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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 July 4, 2004 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.  Delaware
(State or other jurisdiction
of incorporation or organization)
    
    38-3323099
(I.R.S. Employer Identification No.)1950 Concept Drive, Warren, Michigan
(Address of principal executive offices)
    
    48091
(Zip Code)
 (248)299-1000
(Registrants telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   Yes [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] At August 5, 2004, 486,350 shares of Class A common stock of the Registrant
were outstanding.




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MSX INTERNATIONAL, INC.
INDEX PagesPART I.FINANCIAL INFORMATIONITEM 1.Financial Statements:Consolidated Balance Sheets (unaudited) as of July 4, 2004 and December 28, 2003
    
    
    2Consolidated Statements of Operations (unaudited) for the fiscal quarters and fiscal six months ended July 4, 2004 and June 29, 2003
    
    
    3Consolidated Statements of Cash Flows (unaudited) for the fiscal six months ended July 4, 2004 and June 29, 2003
    
    
    4Notes to Consolidated Financial Statements (unaudited)
    
    
    5ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24ITEM 4.Controls and Procedures
    
    
    29PART II.OTHER INFORMATIONITEM 1.Legal Proceedings
    
    
    30ITEM 5.Other Information
    
    
    30ITEM 6.Exhibits and Reports on Form 8-K
    
    
    30SIGNATURE
    
    
    31Certification of Chief Financial Officer Pursuant to Rules 13a-15(e) and 15d-15(e)Certification of Chief Executive Officer Pursuant to Rules 13a-15(e) and 15d-15(e)Certification Pursuant to 18 U.S.C. Section 1350
  1




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS
 MSX INTERNATIONAL, INC. 
 CONSOLIDATED BALANCE SHEETS (Unaudited)as of July 4, 2004 and December 28, 2003 July 4,
    
    December 28,2004
    
    2003(dollars in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,117
    
    
    $
    36,650Accounts receivable, net (Note 3)
    
    
    195,619
    
    
    
    219,219Inventory
    
    
    9,305
    
    
    
    8,618Prepaid expenses and other assets
    
    
    7,208
    
    
    
    6,218Deferred income taxes, net
    
    
    4,014
    
    
    
    6,896Total current assets
    
    
    248,263
    
    
    
    277,601Property and equipment, net
    
    
    14,795
    
    
    
    18,480Goodwill, net (Note 4)
    
    
    133,072
    
    
    
    129,624Other assets
    
    
    12,704
    
    
    
    13,268Deferred income taxes, net
    
    
    388
    
    
    
    Total assets
    
    $
    409,222
    
    
    $
    438,973LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Notes payable and current portion of long-term debt (Note 5)
    
    $
    10,872
    
    
    $
    10,519Accounts payable and drafts
    
    
    128,223
    
    
    
    149,051Accrued payroll and benefits
    
    
    27,389
    
    
    
    29,625Other accrued liabilities
    
    
    73,758
    
    
    
    78,769Total current liabilities
    
    
    240,242
    
    
    
    267,964Long-term debt (Note 5)
    
    
    250,364
    
    
    
    249,742Long-term deferred compensation and other liabilities
    
    
    12,710
    
    
    
    12,546Deferred income taxes, net
    
    
    
    
    
    
    1,618Total liabilities
    
    
    503,316
    
    
    
    531,870Commitments and contingencies
    
    
    
    
    
    
    Series A Preferred Stock (Note 6)
    
    
    86,655
    
    
    
    81,812Shareholders deficit:Common Stock, $.01 par value, 5,000,000 aggregate shares of
Class A and Class B Common Stock authorized; 486,350
shares of Class A Common Stock issued and outstanding
    
    
    5
    
    
    
    5Additional paid-in-capital
    
    
    (24,881
    )
    
    
    (24,881
    )Common stock purchase warrants
    
    
    750
    
    
    
    750Accumulated other comprehensive loss (Note 7)
    
    
    (4,225
    )
    
    
    (2,749
    )Accumulated deficit
    
    
    (152,398
    )
    
    
    (147,834
    )Total shareholders deficit
    
    
    (180,749
    )
    
    
    (174,709
    )Total liabilities and shareholders deficit
    
    $
    409,222
    
    
    $
    438,973
 The accompanying notes are an integral part of the consolidated financial statements. 2




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MSX INTERNATIONAL, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)for the fiscal quarters and fiscal six months ended July 4, 2004 and June 29, 2003 Fiscal Quarter Ended
    
    Fiscal Six Months EndedJuly 4,
    
    June 29,
    
    July 4,
    
    June 29,2004
    
    2003
    
    2004
    
    2003(in thousands)Net sales
    
    $
    153,901
    
    
    $
    185,735
    
    
    $
    321,215
    
    
    $
    369,086Cost of sales
    
    
    135,025
    
    
    
    162,248
    
    
    
    281,738
    
    
    
    325,036Gross profit
    
    
    18,876
    
    
    
    23,487
    
    
    
    39,477
    
    
    
    44,050Selling, general and administrative expenses
    
    
    10,814
    
    
    
    16,108
    
    
    
    22,121
    
    
    
    32,198Restructuring and severance costs
    
    
    
    
    
    
    548
    
    
    
    
    
    
    
    1,900Loss on asset impairment and sale
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    96Operating income
    
    
    8,062
    
    
    
    6,814
    
    
    
    17,356
    
    
    
    9,856Interest expense, net
    
    
    8,349
    
    
    
    6,633
    
    
    
    16,154
    
    
    
    13,308Income (loss) before income taxes, minority
interests and equity in affiliates
    
    
    (287
    )
    
    
    181
    
    
    
    1,202
    
    
    
    (3,452
    )Income tax provision (benefit)
    
    
    (171
    )
    
    
    132
    
    
    
    924
    
    
    
    233Less minority interests and equity in
affiliates, net of taxes
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    (235
    )Net income (loss)
    
    
    (116
    )
    
    
    110
    
    
    
    278
    
    
    
    (3,450
    )Accretion for redemption of preferred stock
    
    
    (2,178
    )
    
    
    (2,261
    )
    
    
    (4,843
    )
    
    
    (4,455
    )Net loss available to common shareholders
    
    $
    (2,294
    )
    
    $
    (2,151
    )
    
    $
    (4,565
    )
    
    $
    (7,905
    )
 The accompanying notes are an integral part of the consolidated financial statements. 3




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MSX INTERNATIONAL, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)for the fiscal six months ended July 4, 2004 and June 29, 2003 Fiscal Six Months EndedJuly 4,
    
    June 29,2004
    
    2003(in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    278
    
    
    $
    (3,450
    )Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating activities:Minority interests and equity in affiliates
    
    
    
    
    
    
    (235
    )Loss on asset impairment and sale
    
    
    
    
    
    
    96Depreciation
    
    
    4,713
    
    
    
    9,445Amortization of debt issuance costs and non-cash interest
    
    
    2,182
    
    
    
    1,072Deferred taxes
    
    
    877
    
    
    
    (1,435
    )(Gain) loss on sale/disposal of property and equipment
    
    
    (50
    )
    
    
    332(Increase) decrease in receivables, net
    
    
    23,600
    
    
    
    (3,194
    )(Increase) decrease in inventory
    
    
    (688
    )
    
    
    (919
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (991
    )
    
    
    (1,083
    )Increase (decrease) in current liabilities
    
    
    (19,460
    )
    
    
    (1,097
    )Other, net
    
    
    (408
    )
    
    
    (979
    )Net cash provided by (used for) operating activities
    
    
    10,053
    
    
    
    (1,447
    )Cash flows from investing activities:Capital expenditures
    
    
    (1,117
    )
    
    
    (3,754
    )Proceeds from sale/disposal of property and equipment
    
    
    150
    
    
    
    1,291Other, net
    
    
    307
    
    
    
    (399
    )Net cash used for investing activities
    
    
    (660
    )
    
    
    (2,862
    )Cash flows from financing activities:Repayment of debt
    
    
    
    
    
    
    (6,343
    )Debt issuance costs
    
    
    (406
    )
    
    
    (1,008
    )Changes in revolving debt, net
    
    
    (147
    )
    
    
    5,540Changes in book overdrafts, net
    
    
    (12,417
    )
    
    
    (850
    )Net cash used for financing activities
    
    
    (12,970
    )
    
    
    (2,661
    )Effect of foreign exchange rate changes on cash and cash
equivalents
    
    
    (956
    )
    
    
    469Cash and cash equivalents:Decrease for the period
    
    
    (4,533
    )
    
    
    (6,501
    )Balance, beginning of period
    
    
    36,650
    
    
    
    10,935Balance, end of period
    
    $
    32,117
    
    
    $
    4,434
 The accompanying notes are an integral part of the consolidated financial statements. 4




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MSX International, Inc. 
 Notes to Consolidated Financial Statements (Unaudited)
  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 six months ended July 4, 2004 and June 29, 2003 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 28, 2003. Certain prior year amounts have been reclassified to
conform to the presentation adopted during the current period.  2.
    
    Restructuring and Severance: During 2003 we executed several restructuring actions to reduce operating
costs and streamline our administrative infrastructure. No significant charges
were recorded during the first six months of 2004. These obligations are
expected to be substantially paid by the second quarter of fiscal 2005. The
following table shows the activity related to restructuring reserves for the
fiscal six months ended July 4, 2004: OtherTermination
    
    Facility
    
    ContractualBenefits
    
    Consolidation
    
    Costs
    
    Other
    
    TotalReserve at December 28, 2003
    
    $
    8,032
    
    
    $
    5,954
    
    
    $
    3,085
    
    
    $
    265
    
    
    $
    17,336Payments and reserve
utilization in fiscal 2004
    
    
    (4,851
    )
    
    
    (5,084
    )
    
    
    (1,759
    )
    
    
    (203
    )
    
    
    (11,897
    )Reserve at July 4, 2004
    
    $
    3,181
    
    
    $
    870
    
    
    $
    1,326
    
    
    $
    62
    
    
    $
    5,439
  3.
    
