstanding.

          Income taxes

          Our provision for income taxes was $14.8 million and $15.0 million during the third quarter and first nine months of 2003, respectively. This compares to income tax expense of $0.2 million and $1.9 million for the comparable time periods of 2002. During the third quarter of 2003 we recorded a non-cash tax charge of $17.0 million to establish valuation allowances against a substantial portion of our deferred tax assets. Valuation allowances were required due to cumulative operating losses generated by certain operations. When negative evidence such as cumulative losses exists SFAS No. 109, Accounting for Income Taxes, requires management to place considerable weight on historical results and less weight on future projections when evaluating the realizeability of deferred tax assets. As a result, management determined that the likelihood of realizing certain deferred tax assets was not sufficient to allow for continued recognition of assets.

          Minority interest/equity in affiliates

          Minority interests and equity losses improved from an expense of $0.5 million during the first nine months of 2002 to income of $0.2 million during the first nine months of 2003. Expense during 2002 included minority interest cost of $0.5 million related to a 25% minority interest in Satiz and $0.2 million of equity losses from our investment in MTE Groups LLC. We acquired the minority interest in Satiz and wrote off our remaining investment in MTE during the fourth quarter of 2002.

          Cumulative effect of accounting change for goodwill impairment

          During the first quarter of fiscal 2002 we adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill be evaluated for impairment charges based on a fair value approach instead of amortizing such intangibles over specified periods. Effective January 1, 2002, we evaluated the fair value of our operating units as of December 30, 2001 based on a discounted cash flow methodology as prescribed by the standard. The result of this analysis was a one-time, non-cash charge of $47.8 million ($38.1 million after taxes). The impairment charge relates to our collaborative engineering and human capital management service lines. Both of these areas experienced significant downturns during 2001 due to reduced demand for selected services and price reductions implemented by certain customers. The impact of the declines had a significant impact on current valuations when compared to prior performance levels and growth rates. Adoption of SFAS No. 142 required that we record this charge during the first quarter of 2002 as a cumulative adjustment from adoption of the new rules.

          Determining fair values based on discounted cash flows requires management to make significant estimates and assumptions including, but not limited to, long term projections of cash flows, market conditions, and appropriate discount rates. Management judgments are based on historical experience, information from our customers, market and regional trends, and other information. While we believe that the estimates and assumptions underlying our valuation models are valid, different assumptions could result in a different outcome.

Liquidity and Capital Resources

          Cash Flows

          General. Historically, our principal capital requirements are for working capital, product development initiatives, and capital expenditures for customer programs. These requirements have been met through a combination of senior debt, issuance of subordinated notes and cash from operations. In response to recent business conditions we have restrained our capital expenditures and increased efforts on disciplined management of working capital. Capital expenditure requirements for current programs have decreased commensurate with reduced demand for selected services and by redeploying underutilized assets. Days sales outstanding and other working capital metrics are monitored closely to minimize borrowings under our bank credit facility. Cash balances in excess of amounts required to fund daily operations are used to pay down any amounts outstanding under the credit facility.

26


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

          We typically pay our employees on a weekly basis and receive payment from our customers within invoicing terms, which is generally a 60-day period after the invoice date. However, in connection with certain of our supply chain management and vendor management services, we collect related receivables at approximately the same time we make payment to suppliers.

          Operating Activities. Net cash provided by operating activities was $2.5 million for the first nine months of 2003 compared to $14.0 million during the comparable period of 2002. The decrease reflects a $6.3 million decrease in earnings before depreciation, amortization and other non-cash charges. The remaining change in net cash is related to changes in our working capital due primarily to the timing of vendor payments relative to the close of the fiscal period.