    Accounts Receivable: Accounts receivable include both billed and unbilled receivables.
Unbilled receivables amounted to $63.2 million and $59.1 million at July 4,
2004 and December 28, 2003, 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 programs attributable to
services provided by our vendors, which are passed on to our customers. These
amounts totaled $63.0 million as of July 4, 2004 and $48.7 million as of
December 28, 2003. A corresponding liability to our vendors for these amounts
is recorded in accounts payable at the time the receivable is recognized. 5




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  4.
    
    Goodwill, net: The following summarizes the changes in our goodwill balances during the fiscal six months ended July 4, 2004: Human CapitalServices
    
    Business Services
    
    Engineering Services
    
    TotalBalance at December 28, 2003
    
    $
    97,392
    
    
    $
    32,232
    
    
    $
    
    
    
    $
    129,624Goodwill recorded during the period
    
    
    
    
    
    
    3,800
    
    
    
    
    
    
    
    3,800Translation changes
    
    
    2
    
    
    
    (354
    )
    
    
    
    
    
    
    (352
    )Balance at July 4, 2004
    
    $
    97,394
    
    
    $
    35,678
    
    
    $
    
    
    
    $
    133,072
 During the first quarter of fiscal 2004 we recorded a contingent earnout
obligation totaling $3.8 million related to a prior acquisition. Payment
of this obligation is pending resolution of a dispute regarding the earnout.  5.
    
    Debt: Debt is comprised of the following: Interest Rates at
    
    Outstanding atJuly 4,
    
    December 28,
    
    July 4,
    
    December 28,2004
    
    2003
    
    2004
    
    2003Senior credit facility
    
    
    7.50
    %
    
    
    8.55
    %
    
    $
    
    
    
    $
    297Senior secured notes, net of $.5 million unamortized discount
    
    
    11.00
    %
    
    
    11.00
    %
    
    
    74,989
    
    
    
    74,911Mezzanine term notes, net of $.6 million unamortized discount
    
    
    11.50
    %
    
    
    11.50
    %
    
    
    24,418
    
    
    
    24,325Fourth lien term notes
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    18,750
    
    
    
    17,802Senior subordinated notes
    
    
    11.375
    %
    
    
    11.375
    %
    
    
    130,000
    
    
    
    130,000Satiz facilities
    
    
    4.60
    %
    
    
    4.67
    %
    
    
    10,871
    
    
    
    10,519Other
    
    
    7.00
    %
    
    
    7.00
    %
    
    
    2,208
    
    
    
    2,407261,236
    
    
    
    260,261Less current portion
    
    
    
    
    
    
    
    
    
    
    10,872
    
    
    
    10,519Total long-term debt
    
    
    
    
    
    
    
    
    
    $
    250,364
    
    
    $
    249,742
 The company was notified by its largest finance source in Italy,
Fidis S.p.a., of its intent to terminate the current financing arrangement with
Satiz S.r.l. in 2004. At July 4, 2004 $9.3 million was drawn on the facility,
collateralized by a corresponding amount of accounts receivable from our largest Italian customer. Recently, the company concluded an arrangement with an alternative financing source to replace the majority but not all of the existing arrangement with Fidis.  We have also negotiated improved payment terms with the customer.  We continue to seek additional financing. 6




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  6.
    
    Series A Preferred Stock: Effective December 29, 2003 the company amended its Restated Certificate
of Incorporation to modify the redemption provisions of our 12% Series A
Cumulative Preferred Stock (the Preferred Stock). As a result of the
amendment, the Preferred Stock is now redeemable to the extent that funds are
legally available, on or after December 31, 2008, at the option of the company
or the shareholder. As of July 4, 2004 and December 28, 2003 there are 359,448 shares of 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 Series A Preferred
Stock, par value $0.01, and 1,000,000 shares of New Preferred Stock, par value
$0.01. As of July 4, 2004, dividends accrued totaled $50.2 million, however we
have not declared or paid any dividends. 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.  7.
    
    Comprehensive Income (Loss): Our comprehensive income (loss) was: Fiscal Quarter Ended
    
    Fiscal Six Months EndedJuly 4,
    
    June 29,
    
    July 4,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    (116
    )
    
    $
    110
    
    
    $
    278
    
    
    $
    (3,450
    )Other comprehensive income (loss) -
foreign currency translation adjustments
    
    
    (162
    )
    
    
    3,801
    
    
    
    (1,476
    )
    
    
    5,199Comprehensive income (loss)
    
    $
    (278
    )
    
    $
    3,911
    
    
    $
    (1,198
    )
    
    $
    1,749
  8.
    
    Income Taxes: We currently provide valuation allowances for a significant portion of the
companys deferred tax assets. The effective tax rate for the quarter and six
months ended July 4, 2004 differs from the 35% federal statutory rate primarily
because of these valuation allowances. The income tax benefit for the quarter
ended July 4, 2004 relates primarily to improved performance in a foreign
operation, which resulted in a reduction to a valuation allowance previously
recorded for this operation. The income tax expense for the fiscal six months
ended July 4, 2004 relates primarily to earnings in certain foreign
jurisdictions for which valuation allowances are not required. 7




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  9.
    
    Segment Information: MSXI is a global provider of technical business services to the automotive
and other industries. Our business includes: human capital services, business
services and engineering services. Human capital services include a full range
of staffing solutions, including direct support of our engineering and business
services. Our business services include solutions to our customers product
quality, and communication related customer needs. Engineering services offer
a full range of total product, custom, or single point engineering solutions.
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, common customers, and marketing and
sales processes. The accounting policies of each 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 including the Michigan
Single Business Tax and other similar taxes (EBITA). 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 CapitalServices
    
    Business Services
    
    Engineering Services
    
    Other
    
    TotalQuarter Ended July 4, 2004:Net sales  external
    
    $
    55,193
    
    
    $
    66,161
    
    
    $
    32,547
    
    
    $
    
    
    
    $
    153,901Net intercompany sales
    
    
    7
    
    
    
    610
    
    
    
    693
    
    
    
    (1,310
    )
    
    
    Segment EBITA
    
    
    2,594
    
    
    
    7,095
    
    
    
    1,443
    
    
    
    
    
    
    
    11,132Quarter Ended June 29, 2003:Net sales  external
    
    
    68,936
    
    
    
    73,215
    
    
    
    43,584
    
    
    
    
    
    
    
    185,735Net intercompany sales
    
    
    23
    
    
    
    2,411
    
    
    
    153
    
    
    
    (2,587
    )
    
    
    Segment EBITA
    
    
    5,342
    
    
    
    6,141
    
    
    
    (2,321
    )
    
    
    
    
    
    
    9,162
 Human CapitalServices
    
    Business Services
    
    Engineering Services
    
    Other
    
    TotalSix Months Ended July 4, 2004:Net sales  external
    
    $
    114,071
    
    
    $
    135,329
    
    
    $
    71,815
    
    
    $
    
    
    
    $
    321,215Net intercompany sales
    
    
    9
    
    
    
    915
    
    
    
    962
    
    
    
    (1,886
    )
    
    
    Segment EBITA
    
    
    6,371
    
    
    
    14,127
    
    
    
    4,062
    
    
    
    
    
    
    
    24,560Six Months Ended June 29, 2003:Net sales  external
    
    
    141,159
    
    
    
    140,147
    
    
    
    87,780
    
    
    
    
    
    
    
    369,086Net intercompany sales
    
    
    315
    
    
    
    3,939
    
    
    
    291
    
    
    
    (4,545
    )
    
    
    Segment EBITA
    
    
    10,065
    
    
    
    10,486
    
    
    
    (4,797
    )
    
    
    
    
    
    
    15,754
 8




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  9.
    
    Segment Information:  continued A reconciliation of total segment EBITA to consolidated income (loss)
before income taxes, minority interests and equity in affiliates is as follows: Fiscal Quarter Ended
    
    Fiscal Six Months EndedJuly 4,
    
    June 29,
    
    July 4,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Total segment EBITA
    
    $
    11,132
    
    
    $
    9,162
    
    
    $
    24,560
    
    
    $
    15,754Net costs not allocated to segments
    
    
    (2,469
    )
    
    
    (1,447
    )
    
    
    (5,817
    )
    
    
    (4,122
    )Interest expense, net
    
    
    (8,349
    )
    
    
    (6,633
    )
    
    
    (16,154
    )
    
    
    (13,308
    )Michigan single business tax and other similar taxes
    
    
    (601
    )
    
    
    (901
    )
    
    
    (1,387
    )
    
    
    (1,776
    )Consolidated income (loss) before taxes, minority
interests and equity in affiliates
    
    $
    (287
    )
    
    $
    181
    
    
    $
    1,202
    
    
    $
    (3,452
    )
  10.
    
    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 now account for the options under variable plan accounting. 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 July
4, 2004. The following table illustrates the effect on net loss for the fiscal
quarters and fiscal six months ended July 4, 2004 and June 29, 2003 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 Six Months EndedJuly 4,
    
    June 29,
    
    July 4,
    
    June 29,2004
    
    2003
    
    2004
    
    2003Net income (loss) as reported
    
    $
    (116
    )
    
    $
    110
    
    
    $
    278
    
    
    $
    (3,450
    )Deduct: Total employee stock-based compensation
Determined under the fair value method, net of
taxes
    
    
    
    
    
    
    (19
    )
    
    
    
    
    
    
    (37
    )Pro forma net income (loss)
    
    $
    (116
    )
    
    $
    91
    
    
    $
    278
    
    
    $
    (3,487
    )
  11.
    
    New Accounting Pronouncements: 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. As discussed in Note 6, the
redemption provisions of our preferred stock were amended and the adoption of
SFAS 150 during the first quarter of fiscal 2004 did not have any impact on the
companys consolidated results of operations or financial position. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46) which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable to variable
interest entities created after January 31, 2003. Variable interest entities
created prior to February 1, 2003, must be consolidated effective December 31,
2003. The adoption of FIN 46 during the first quarter of fiscal 2004 did not
have a material impact on the companys consolidated results of operations or
financial position. 9




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  12.
    
    Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.: Senior secured notes that are issued by MSX International, Inc. are
collateralized 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 as well as the senior subordinated
notes issued by MSX International, Inc. are guaranteed jointly and severally 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 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
each of the guarantor and non-guarantor subsidiaries are not presented because
management has determined such statements would not provide additional material
information to the holders of the senior subordinated or senior secured notes. 10




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  12.
    
    Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. 
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of July 4, 2004 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,450
    
    
    $
    1,092
    
    
    $
    14,575
    
    
    $
    
    
    
    $
    32,117Accounts receivable, net
    
    
    
    
    
    
    89,936
    
    
    
    105,683
    
    
    
    
    
    
    
    195,619Inventory
    
    
    
    
    
    
    6,468
    
    
    
    2,837
    
    
    
    
    
    
    
    9,305Prepaid expenses and other assets
    
    
    
    
    
    
    4,519
    
    
    
    2,689
    
    
    
    
    
    
    
    7,208Deferred income taxes, net
    
    
    
    
    
    
    2,925
    
    
    
    3,789
    
    
    
    (2,700
    )
    
    
    4,014Total current assets
    
    
    16,450
    
    
    
    104,940
    
    
    
    129,573
    
    
    
    (2,700
    )
    
    
    248,263Property and equipment, net
    
    
    
    
    
    
    6,096
    
    
    
    8,699
    
    
    
    
    
    
    
    14,795Goodwill, net
    
    
    
    
    
    
    116,302
    
    
    
    16,770
    
    
    
    
    
    
    
    133,072Investment in subsidiaries
    
    
    97,065
    
    
    
    19,806
    
    
    
    
    
    
    
    (115,113
    )
    
    
    1,758Other assets
    
    
    6,764
    
    
    
    3,470
    
    
    
    712
    
    
    
    
    
    
    
    10,946Deferred income taxes, net
    
    
    
    
    
    
    946
    
    
    
    627
    
    
    
    (1,185
    )
    
    
    388Total assets
    
    $
    120,279
    
    
    $
    251,560
    
    
    $
    156,381
    
    
    $
    (118,998
    )
    
    $
    409,222LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    10,872
    
    
    $
    
    
    
    $
    10,872Accounts payable and drafts
    
    
    
    
    
    
    73,121
    
    
    
    55,102
    
    
    
    
    
    
    
    128,223Accrued liabilities
    
    
    11,336
    
    
    
    49,955
    
    
    
    39,856
    
    
    
    
    
    
    
    101,147Deferred income taxes, net
    
    
    2,700
    
    
    
    
    
    
    
    
    
    
    
    (2,700
    )
    
    
    Total current liabilities
    
    
    14,036
    
    
    
    123,076
    
    
    
    105,830
    
    
    
    (2,700
    )
    
    
    240,242Long-term debt
    
    
    231,541
    
    
    
    
    
    
    
    18,823
    
    
    
    
    
    
    
    250,364Intercompany accounts
    
    
    (32,389
    )
    
    
    28,213
    
    
    
    4,176
    
    
    
    
    
    
    
    Long-term deferred compensation and other liabilities
    
    
    
    
    
    
    3,207
    
    
    
    9,503
    
    
    
    
    
    
    
    12,710Deferred income taxes, net
    
    
    1,185
    
    
    
    
    
    
    
    
    
    
    
    (1,185
    )
    
    
    Total liabilities
    
    
    214,373
    
    
    
    154,496
    
    
    
    138,332
    
    
    
    (3,885
    )
    
    
    503,316Series A Preferred Stock
    
    
    86,655
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,655Shareholders equity (deficit)
    
    
    (180,749
    )
    
    
    97,064
    
    
    
    18,049
    
    
    
    (115,113
    )
    
    
    (180,749
    )Total liabilities and shareholders equity (deficit)
    
    $
    120,279
    
    
    $
    251,560
    
    
    $
    156,381
    
    
    $
    (118,998
    )
    
    $
    409,222
 11




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  12.
    
    Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. 
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of December 28, 2003 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,600
    
    
    $
    390
    
    
    $
    17,660
    
    
    $
    
    
    
    $
    36,650Accounts receivable, net
    
    
    
    
    
    
    95,154
    
    
    
    124,065
    
    
    
    
    
    
    
    219,219Inventory
    
    
    
    
    
    
    5,635
    
    
    
    2,983
    
    
    
    
    
    
    
    8,618Prepaid expenses and other assets
    
    
    
    
    
    
    4,151
    
    
    
    2,067
    
    
    
    
    
    
    
    6,218Deferred income taxes, net
    
    
    
    
    
    
    3,093
    
    
    
    6,896
    
    
    
    (3,093
    )
    
    
    6,896Total current assets
    
    
    18,600
    
    
    
    108,423
    
    
    
    153,671
    
    
    
    (3,093
    )
    
    
    277,601Property and equipment, net
    
    
    
    
    
    
    8,129
    
    
    
    10,351
    
    
    
    
    
    
    
    18,480Goodwill, net
    
    
    
    
    
    
    112,502
    
    
    
    17,122
    
    
    
    
    
    
    
    129,624Investment in subsidiaries
    
    
    87,423
    
    
    
    13,659
    
    
    
    
    
    
    
    (99,284
    )
    
    
    1,798Other assets
    
    
    7,370
    
    
    
    3,448
    
    
    
    652
    
    
    
    
    
    
    
    11,470Deferred income taxes, net
    
    
    
    
    
    
    2,286
    
    
    
    
    
    
    
    (2,286
    )
    
    
    Total assets
    
    $
    113,393
    
    
    $
    248,447
    
    
    $
    181,796
    
    
    $
    (104,663
    )
    
    $
    438,973LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    10,519
    
    
    $
    
    
    
    $
    10,519Accounts payable and drafts
    
    
    
    
    
    
    77,525
    
    
    
    71,526
    
    
    
    
    
    
    
    149,051Accrued liabilities
    
    
    9,425
    
    
    
    50,632
    
    
    
    48,337
    
    
    
    
    
    
    
    108,394Deferred income taxes, net
    
    
    3,093
    
    
    
    
    
    
    
    
    
    
    
    (3,093
    )
    
    
    Total current liabilities
    
    
    12,518
    
    
    
    128,157
    
    
    
    130,382
    
    
    
    (3,093
    )
    
    
    267,964Long-term debt
    
    
    230,566
    
    
    
    
    
    
    
    19,176
    
    
    
    
    
    
    
    249,742Intercompany accounts
    
    
    (39,080
    )
    
    
    29,668
    
    
    
    9,412
    
    
    
    
    
    
    
    Long-term deferred compensation and other liabilities
    
    
    
    
    
    
    3,199
    
    
    
    9,347
    
    
    
    
    
    
    
    12,546Deferred income taxes, net
    
    
    2,286
    
    
    
    
    
    
    
    1,618
    
    
    
    (2,286
    )
    
    
    1,618Total liabilities
    
    
    206,290
    
    
    
    161,024
    
    
    
    169,935
    
    
    
    (5,379
    )
    
    
    531,870Series A Preferred Stock
    
    
    81,812
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,812Shareholders equity (deficit)
    
    
    (174,709
    )
    
    
    87,423
    
    
    
    11,861
    
    
    
    (99,284
    )
    
    
    (174,709
    )Total liabilities and shareholders equity (deficit)
    
    $
    113,393
    
    
    $
    248,447
    
    
    $
    181,796
    
    
    $
    (104,663
    )
    
    $
    438,973
 12




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  12.
    
    Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.-
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended July 4, 2004 and June 29, 2003 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedFiscal Quarter Ended July 4, 2004:Net sales
    
    $
    
    
    
    $
    87,016
    
    
    $
    68,222
    
    
    $
    (1,337
    )
    
    $
    153,901Cost of sales
    
    
    
    
    
    
    75,838
    
    
    
    60,524
    
    
    
    (1,337
    )
    
    
    135,025Gross profit
    
    
    
    
    
    
    11,178
    
    
    
    7,698
    
    
    
    
    
    
    
    18,876Selling, general and administrative expenses
    
    
    
    
    
    
    6,562
    
    
    
    4,252
    
    
    
    
    
    
    
    10,814Operating income
    
    
    
    
    
    
    4,616
    
    
    
    3,446
    
    
    
    
    
    
    
    8,062Interest expense, net
    
    
    6,055
    
    
    
    1,163
    
    
    
    1,131
    
    
    
    
    
    
    
    8,349Income (loss) before income taxes,
minority
interests and equity in affiliates
    
    
    (6,055
    )
    
    
    3,453
    
    
    
    2,315
    
    
    
    
    
    
    
    (287
    )Income tax provision (benefit)
    
    
    (1,262
    )
    
    
    1,302
    
    
    
    (211
    )
    
    
    
    
    
    
    (171
    )Minority interests and equity in affiliates
    
    
    4,677
    
    
    
    2,526
    
    
    
    
    
    
    
    (7,203
    )
    
    
    Net income (loss)
    
    $
    (116
    )
    
    $
    4,677
    
    
    $
    2,526
    
    
    $
    (7,203
    )
    
    $
    (116
    )Fiscal Quarter Ended June 29, 2003:Net sales
    
    $
    
    
    
    $
    108,854
    
    
    $
    79,467
    
    
    $
    (2,586
    )
    
    $
    185,735Cost of sales
    
    
    
    
    
    
    92,357
    
    
    
    72,166
    
    
    
    (2,275
    )
    
    
    162,248Gross profit
    
    
    
    
    
    
    16,497
    
    
    
    7,301
    
    
    
    (311
    )
    
    
    23,487Selling, general and administrative expenses
    
    
    
    
    
    
    8,396
    
    
    
    7,712
    
    
    
    
    
    
    
    16,108Restructuring and severance costs
    
    
    
    
    
    
    
    
    
    
    548
    
    
    
    
    
    
    
    548(Gain) loss on asset impairment and sale
    
    
    
    
    
    
    (55
    )
    
    
    72
    
    
    
    
    
    
    
    17Operating income (loss)
    
    
    
    
    
    
    8,156
    
    
    
    (1,031
    )
    
    
    (311
    )
    
    
    6,814Interest expense, net
    
    
    4,348
    
    
    
    2,108
    
    
    
    177
    
    
    
    
    
    
    
    6,633Income (loss) before income taxes,
minority
interests and equity in affiliates
    
    
    (4,348
    )
    
    
    6,048
    
    
    
    (1,208
    )
    
    
    (311
    )
    
    
    181Income tax provision (benefit)
    
    
    (148
    )
    
    
    467
    
    
    
    (187
    )
    
    
    
    
    
    
    132Minority interests and equity in affiliates
    
    
    4,621
    
    
    
    (960
    )
    
    
    61
    
    
    
    (3,661
    )
    
    
    61Net income (loss)
    
    $
    421
    
    
    $
    4,621
    
    
    $
    (960
    )
    
    $
    (3,972
    )
    
    $
    110
 13




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  12.
    
    Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.-
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal six months ended July 4, 2004 and June 29, 2003 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedFiscal Six Months Ended July 4, 2004:Net sales
    
    $
    
    
    
    $
    184,415
    
    
    $
    138,713
    
    
    $
    (1,913
    )
    
    $
    321,215Cost of sales
    
    
    
    
    
    
    163,407
    
    
    
    120,244
    
    
    
    (1,913
    )
    
    
    281,738Gross profit
    
    
    
    
    
    
    21,008
    
    
    
    18,469
    
    
    
    
    
    
    
    39,477Selling, general and administrative expenses
    
    
    
    
    
    
    13,552
    
    
    
    8,569
    
    
    
    
    
    
    
    22,121Operating income
    
    
    
    
    
    
    7,456
    
    
    
    9,900
    
    
    
    
    
    
    
    17,356Interest expense, net
    
    
    12,722
    
    
    
    2,262
    
    
    
    1,170
    
    
    
    
    
    
    
    16,154Income (loss) before income taxes,
minority
interests and equity in affiliates
    
    
    (12,722
    )
    
    
    5,194
    
    
    
    8,730
    
    
    
    
    
    
    
    1,202Income tax provision (benefit)
    
    
    (1,884
    )
    
    
    1,738
    
    
    
    1,070
    
    
    
    
    
    
    
    924Minority interests and equity in affiliates
    
    
    11,116
    
    
    
    7,660
    
    
    
    
    
    
    
    (18,776
    )
    
    
    Net income (loss)
    
    $
    278
    
    
    $
    11,116
    
    
    $
    7,660
    
    
    $
    (18,776
    )
    
    $
    278Fiscal Six Months Ended June 29, 2003:Net sales
    
    $
    
    
    
    $
    217,885
    
    
    $
    155,746
    
    
    $
    (4,545
    )
    
    $
    369,086Cost of sales
    
    
    
    
    
    
    188,682
    
    
    
    140,588
    
    
    
    (4,234
    )
    
    
    325,036Gross profit
    
    
    
    
    
    
    29,203
    
    
    
    15,158
    
    
    
    (311
    )
    
    
    44,050Selling, general and administrative expenses
    
    
    
    
    
    
    18,109
    
    
    
    14,089
    
    
    
    
    
    
    
    32,198Restructuring and severance costs
    
    
    
    
    
    
    957
    
    
    
    943
    
    
    
    
    
    
    
    1,900Loss on asset impairment and sale
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    96Operating income (loss)
    
    
    
    
    
    
    10,137
    
    
    
    30
    
    
    
    (311
    )
    
    
    9,856Interest expense, net
    
    
    8,694
    
    
    
    4,129
    
    
    
    485
    
    
    
    
    
    
    
    13,308Income (loss) before income taxes,
minority
interests and equity in affiliates
    
    
    (8,694
    )
    
    
    6,008
    
    
    
    (455
    )
    
    
    (311
    )
    
    
    (3,452
    )Income tax provision (benefit)
    
    
    (1,443
    )
    
    
    866
    
    
    
    810
    
    
    
    
    
    
    
    233Minority interests and equity in affiliates
    
    
    4,112
    
    
    
    (1,030
    )
    
    
    121
    
    
    
    (2,968
    )
    
    
    235Net income (loss)
    
    $
    (3,139
    )
    
    $
    4,112
    
    
    $
    (1,144
    )
    
    $
    (3,279
    )
    
    $
    (3,450
    )
 14




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  12.
    
    Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. 
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal six months ended July 4, 2004 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    278
    
    
    $
    11,116
    
    
    $
    7,660
    
    
    $
    (18,776
    )
    
    $
    278Adjustments to reconcile net income (loss) to
net
cash provided by (used for) operating
activities:Equity in affiliates
    
    
    (11,116
    )
    
    
    (7,660
    )
    
    
    
    
    
    
    18,776
    
    
    
    Depreciation
    
    
    
    
    
    
    2,282
    
    
    
    2,431
    
    
    
    
    
    
    
    4,713Amortization of debt issuance costs and
non-cash interest
    
    
    2,018
    
    
    
    
    
    
    
    164
    
    
    
    
    
    
    
    2,182Deferred taxes
    
    
    (1,496
    )
    
    
    1,508
    
    
    
    865
    
    
    
    
    
    
    
    877(Gain) loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    20
    
    
    
    (70
    )
    
    
    
    
    
    
    (50
    )(Increase) decrease in receivables, net
    
    
    
    
    
    
    5,219
    
    
    
    18,381
    
    
    
    
    
    
    
    23,600(Increase) decrease in inventory
    
    
    
    
    
    
    (834
    )
    
    
    146
    
    
    
    
    
    
    
    (688
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    
    
    
    
    (369
    )
    
    
    (622
    )
    
    
    
    
    
    
    (991
    )Increase (decrease) in current liabilities
    
    
    1,910
    
    
    
    5,770
    
    
    
    (27,140
    )
    
    
    
    
    
    
    (19,460
    )Other, net
    
    
    
    
    
    
    (292
    )
    
    
    (116
    )
    
    
    
    
    
    
    (408
    )Net cash provided by (used for) operating
activities
    
    
    (8,406
    )
    
    
    16,760
    
    
    
    1,699
    
    
    
    
    
    
    
    10,053Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (275
    )
    
    
    (842
    )
    
    
    
    
    
    
    (1,117
    )Proceeds from sale/disposal of property
and equipment
    
    
    
    
    
    
    16
    
    
    
    134
    
    
    
    
    
    
    
    150Other, net
    
    
    
    
    
    
    307
    
    
    
    
    
    
    
    
    
    
    
    307Net cash provided by (used for) investing
activities
    
    
    
    
    
    
    48
    
    
    
    (708
    )
    
    
    
    
    
    
    (660
    )Cash flows from financing activities:Transactions with subsidiaries
    
    
    6,692
    
    
    
    (1,455
    )
    
    
    (5,237
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    (436
    )
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    (406
    )Changes in revolving debt, net
    
    
    
    
    
    
    
    
    
    
    (147
    )
    
    
    
    
    
    
    (147
    )Changes in book overdrafts, net
    
    
    
    
    
    
    (14,652
    )
    
    
    2,235
    
    
    
    
    
    
    
    (12,417
    )Net cash provided by (used for) financing
activities
    
    
    6,256
    
    
    
    (16,107
    )
    
    
    (3,119
    )
    
    
    
    
    
    
    (12,970
    )Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (956
    )
    
    
    
    
    
    
    (956
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    (2,150
    )
    
    
    701
    
    
    
    (3,084
    )
    
    
    
    
    
    
    (4,533
    )Balance, beginning of period
    
    
    18,600
    
    
    
    391
    
    
    
    17,659
    
    
    
    
    
    
    
    36,650Balance, end of period
    
    $
    16,450
    
    
    $
    1,092
    
    
    $
    14,575
    
    
    $
    
    
    
    $
    32,117
 15




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  12.
    
    Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal six months ended June 29, 2003 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (3,139
    )
    
    $
    4,112
    
    
    $
    (1,144
    )
    
    $
    (3,279
    )
    
    $
    (3,450
    )Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:Equity in affiliates
    
    
    (4,112
    )
    
    
    1,030
    
    
    
    (121
    )
    
    
    2,968
    
    
    
    (235
    )Loss on asset impairment and sale
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    96Depreciation
    
    
    
    
    
    
    4,630
    
    
    
    4,815
    
    
    
    
    
    
    
    9,445Amortization of debt issuance costs
    
    
    1,072
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,072Deferred taxes
    
    
    (1,958
    )
    
    
    754
    
    
    
    (231
    )
    
    
    
    
    
    
    (1,435
    )Loss on sale/disposal of property and equipment
    
    
    
    
    
    
    101
    
    
    
    231
    
    
    
    
    
    
    
    332(Increase) decrease in receivables, net
    
    
    75
    
    
    
    (1,725
    )
    
    
    (1,544
    )
    
    
    
    
    
    
    (3,194
    )(Increase) decrease in inventory
    
    
    
    
    
    
    (110
    )
    
    
    (809
    )
    
    
    
    
    
    
    (919
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    7
    
    
    
    (1,133
    )
    
    
    43
    
    
    
    
    
    
    
    (1,083
    )Increase (decrease) in current liabilities
    
    
    
    
    
    
    1,639
    
    
    
    (2,736
    )
    
    
    
    
    
    
    (1,097
    )Other, net
    
    
    
    
    
    
    (977
    )
    
    
    (2
    )
    
    
    
    
    
    
    (979
    )Net cash provided by (used for) operating activities
    
    
    (8,055
    )
    
    
    8,321
    
    
    
    (1,402
    )
    
    
    (311
    )
    
    
    (1,447
    )Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (1,971
    )
    
    
    (1,783
    )
    
    
    
    
    
    
    (3,754
    )Proceeds from sale/disposal of property
and equipment
    
    
    
    
    
    
    672
    
    
    
    619
    
    
    
    
    
    
    
    1,291Other, net
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    
    
    
    
    (399
    )Net cash used for investing activities
    
    
    
    
    
    
    (1,698
    )
    
    
    (1,164
    )
    
    
    
    
    
    
    (2,862
    )Cash flows from financing activities:Transactions with subsidiaries
    
    
    6,331
    
    
    
    (5,753
    )
    
    
    (889
    )
    
    
    311
    
    
    
    Repayment of debt
    
    
    (3,077
    )
    
    
    (10
    )
    
    
    (3,256
    )
    
    
    
    
    
    
    (6,343
    )Debt issuance costs
    
    
    (1,008
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,008
    )Changes in revolving debt, net
    
    
    5,809
    
    
    
    
    
    
    
    (269
    )
    
    
    
    
    
    
    5,540Changes in book overdrafts, net
    
    
    
    
    
    
    (845
    )
    
    
    (5
    )
    
    
    
    
    
    
    (850
    )Net cash provided by (used for) financing activities
    
    
    8,055
    
    
    
    (6,608
    )
    
    
    (4,419
    )
    
    
    311
    
    
    
    (2,661
    )Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    
    
    
    
    469
    
    
    
    
    
    
    
    469Cash and cash equivalents:Increase (decrease) for the period
    
    
    
    
    
    
    15
    
    
    
    (6,516
    )
    
    
    
    
    
    
    (6,501
    )Balance, beginning of period
    
    
    
    
    
    
    154
    
    
    
    10,781
    
    
    
    
    
    
    
    10,935Balance, end of period
    
    $
    
    
    
    $
    169
    
    
    $
    4,265
    
    
    $
    
    
    
    $
    4,434
 16




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  13.
    