          Investing Activities. Net cash used for investing activities decreased $6.3 million from $9.0 million for the first nine months of 2002 to $2.7 million for the first nine months of 2003. Capital expenditure requirements for current programs decreased commensurate with the current lower volumes in business while discretionary spending was reduced as a result of management initiatives. Cash used to acquire businesses during 2002 included funding of the Draupner Associates AB acquisition and the acquisition of the remaining outstanding common stock of Cadform-MSX Engineering GmbH. Proceeds from the sale/disposal of property and equipment were the result of the company disposing of idle or obsolete equipment and the disposition of selected assets of our translation management business. Other cash from investing activities during the first nine months of 2002 primarily represents the refund of escrow funds related to an investment in MTE Groups LLC as a result of their non-attainment of earnings targets.

          Financing Activities. Net cash used in financing activities was $2.7 million for the first nine months of 2003 compared to cash used in financing activities of $3.7 million for the first nine months of 2002. During the third quarter of 2003 we completed our private offering of senior notes and used the proceeds to repay all debt under our old credit facility and to repay our outstanding revolving debt. Financing activities during 2003 also includes an increase in book overdrafts, of $6.8 million, compared to 2002 due to the timing of vendor payments.

          Liquidity and Available Financings

          Our total indebtedness as of September 28, 2003 consists of senior secured notes, mezzanine term notes, senior subordinated notes, our fourth lien term notes, borrowings under our credit facilities and borrowings under various short-term arrangements. In addition to our total indebtedness, we also have contingent commitments under letters of credit totaling about $4.6 million, without duplication, at September 28, 2003.

          Available borrowings under our credit facility as of September 28, 2003 are subject to accounts receivable balance requirements. As of September 28, 2003 we have $39.7 million available for immediate borrowing based on eligible accounts receivable as determined in accordance with our credit agreement, as amended.

          On August 1, 2003 we completed a private offering of senior secured notes and mezzanine term notes, both maturing October 15, 2007. We also entered into a new three-year senior secured revolving credit facility that consists of a $40.0 million revolving credit agreement plus an additional $5 million available exclusively for the issuance of letters of credit. In addition we also amended the terms of certain of our other debt obligations. Proceeds from the offering were used to repay term loans and revolving debt under our credit facilities that matured between December 2004 and December 2006. These transactions refinanced our debt obligations over a longer term and removed certain restrictive covenants in place under prior arrangements.

          We believe that our current financing arrangements provide us with sufficient financial flexibility to fund our operations and debt service requirements through the term of our new senior credit facility with an expected maturity of July 2006, although there can be no assurance that will be the case. Financing requirements over the longer term will require additional access to capital markets. Our ability to access additional capital in the long term depends on availability of capital markets and pricing on commercially reasonable terms as well as our credit profile at the time we are seeking funds. From time to time, we review our long-term financing and capital structure. As a result of our review, we may periodically explore alternatives to our current financing, including the issuance of additional long-term debt, refinancing our new credit facility and other restructurings or financings. In addition, we may from time to time seek to retire our outstanding notes in open market purchases, privately negotiated transactions or otherwise. These repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amount of repurchases of our notes may be material and may involve significant amounts of cash and/or financing availability.

27


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

Significant Accounting Policies

          Certain accounting policies applied require management’s judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to a degree of uncertainty. Management judgments are based on historical experience, information from our customers, market and regional trends, and other information.

          During the third quarter of 2003 we established one additional significant accounting policy related to the valuation of 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. To determine the fair value of the warrants we completed a discounted cash flow analysis, which requires management to make significant estimates and assumptions including, but not limited to, long-term projections of cash flows, market conditions, and appropriate discount rates. During the third quarter of 2003, we recorded common stock purchase warrants at a fair value of $750,000. While we believe that the estimates and assumptions underlying our valuation models are valid, different assumptions could result in a different fair market value assigned to the warrants.

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 statement of financial position 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.

Forward - Looking Statements

          Certain of the statements made in this report on Form 10Q, including the success of restructuring activities and other operational improvements, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by the use of forward looking terminology such as “believes,” “expects,” “estimates,” “will,” “should,” “plans,” “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Such forward-looking statements are based on current management projections and expectations. They involve significant risks and uncertainties. As such, they are not guarantees of future performance. MSX International disclaims any intent or obligation to update such statements.