    Guarantor and Non-Guarantor Subsidiaries of MSXI Limited: Senior secured notes that are issued by MSXI Limited, an indirect
subsidiary of MSX International, Inc., are collateralized 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 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 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
each of the guarantor and non-guarantor subsidiaries are not presented because
management has determined such statements would not provide additional material
information 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)  13.
    
    Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of July 4, 2004 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    16,450
    
    
    $
    16
    
    
    $
    1,092
    
    
    $
    14,559
    
    
    $
    
    
    
    $
    32,117Accounts receivable, net
    
    
    
    
    
    
    19,744
    
    
    
    89,936
    
    
    
    85,939
    
    
    
    
    
    
    
    195,619Inventory
    
    
    
    
    
    
    
    
    
    
    6,468
    
    
    
    2,837
    
    
    
    
    
    
    
    9,305Prepaid expenses and other assets
    
    
    
    
    
    
    1,121
    
    
    
    4,519
    
    
    
    1,568
    
    
    
    
    
    
    
    7,208Deferred income taxes, net
    
    
    
    
    
    
    518
    
    
    
    2,925
    
    
    
    3,271
    
    
    
    (2,700
    )
    
    
    4,014Total current assets
    
    
    16,450
    
    
    
    21,399
    
    
    
    104,940
    
    
    
    108,174
    
    
    
    (2,700
    )
    
    
    248,263Property and equipment, net
    
    
    
    
    
    
    1,903
    
    
    
    6,096
    
    
    
    6,796
    
    
    
    
    
    
    
    14,795Goodwill, net
    
    
    
    
    
    
    102
    
    
    
    116,302
    
    
    
    16,668
    
    
    
    
    
    
    
    133,072Investment in subsidiaries
    
    
    97,065
    
    
    
    10
    
    
    
    19,806
    
    
    
    (2,386
    )
    
    
    (112,737
    )
    
    
    1,758Other assets
    
    
    6,764
    
    
    
    547
    
    
    
    3,470
    
    
    
    165
    
    
    
    
    
    
    
    10,946Deferred income taxes, net
    
    
    
    
    
    
    
    
    
    
    946
    
    
    
    1,145
    
    
    
    (1,703
    )
    
    
    388Total assets
    
    $
    120,279
    
    
    $
    23,961
    
    
    $
    251,560
    
    
    $
    130,562
    
    
    $
    (117,140
    )
    
    $
    409,222LIABILITIES AND SHAREHOLDERS
EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of
long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,872
    
    
    $
    
    
    
    $
    10,872Accounts payable and drafts
    
    
    
    
    
    
    8,470
    
    
    
    73,121
    
    
    
    46,632
    
    
    
    
    
    
    
    128,223Accrued liabilities
    
    
    11,336
    
    
    
    9,239
    
    
    
    49,955
    
    
    
    30,617
    
    
    
    
    
    
    
    101,147Deferred income taxes, net
    
    
    2,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,700
    )
    
    
    Total current liabilities
    
    
    14,036
    
    
    
    17,709
    
    
    
    123,076
    
    
    
    88,121
    
    
    
    (2,700
    )
    
    
    240,242Long-term debt
    
    
    231,541
    
    
    
    16,615
    
    
    
    
    
    
    
    2,208
    
    
    
    
    
    
    
    250,364Intercompany accounts
    
    
    (32,389
    )
    
    
    (8,773
    )
    
    
    28,213
    
    
    
    12,949
    
    
    
    
    
    
    
    Long-term deferred compensation and
other liabilities
    
    
    
    
    
    
    264
    
    
    
    3,207
    
    
    
    9,239
    
    
    
    
    
    
    
    12,710Deferred income taxes, net
    
    
    1,185
    
    
    
    518
    
    
    
    
    
    
    
    
    
    
    
    (1,703
    )
    
    
    Total liabilities
    
    
    214,373
    
    
    
    26,333
    
    
    
    154,496
    
    
    
    112,517
    
    
    
    (4,403
    )
    
    
    503,316Series A Preferred Stock
    
    
    86,655
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    86,655Shareholders equity (deficit)
    
    
    (180,749
    )
    
    
    (2,372
    )
    
    
    97,064
    
    
    
    18,045
    
    
    
    (112,737
    )
    
    
    (180,749
    )Total liabilities and shareholders
equity (deficit)
    
    $
    120,279
    
    
    $
    23,961
    
    
    $
    251,560
    
    
    $
    130,562
    
    
    $
    (117,140
    )
    
    $
    409,222
 18




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  13.
    
    Guarantor and Non-Guarantor Subsidiaries of MSXI Limited  continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of December 28, 2003 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,600
    
    
    $
    5,639
    
    
    $
    390
    
    
    $
    12,021
    
    
    $
    
    
    
    $
    36,650Accounts receivable, net
    
    
    
    
    
    
    23,876
    
    
    
    95,154
    
    
    
    100,189
    
    
    
    
    
    
    
    219,219Inventory
    
    
    
    
    
    
    
    
    
    
    5,635
    
    
    
    2,983
    
    
    
    
    
    
    
    8,618Prepaid expenses and other assets
    
    
    
    
    
    
    715
    
    
    
    4,151
    
    
    
    1,352
    
    
    
    
    
    
    
    6,218Deferred income taxes, net
    
    
    
    
    
    
    391
    
    
    
    3,093
    
    
    
    6,506
    
    
    
    (3,094
    )
    
    
    6,896Total current assets
    
    
    18,600
    
    
    
    30,621
    
    
    
    108,423
    
    
    
    123,051
    
    
    
    (3,094
    )
    
    
    277,601Property and equipment, net
    
    
    
    
    
    
    2,614
    
    
    
    8,129
    
    
    
    7,737
    
    
    
    
    
    
    
    18,480Goodwill, net
    
    
    
    
    
    
    99
    
    
    
    112,502
    
    
    
    17,023
    
    
    
    
    
    
    
    129,624Investment in subsidiaries
    
    
    87,423
    
    
    
    10
    
    
    
    13,659
    
    
    
    (2,638
    )
    
    
    (96,656
    )
    
    
    1,798Other assets
    
    
    7,370
    
    
    
    594
    
    
    
    3,448
    
    
    
    58
    
    
    
    
    
    
    
    11,470Deferred income taxes, net
    
    
    
    
    
    
    
    
    
    
    2,286
    
    
    
    
    
    
    
    (2,286
    )
    
    
    Total assets
    
    $
    113,393
    
    
    $
    33,938
    
    
    $
    248,447
    
    
    $
    145,231
    
    
    $
    (102,036
    )
    
    $
    438,973LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of
long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,519
    
    
    $
    
    
    
    $
    10,519Accounts payable and drafts
    
    
    
    
    
    
    15,028
    
    
    
    77,525
    
    
    
    56,498
    
    
    
    
    
    
    
    149,051Accrued liabilities
    
    
    9,425
    
    
    
    12,700
    
    
    
    51,147
    
    
    
    35,122
    
    
    
    
    
    
    
    108,394Deferred income taxes, net
    
    
    3,093
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,093
    )
    
    
    Total current liabilities
    
    
    12,518
    
    
    
    27,728
    
    
    
    128,672
    
    
    
    102,139
    
    
    
    (3,093
    )
    
    
    267,964Long-term debt
    
    
    230,566
    
    
    
    16,471
    
    
    
    
    
    
    
    2,705
    
    
    
    
    
    
    
    249,742Intercompany accounts
    
    
    (39,080
    )
    
    
    (8,779
    )
    
    
    29,668
    
    
    
    18,191
    
    
    
    
    
    
    
    Long-term deferred compensation and other
liabilities
    
    
    
    
    
    
    755
    
    
    
    2,684
    
    
    
    9,107
    
    
    
    
    
    
    
    12,546Deferred income taxes, net
    
    
    2,286
    
    
    
    391
    
    
    
    
    
    
    
    1,228
    
    
    
    (2,287
    )
    
    
    1,618Total liabilities
    
    
    206,290
    
    
    
    36,566
    
    
    
    161,024
    
    
    
    133,370
    
    
    
    (5,380
    )
    
    
    531,870Series A Preferred Stock
    
    
    81,812
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,812Shareholders equity (deficit)
    
    
    (174,709
    )
    
    
    (2,628
    )
    
    
    87,423
    
    
    
    11,861
    
    
    
    (96,656
    )
    
    
    (174,709
    )Total liabilities and shareholders equity
(deficit)
    
    $
    113,393
    
    
    $
    33,938
    
    
    $
    248,447
    
    
    $
    145,231
    
    
    $
    (102,036
    )
    
    $
    438,973
 19




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  13.
    
    Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended July 4, 2004 and June 29, 2003 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedFiscal Quarter Ended July 4, 2004Net sales
    
    $
    
    
    
    $
    17,140
    
    
    $
    87,016
    
    
    $
    51,082
    
    
    $
    (1,337
    )
    
    $
    153,901Cost of sales
    
    
    
    
    
    
    15,402
    
    
    
    75,838
    
    
    
    45,122
    
    
    
    (1,337
    )
    
    
    135,025Gross profit
    
    
    
    
    
    
    1,738
    
    
    
    11,178
    
    
    
    5,960
    
    
    
    
    
    
    
    18,876Selling, general and administrative expenses
    
    
    
    
    
    
    1,352
    
    
    
    6,562
    
    
    
    2,900
    
    
    
    
    
    
    
    10,814Operating income
    
    
    
    
    
    
    386
    
    
    
    4,616
    
    
    
    3,060
    
    
    
    
    
    
    
    8,062Interest expense (income), net
    
    
    6,055
    
    
    
    911
    
    
    
    1,163
    
    
    
    220
    
    
    
    
    
    
    
    8,349Income (loss) before income taxes,
minority interests and equity in affiliates
    
    
    (6,055
    )
    
    
    (525
    )
    
    
    3,453
    
    
    
    2,840
    
    
    
    
    
    
    
    (287
    )Income tax provision (benefit)
    
    
    (1,262
    )
    
    
    (355
    )
    
    
    1,302
    
    
    
    144
    
    
    
    
    
    
    
    (171
    )Minority interests and equity in affiliates
    
    
    4,677
    
    
    
    
    
    
    
    2,526
    
    
    
    (170
    )
    
    
    (7,033
    )
    
    
    Net income (loss)
    
    $
    (116
    )
    
    $
    (170
    )
    
    $
    4,677
    
    
    $
    2,526
    
    
    $
    (7,033
    )
    
    $
    (116
    )Fiscal Quarter Ended June 29, 2003Net sales
    
    $
    
    
    
    $
    21,499
    
    
    $
    108,854
    
    
    $
    57,968
    
    
    $
    (2,586
    )
    
    $
    185,735Cost of sales
    
    
    
    
    
    
    22,981
    
    
    
    92,357
    
    
    
    49,185
    
    
    
    (2,275
    )
    
    
    162,248Gross profit
    
    
    
    
    
    
    (1,482
    )
    
    
    16,497
    
    
    
    8,783
    
    
    
    (311
    )
    
    
    23,487Selling, general and administrative expenses
    
    
    
    
    
    
    585
    
    
    
    8,396
    
    
    
    7,127
    
    
    
    
    
    
    
    16,108Restructuring and severance costs
    
    
    
    
    
    
    235
    
    
    
    
    
    
    
    313
    
    
    
    
    
    
    
    548(Gain)/loss on asset impairment and sale
    
    
    
    
    
    
    
    
    
    
    (55
    )
    
    
    72
    
    
    
    
    
    
    
    17Operating income (loss)
    
    
    
    
    
    
    (2,302
    )
    
    
    8,156
    
    
    
    1,271
    
    
    
    (311
    )
    
    
    6,814Interest expense (income), net
    
    
    4,348
    
    
    
    283
    
    
    
    2,108
    
    
    
    (106
    )
    
    
    
    
    
    
    6,633Income (loss) before income taxes,
minority interests and equity in
affiliates
    
    
    (4,348
    )
    
    
    (2,585
    )
    
    
    6,048
    
    
    
    1,377
    
    
    
    (311
    )
    
    
    181Income tax provision (benefit)
    
    
    (148
    )
    
    
    (644
    )
    
    
    467
    
    
    
    457
    
    
    
    
    
    
    
    132Minority interests and equity in affiliates
    
    
    4,621
    
    
    
    
    
    
    
    (960
    )
    
    
    (1,880
    )
    
    
    (1,720
    )
    
    
    61Net income (loss)
    
    $
    421
    
    
    $
    (1,941
    )
    
    $
    4,621
    
    
    $
    (960
    )
    
    $
    (2,031
    )
    
    $
    110
 20




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  13.
    
    Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal six months ended July 4, 2004 and June 29, 2003 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedFiscal Six Months Ended July 4, 2004Net sales
    
    $
    
    
    
    $
    36,140
    
    
    $
    184,415
    
    
    $
    102,573
    
    
    $
    (1,913
    )
    
    $
    321,215Cost of sales
    
    
    
    
    
    
    31,956
    
    
    
    163,407
    
    
    
    88,288
    
    
    
    (1,913
    )
    
    
    281,738Gross profit
    
    
    
    
    
    
    4,184
    
    
    
    21,008
    
    
    
    14,285
    
    
    
    
    
    
    
    39,477Selling, general and administrative expenses
    
    
    
    
    
    
    2,585
    
    
    
    13,552
    
    
    
    5,984
    
    
    
    
    
    
    
    22,121Operating income
    
    
    
    
    
    
    1,599
    
    
    
    7,456
    
    
    
    8,301
    
    
    
    
    
    
    
    17,356Interest expense (income), net
    
    
    12,722
    
    
    
    733
    
    
    
    2,262
    
    
    
    437
    
    
    
    
    
    
    
    16,154Income (loss) before income taxes,
minority interests and equity in affiliates
    
    
    (12,722
    )
    
    
    866
    
    
    
    5,194
    
    
    
    7,864
    
    
    
    
    
    
    
    1,202Income tax provision (benefit)
    
    
    (1,884
    )
    
    
    68
    
    
    
    1,738
    
    
    
    1,002
    
    
    
    
    
    
    
    924Minority interests and equity in affiliates
    
    
    11,116
    
    
    
    
    
    
    
    7,660
    
    
    
    798
    
    
    
    (19,574
    )
    
    
    Net income (loss)
    
    $
    278
    
    
    $
    798
    
    
    $
    11,116
    
    
    $
    7,660
    
    
    $
    (19,574
    )
    
    $
    278Fiscal Six Months Ended June 29, 2003Net sales
    
    $
    
    
    
    $
    44,432
    
    
    $
    217,885
    
    
    $
    111,314
    
    
    $
    (4,545
    )
    
    $
    369,086Cost of sales
    
    
    
    
    
    
    43,359
    
    
    
    188,682
    
    
    
    97,229
    
    
    
    (4,234
    )
    
    
    325,036Gross profit
    
    
    
    
    
    
    1,073
    
    
    
    29,203
    
    
    
    14,085
    
    
    
    (311
    )
    
    
    44,050Selling, general and administrative expenses
    
    
    
    
    
    
    3,671
    
    
    
    18,109
    
    
    
    10,418
    
    
    
    
    
    
    
    32,198Restructuring and severance costs
    
    
    
    
    
    
    605
    
    
    
    957
    
    
    
    338
    
    
    
    
    
    
    
    1,900(Gain)/loss on asset impairment and sale
    
    
    
    
    
    
    241
    
    
    
    
    
    
    
    (145
    )
    
    
    
    
    
    
    96Operating income (loss)
    
    
    
    
    
    
    (3,444
    )
    
    
    10,137
    
    
    
    3,474
    
    
    
    (311
    )
    
    
    9,856Interest expense (income), net
    
    
    8,694
    
    
    
    545
    
    
    
    4,129
    
    
    
    (60
    )
    
    
    
    
    
    
    13,308Income (loss) before income taxes,
minority interests and equity in
affiliates
    
    
    (8,694
    )
    
    
    (3,989
    )
    
    
    6,008
    
    
    
    3,534
    
    
    
    (311
    )
    
    
    (3,452
    )Income tax provision (benefit)
    
    
    (1,443
    )
    
    
    (1,167
    )
    
    
    866
    
    
    
    1,977
    
    
    
    
    
    
    
    233Minority interests and equity in affiliates
    
    
    4,112
    
    
    
    
    
    
    
    (1,030
    )
    
    
    (2,702
    )
    
    
    (145
    )
    
    
    235Net income (loss)
    
    $
    (3,139
    )
    
    $
    (2,822
    )
    
    $
    4,112
    
    
    $
    (1,145
    )
    
    $
    (456
    )
    
    $
    (3,450
    )
 21




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  13.
    
    Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal six months ended July 4, 2004 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    278
    
    
    $
    798
    
    
    $
    11,116
    
    
    $
    7,660
    
    
    $
    (19,574
    )
    
    $
    278Adjustments to reconcile net income (loss) to
net
cash provided by (used for) operating
activities:Equity in affiliates
    
    
    (11,116
    )
    
    
    
    
    
    
    (7,660
    )
    
    
    (798
    )
    
    
    19,574
    
    
    
    Depreciation
    
    
    
    
    
    
    810
    
    
    
    2,282
    
    
    
    1,621
    
    
    
    
    
    
    
    4,713Amortization of debt issuance costs
    
    
    2,018
    
    
    
    164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,182Deferred taxes
    
    
    (1,496
    )
    
    
    
    
    
    
    1,508
    
    
    
    865
    
    
    
    
    
    
    
    877(Gain) loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    (70
    )
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    (50
    )(Increase) decrease in receivables, net
    
    
    
    
    
    
    4,132
    
    
    
    5,219
    
    
    
    14,249
    
    
    
    
    
    
    
    23,600(Increase) decrease in inventory
    
    
    
    
    
    
    
    
    
    
    (834
    )
    
    
    146
    
    
    
    
    
    
    
    (688
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    
    
    
    
    (405
    )
    
    
    (369
    )
    
    
    (217
    )
    
    
    
    
    
    
    (991
    )Increase (decrease) in current liabilities
    
    
    1,910
    
    
    
    (12,769
    )
    
    
    5,770
    
    
    
    (14,371
    )
    
    
    
    
    
    
    (19,460
    )Other, net
    
    
    
    
    
    
    63
    
    
    
    (292
    )
    
    
    (179
    )
    
    
    
    
    
    
    (408
    )Net cash provided by (used for) operating
activities
    
    
    (8,406
    )
    
    
    (7,277
    )
    
    
    16,760
    
    
    
    8,976
    
    
    
    
    
    
    
    10,053Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (106
    )
    
    
    (275
    )
    
    
    (736
    )
    
    
    
    
    
    
    (1,117
    )Proceeds from sale/disposal of property and
equipment
    
    
    
    
    
    
    74
    
    
    
    16
    
    
    
    60
    
    
    
    
    
    
    
    150Other, net
    
    
    
    
    
    
    
    
    
    
    307
    
    
    
    
    
    
    
    
    
    
    
    307Net cash provided by (used for) investing
activities
    
    
    
    
    
    
    (32
    )
    
    
    48
    
    
    
    (676
    )
    
    
    
    
    
    
    (660
    )Cash flows from financing activities:Transactions with subsidiaries
    
    
    6,692
    
    
    
    6
    
    
    
    (1,455
    )
    
    
    (5,243
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    (436
    )
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (406
    )Changes in revolving debt, net
    
    
    
    
    
    
    (3
    )
    
    
    
    
    
    
    (144
    )
    
    
    
    
    
    
    (147
    )Changes in book overdrafts, net
    
    
    
    
    
    
    2,235
    
    
    
    (14,652
    )
    
    
    
    
    
    
    
    
    
    
    (12,417
    )Net cash provided by (used for) financing
activities
    
    
    6,256
    
    
    
    2,268
    
    
    
    (16,107
    )
    
    
    (5,387
    )
    
    
    
    
    
    
    (12,970
    )Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    (582
    )
    
    
    
    
    
    
    (374
    )
    
    
    
    
    
    
    (956
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    (2,150
    )
    
    
    (5,623
    )
    
    
    701
    
    
    
    2,539
    
    
    
    
    
    
    
    (4,533
    )Balance, beginning of period
    
    
    18,600
    
    
    
    5,639
    
    
    
    391
    
    
    
    12,020
    
    
    
    
    
    
    
    36,650Balance, end of period
    
    $
    16,450
    
    
    $
    16
    
    
    $
    1,092
    
    
    $
    14,559
    
    
    $
    
    
    
    $
    32,117
 22




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated)  13.
    
    Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal six months ended June 29, 2003 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (3,139
    )
    
    $
    (2,822
    )
    
    $
    4,112
    
    
    $
    (1,145
    )
    
    $
    (456
    )
    
    $
    (3,450
    )Adjustments to reconcile net income (loss) to
net
cash provided by (used for) operating
activities:Equity in affiliates
    
    
    (4,112
    )
    
    
    
    
    
    
    1,030
    
    
    
    2,702
    
    
    
    145
    
    
    
    (235
    )Loss on asset impairment and sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96
    
    
    
    
    
    
    
    96Depreciation
    
    
    
    
    
    
    1,953
    
    
    
    4,630
    
    
    
    2,862
    
    
    
    
    
    
    
    9,445Amortization of debt issuance costs
    
    
    1,072
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,072Deferred taxes
    
    
    (1,958
    )
    
    
    (28
    )
    
    
    754
    
    
    
    (203
    )
    
    
    
    
    
    
    (1,435
    )Loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    (40
    )
    
    
    101
    
    
    
    271
    
    
    
    
    
    
    
    332(Increase) decrease in receivables, net
    
    
    75
    
    
    
    (577
    )
    
    
    (1,725
    )
    
    
    (967
    )
    
    
    
    
    
    
    (3,194
    )(Increase) decrease in inventory
    
    
    
    
    
    
    (3
    )
    
    
    (110
    )
    
    
    (806
    )
    
    
    
    
    
    
    (919
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    7
    
    
    
    143
    
    
    
    (1,133
    )
    
    
    (100
    )
    
    
    
    
    
    
    (1,083
    )Increase (decrease) in current liabilities
    
    
    
    
    
    
    883
    
    
    
    1,639
    
    
    
    (3,619
    )
    
    
    
    
    
    
    (1,097
    )Other, net
    
    
    
    
    
    
    58
    
    
    
    (977
    )
    
    
    (60
    )
    
    
    
    
    
    
    (979
    )Net cash provided by (used for) operating
activities
    
    
    (8,055
    )
    
    
    (433
    )
    
    
    8,321
    
    
    
    (969
    )
    
    
    (311
    )
    
    
    (1,447
    )Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (585
    )
    
    
    (1,971
    )
    
    
    (1,198
    )
    
    
    
    
    
    
    (3,754
    )Proceeds from sale/disposal of equipment and
investments
    
    
    
    
    
    
    479
    
    
    
    672
    
    
    
    140
    
    
    
    
    
    
    
    1,291Other, net
    
    
    
    
    
    
    
    
    
    
    (399
    )
    
    
    
    
    
    
    
    
    
    
    (399
    )Net cash used for investing activities
    
    
    
    
    
    
    (106
    )
    
    
    (1,698
    )
    
    
    (1,058
    )
    
    
    
    
    
    
    (2,862
    )Cash flows from financing activities:Transactions with subsidiaries
    
    
    6,331
    
    
    
    1,307
    
    
    
    (5,753
    )
    
    
    (2,196
    )
    
    
    311
    
    
    
    Repayment of debt
    
    
    (3,077
    )
    
    
    
    
    
    
    (10
    )
    
    
    (3,256
    )
    
    
    
    
    
    
    (6,343
    )Debt issuance costs
    
    
    (1,008
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,008
    )Changes in revolving debt, net
    
    
    5,809
    
    
    
    (240
    )
    
    
    
    
    
    
    (29
    )
    
    
    
    
    
    
    5,540Changes in book overdrafts, net
    
    
    
    
    
    
    
    
    
    
    (845
    )
    
    
    (5
    )
    
    
    
    
    
    
    (850
    )Net cash provided by (used for) financing
activities
    
    
    8,055
    
    
    
    1,067
    
    
    
    (6,608
    )
    
    
    (5,486
    )
    
    
    311
    
    
    
    (2,661
    )Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    (502
    )
    
    
    
    
    
    
    971
    
    
    
    
    
    
    
    469Cash and cash equivalents:Increase (decrease) for the period
    
    
    
    
    
    
    26
    
    
    
    15
    
    
    
    (6,542
    )
    
    
    
    
    
    
    (6,501
    )Balance, beginning of period
    
    
    
    
    
    
    116
    
    
    
    154
    
    
    
    10,665
    
    
    
    
    
    
    
    10,935Balance, end of period
    
    $
    
    
    
    $
    142
    
    
    $
    169
    
    
    $
    4,123
    
    
    $
    
    
    
    $
    4,434
 23




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Results of
Operations
     Outlook We are a significant supplier of technical business services and have
developed, through internal growth and acquisition, extensive international
service delivery capability. We are executing the following business strategy
to leverage our commercial strengths:  
    
    Capitalize on growing trend toward outsourcing
    
    Grow our non-automotive and non-traditional client base
    
    Increase market share by delivering integrated services and
cross-selling
    
    Increase margins through emphasis on higher return service
offerings in service segments with higher growth prospects Our business segments are affected by differing industry dynamics. As a
result of recent industry and economic trends, our overall revenue declined
during the past three years. Our revenue remains under pressure from
continuing cost containment actions at our major customers. In response to
difficult industry conditions we completed a significant restructuring plan in
2003 that reduced our headcount, consolidated underutilized facilities and
eliminated unfavorable leases. General economic trends in North America and
Europe appear to support the continuing development of our business and the
achievement of the companys 2004 operating plan. 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. As we continue
to expand our services with current customers in the automotive industry, an
important strategy is to expand our customer relationships to new automotive
customers and to other industries. Our targeted markets include transportation,
medical products, and financial services, among others. 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. Net Sales For the first six months of fiscal 2004, consolidated net sales decreased
$47.9 million, or 13.0%, from $369.1 million in fiscal 2003 to $321.2 million
during fiscal 2004. For the second quarter of fiscal 2004, consolidated net
sales decreased $31.8 million, or 17.1%, from $185.7 million in fiscal 2003 to
$153.9 million during fiscal 2004. Our sales by segment,
net of intercompany sales, were as follows: Change2004
    
    2003
    
    $
    
    %(dollars in thousands)Fiscal Quarter:Human Capital Services
    
    $
    55,193
    
    
    $
    68,936
    
    
    $
    (13,743
    )
    
    
    (19.9
    %)Business Services
    
    
    66,161
    
    
    
    73,215
    
    
    
    (7,054
    )
    
    
    (9.6
    %)Engineering Services
    
    
    32,547
    
    
    
    43,584
    
    
    
    (11,037
    )
    
    
    (25.3
    %)Total net sales
    
    $
    153,901
    
    
    $
    185,735
    
    
    $
    (31,834
    )
    
    
    (17.1
    %)Fiscal Six Months:Human Capital Services
    
    $
    114,071
    
    
    $
    141,159
    
    
    $
    (27,088
    )
    
    
    (19.2
    %)Business Services
    
    
    135,329
    
    
    
    140,147
    
    
    
    (4,818
    )
    
    
    (3.4
    %)Engineering Services
    
    
    71,815
    
    
    
    87,780
    
    
    
    (15,965
    )
    
    
    (18.2
    %)Total net sales
    
    $
    321,215
    
    
    $
    369,086
    
    
    $
    (47,871
    )
    
    
    (13.0
    %)
 24




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS The decline in human capital services primarily reflects reduced volumes
in our engineering staffing and IT and technical staffing services in North
America. Volume reductions reflect year over year declines in development
programs and related contract staffing at automotive OEMs and selected
non-automotive clients. Sales of business services declined versus 2003 primarily due to reduced
demand for custom communication services in our Italian operations, in part due
to commercial challenges confronting our principal customer, Fiat Auto. We recently executed a three year extension of our contract
with Fiat Auto covering most services on commercially reasonable terms that include price reductions,
but accelerated invoice payment terms. The overall decline in business services
was partially offset by favorable exchange rates impacting our European
results. The net impact of year over year exchange rate changes was to
increase sales of business services by about $2.7 million for the second
quarter of 2004 and $8.7 million for the first six months of 2004. Excluding
the impact of foreign exchange rate changes, sales of business services for the
second quarter and first six months of 2004 decreased about $9.8 million, or
13.4% and $13.5 million or 9.6%, respectively, versus the comparable periods
for 2003. Sales of engineering services reflect declining volumes
partially offset by exchange rate movement totaling $0.8 million and $2.3 million on sales for
the second quarter and first six months of 2004, respectively. After adjusting
for changes due to exchange rate movements, our engineering operations reflect a net decrease
of $11.8 million, or 27.2% and $18.2 million, or 20.8% for the second quarter
and for the first six months of 2004, respectively, compared to the comparable
periods of fiscal 2003. The sales decline is due primarily to lower customer demand in Europe
and the elimination of manufacturing engineering in North America. Operating Profit Our consolidated gross profit, selling, general and administrative
expenses and operating income for the periods presented were: Change2004
    