          Actual results may vary materially from those in the forward-looking statements as a result of any number of factors, many of which are beyond the control of management. These important factors include: our leverage and related exposure to changes in interest rates; our reliance on major customers in the automotive industry and the timing of their product development and other initiatives; the market demand for our technical business services in general; our ability to recruit and place qualified personnel; delays or unexpected costs associated with cost reduction efforts; risks associated with operating internationally, including economic, political and currency risks; and risks associated with our acquisition strategy. Additional information concerning these and other factors are discussed in MSX International’s Registration Statement on Form S-4 (dated September 30, 2003) and in other filings with the Securities and Exchange Commission.

28


Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

          We are exposed to certain market risks, including interest rate risks. As a result of the sale of senior secured notes and related notes, risks associated with interest rate management have changed since our fiscal year ended December 29, 2002. As of September 28, 2003 we had outstanding $130 million of senior subordinated notes at a fixed interest rate of 11.375%, $75 million of senior secured notes at a fixed interest rate of 11%, $25 million of mezzanine term notes at a fixed interest rate of 11.5% and $17.4 million of fourth lien term notes at a fixed interest rate of 10%. In addition to the fixed interest rate obligations, we have a $40 million revolver with variable interest rates. The debt outstanding under the revolver is determined by our operating cash flows and therefore will fluctuate on a regular basis.

ITEM 4. CONTROLS AND PROCEDURES

          As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of MSX International, Inc.’s Disclosure Committee and management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15. Based upon this evaluation the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic SEC reports is recorded, processed, summarized, and reported as and when required. In addition, they concluded that no significant deficiencies in the design or operation of internal controls existed which could significantly affect our ability to record, process, summarize and report financial data.

          There have been no significant changes in internal control over financial reporting that have materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

29


Table of Contents

PART II. OTHER INFORMATION

     
ITEM 1.   LEGAL PROCEEDINGS

    We are involved in various legal proceedings incidental to the ordinary conduct of our business. One such matter is proceeding in both federal court and in an arbitration proceeding. It involves claims and counter claims asserted by both parties in connection with a contingent earnout obligation related to the acquisition of Lexstra International, Inc. and Lexus Temporaries, Inc. and various other claims by and against two former employees. Litigation is subject to significant uncertainty and any final result could be greater or less than what management anticipates. However, we believe that none of the legal proceedings will have a material adverse effect on our financial condition, results of operations or long-term cash flows.

     
ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K
     
    (a)  Exhibits:
     
31.1   Certification of Chief Financial Officer pursuant to rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.
     
31.2   Certification of Chief Executive Officer pursuant to rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.
     
32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002
     
99.1   Press release announcing 2003 third quarter results

    (b) Reports on Form 8-K:
 
    During the period covered by this report, the following reports were filed on Form 8-K:

    July 7, 2003 reporting under “Item 5. Other Events” and “Item 7. Financial Statements and Exhibits” an announcement regarding our proposed offer to sell approximately $100 million of senior secured notes.
 
    July 16, 2003 reporting under “Item 9. Regulation FD Disclosure” the announcement of our expected 2003 second quarter results.
 
    July 28, 2003 reporting under “Item 5. Other Events” announcing that we priced our private offering of senior secured notes.

30


Table of Contents

SIGNATURE

          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.

Date: November 7, 2003

MSX INTERNATIONAL, INC.
(Registrant)

     
By:   /s/ Frederick K. Minturn
    Frederick K. Minturn
    Executive Vice President and
    Chief Financial Officer
 
(Chief accounting officer
and authorized signatory)

31


Table of Contents

10-Q EXHIBIT INDEX

     
EXHIBIT NO.   DESCRIPTION

 
31.1   Certification of Chief Financial Officer pursuant to rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.
     
31.2   Certification of Chief Executive Officer pursuant to rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.
     
32.1   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes – Oxley Act of 2002
     
99.1   Press release announcing 3rd quarter results