    2003
    
    $
    
    %(dollars in thousands)Fiscal Quarter:Gross profit
    
    $
    18,876
    
    
    $
    23,487
    
    
    $
    (4,611
    )
    
    
    (19.6
    %)% of net sales
    
    
    12.3
    %
    
    
    12.6
    %
    
    
    n/a
    
    
    
    n/aSelling, general
and administrative
expenses
    
    $
    10,814
    
    
    $
    16,108
    
    
    $
    (5,294
    )
    
    
    (32.9
    %)% of net sales
    
    
    7.0
    %
    
    
    8.7
    %
    
    
    n/a
    
    
    
    n/aOperating income
    
    $
    8,062
    
    
    $
    6,814
    
    
    $
    1,248
    
    
    
    18.3
    %% of net sales
    
    
    5.2
    %
    
    
    3.7
    %
    
    
    n/a
    
    
    
    n/aFiscal Six Months:Gross profit
    
    $
    39,477
    
    
    $
    44,050
    
    
    $
    (4,573
    )
    
    
    (10.4
    %)% of net sales
    
    
    12.3
    %
    
    
    11.9
    %
    
    
    n/a
    
    
    
    n/aSelling, general
and administrative
expenses
    $
    22,121
    
    
    $
    32,198
    
    
    $
    (10,077
    )
    
    
    (31.3
    )% of net sales
    
    
    6.9
    %
    
    
    8.7
    %
    
    
    n/a
    
    
    
    n/aOperating income
    
    $
    17,356
    
    
    $
    9,856
    
    
    $
    7,500
    
    
    
    76.1
    %% of net sales
    
    
    5.4
    %
    
    
    2.7
    %
    
    
    n/a
    
    
    
    n/a
 25




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Overall, gross profit declined year over year as a result of reduced
volumes and pricing pressures, combined with settlement of a contractual
volume discount related to vendor management services. This rebate was not
offset, as expected, during the quarter by a cost benefit sharing arrangement with the customer,
however, we have negotiated further revenue expansion opportunities
directly benefiting the company. The impact of these factors on gross profit
were partially offset by cost reductions implemented
throughout the company during fiscal 2003. 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
savings to our cost of sales of approximately $3.5 million for the second
quarter of 2004 and $7.6 million for the first six months of 2004. Gross profit as a percentage of sales declined to 12.3% for the
second quarter of 2004 compared to 12.6% for the second quarter of 2003. For
the first six months of 2004 gross profit as a percentage of net sales improved
to 12.3% compared to 11.9% for the corresponding period of 2003. For the first
six months of 2004 our cost reduction program has resulted in total savings of
$17.7 million in both cost of sales and in selling, general and administrative expenses compared to the
first six months of 2003. Interest expense Interest expense increased from $6.6 million during the second quarter of
2003 to $8.3 million during the second quarter of 2004, a $1.7 million
increase. For the first six months of 2004, interest expense increased $2.8
million versus 2003, net of an increase in interest income on invested cash balances. The increase in interest expense compared to 2003
primarily resulted from increased interest rates, an increase in the average debt outstanding and
increased debt amortization costs resulting from the senior secured debt refinancing completed August 1, 2003. Income taxes We currently provide valuation allowances for a significant portion of the
companys deferred tax assets. The effective tax rate for the quarter and six
months ended July 4, 2004 differs from the 35% federal statutory rate primarily
because of these valuation allowances. The income tax benefit for the quarter
ended July 4, 2004 relates primarily to improved performance in a foreign
operation, which resulted in a reduction to a valuation allowance previously
recorded for this operation. The income tax expense for the fiscal six months
ended July 4, 2004 relates primarily to earnings in certain foreign
jurisdictions for which valuation allowances are not required. 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
secured debt, issuance of senior subordinated notes and cash from operations.
In response to lower sales volumes and a de-emphasis on capital intensive
businesses we have reduced our capital expenditures for existing programs and
selected new product development initiatives. We also emphasize 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, accounts
receivable agings, and other working capital metrics are monitored closely to
minimize investments in working capital. We believe that such metrics are
important to identify opportunities and potential problems, particularly those
associated with the automated payment processes of our large automotive
customers. Cash balances in excess of amounts required to fund daily operations
are used to pay down any amounts outstanding under our credit facility.
Thereafter, surplus funds are invested in short term, money market investments. We typically pay our employees on a weekly basis. In some cases,
including in Europe, employees are paid on a monthly or bi-weekly basis. We
receive payment from our customers within invoicing terms, which is generally a
30 to 60 day period after the invoice date. However, in connection with
certain of our vendor management services, we collect related receivables at
approximately the same time we make payment to suppliers. 26




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Operating Activities. Net cash provided by operating activities was $10.1
million for the first six months of fiscal 2004 compared to net cash used for
operating activities of $1.4 million during fiscal 2003. The increase reflects
a $26.8 million change in accounts receivable due primarily to the collection
of accounts receivable relative to the close of the fiscal period and a reduction in days sales outstanding. This
increase is partially offset by an $18.4 million change in current liabilities
due primarily to payments related to 2003 restructuring actions. The remaining $3.1 increase is
the result of all other changes in our net income and working capital. Investing Activities.Net cash used for investing activities was $0.7
million for the first six months of 2004 compared to net cash used for
investing activities of $2.9 million for the comparable period of 2003. Capital
expenditure requirements for current programs decreased commensurate with the
current business volumes, while discretionary spending is lower due to
increased strategic emphasis on low investment, high return services. Financing Activities. Net cash used in financing activities was $13.0 million
for the first six months of 2004 compared to net cash used in financing
activities of $2.7 million for the first six months of 2003. During the
first six months of 2004, $12.4 million of the net cash used resulted from the
timing of working capital funding. Financing requirements during the first six
months of 2003 included repayment of debt of $6.3 million partially offset by a
change of $5.6 million in our revolving debt used to provide for changes in our
working capital. Liquidity and Available Financings Our total indebtedness as of July 4, 2004 consists of senior secured
notes, mezzanine term notes, fourth lien term notes, senior subordinated notes
and borrowings under various short-term arrangements. As of July 4, 2004 there
were no drawings pursuant to our senior credit facility. In addition to our
total indebtedness, we also have contingent commitments related to letters of
credit totaling about $4.6 million at July 4, 2004. Available borrowings under our credit facility as of July 4, 2004 are
subject to accounts receivable balance requirements. As of July 4, 2004 we
have $38.5 million available for immediate borrowing based on eligible accounts
receivable as determined in accordance with our credit agreement, as amended. The company was notified by its largest finance source in Italy,
Fidis S.p.a., of its intent to terminate the current financing arrangement with
Satiz S.r.l. in 2004. At July 4, 2004 $9.3 million was drawn on the facility,
collateralized by a corresponding amount of accounts receivable from our largest Italian customer. Recently, the company concluded an arrangement with
an alternative financing source to replace the majority but not all of the existing arrangement with Fidis. We have also negotiated improved
payment terms with the customer. We continue to seek additional financing. We believe that our financing arrangements , including expected changes to
arrangements in Italy, provide us with sufficient financial flexibility to fund
our operations, debt service requirements and contingent earnout obligations
(See Part II, Item 1. Legal Proceedings) through the term of our senior credit
facility, although there can be no assurance that will be the case. Financing
requirements beyond July 2006 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. In connection with our procurement services program, we have agreed with
our customer to modify the process by which we receive funds and disburse
payments to vendors. The change in process is expected to result in a one-time
remittance to the customer in the second half of 2004 totaling about $10.1
million. This amount has been reflected as a current liability in our consolidated
balance sheet. 27




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS New Accounting Pronouncements 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. As discussed in Note 6, the
redemption provisions of our preferred stock were amended and the adoption of
SFAS 150 during the first quarter of fiscal 2004 did not have any impact on the
companys consolidated results of operations or financial position. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46) which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable to variable
interest entities created after January 31, 2003. Variable interest entities
created prior to February 1, 2003, must be consolidated effective December 31,
2003. The adoption of FIN 46 during the first quarter of fiscal 2004 did not
have a material impact on the companys consolidated results of operations or
financial position. Forward  Looking Statements Certain of the statements made in this report on Form 10-Q, 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 November 19, 2003) and in other
filings with the Securities and Exchange Commission. 28




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##### Table of Contents



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(e) and 15d-15(e). 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. 29




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##### 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 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.
The parties agreed to terms of settlement with regard to this matter on June
29, 2004. The monetary terms of settlement are consistent in present value
with amounts previously reserved by the company, with 40% of the settlement
amount expected to be paid in the third quarter of 2004 and the balance paid in
equal quarterly installments over three years. Another such matter is an arbitration and related action in state court to
enforce/vacate a March 2004 arbitration award totaling $3.8 million. The
underlying dispute involves a claim for a contingent earnout payment under the
terms of a purchase agreement for the acquisition of Management Resources, Inc.
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 operation or long-term cash flows. 
 ITEM 5. OTHER INFORMATION On July 27, 2004, the MSX International, Inc. Board of Directors accepted
the resignation of Thomas T. Stallkamp as Chairman of the Board of Directors.
Mr. Stallkamp shall continue to serve as a director. Contemporaneously, Mr.
Erwin H. Billig was elected as Chairman of the Board of Directors. 
 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 (b) Reports on Form 8-K: During the period covered by this report, the following reports
were filed on Form 8-K:  
    
    May 10, 2004 reporting under Item 12.
Results of Operations and Financial Condition we furnished
the press release announcing our financial results for the
fiscal quarter ended
April 4, 2004. 30




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##### 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: August 9, 2004 MSX INTERNATIONAL, INC.
(Registrant) By:
    
    /s/ Frederick K. MinturnFrederick K. MinturnExecutive Vice President andChief Financial Officer
 (Chief accounting officer
and authorized signatory) 31




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##### Table of Contents



Exhibit Index Exhibit No.
    
    Description31.1
    
    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 U.S.C.
Section 1350, as adopted pursuant to section 906 of the Sarbanes  Oxley Act of 2002