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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 April 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]




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MSX INTERNATIONAL, INC.
INDEX PART I.  FINANCIAL INFORMATIONITEM 1.  Financial Statements:
    
    PagesConsolidated Balance Sheets (unaudited) as of April 4, 2004 and
December 28, 2003
    
    
    2Consolidated Statements of Operations (unaudited) for the fiscal quarters
ended April 4, 2004 and March 30, 2003
    
    
    3Consolidated Statements of Cash Flows (unaudited) for the fiscal quarters
ended April 4, 2004 and March 30, 2003
    
    
    4Notes to Consolidated Financial Statements (unaudited)
    
    
    5ITEM 2.  Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    22ITEM 4.  Controls and Procedures
    
    
    26PART II.  OTHER INFORMATIONITEM 1.  Legal Proceedings
    
    
    27ITEM 4.  Submission of Matters to a Vote of Security Holders
    
    
    27ITEM 6.  Exhibits and Reports on Form 8-K
    
    
    27SIGNATURE
    
    
    28Certificate of AmendmentCertification of Chief Financial OfficerCertificate of Chief Executive OfficerCertification 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 as of April 4, 2004 and December 28, 2003
 April 4,2004(Unaudited)
    
    December 28,2003(dollars in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    41,121
    
    
    $
    36,650Accounts receivable, net (Note 3)
    
    
    208,395
    
    
    
    219,219Inventory
    
    
    9,012
    
    
    
    8,618Prepaid expenses and other assets
    
    
    7,765
    
    
    
    6,218Deferred income taxes, net
    
    
    6,501
    
    
    
    6,896Total current assets
    
    
    272,794
    
    
    
    277,601Property and equipment, net
    
    
    16,376
    
    
    
    18,480Goodwill, net (Note 4)
    
    
    133,358
    
    
    
    129,624Other assets
    
    
    13,016
    
    
    
    13,268Total assets
    
    $
    435,544
    
    
    $
    438,973LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Notes payable and current portion of long-term debt (Note 5)
    
    $
    10,255
    
    
    $
    10,519Accounts payable and drafts
    
    
    152,672
    
    
    
    149,051Accrued payroll and benefits
    
    
    29,954
    
    
    
    30,140Other accrued liabilities
    
    
    72,715
    
    
    
    78,769Total current liabilities
    
    
    265,596
    
    
    
    268,479Long-term debt (Note 5)
    
    
    249,944
    
    
    
    249,742Long-term deferred compensation and other liabilities
    
    
    11,939
    
    
    
    12,031Deferred income taxes, net
    
    
    1,882
    
    
    
    1,618Total liabilities
    
    
    529,361
    
    
    
    531,870Commitments and contingencies
    
    
    
    
    
    
    Series A Preferred Stock (Note 6)
    
    
    84,477
    
    
    
    81,812Shareholders deficit:Common Stock, $.01 par value, 5,000,000 aggregate shares of
Class A and Class B Common Stock authorized; 486,354
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
    
    
    (4,063
    )
    
    
    (2,749
    )Accumulated deficit
    
    
    (150,105
    )
    
    
    (147,834
    )Total shareholders deficit
    
    
    (178,294
    )
    
    
    (174,709
    )Total liabilities and shareholders deficit
    
    $
    435,544
    
    
    $
    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 ended April 4, 2004 and March 30, 2003
 Fiscal Quarter EndedApril 4,
    
    March 30,2004
    
    2003(in thousands)Net sales
    
    $
    167,314
    
    
    $
    183,351Cost of sales
    
    
    146,713
    
    
    
    162,788Gross profit
    
    
    20,601
    
    
    
    20,563Selling, general and administrative expenses
    
    
    11,307
    
    
    
    16,090Restructuring and severance costs
    
    
    
    
    
    
    1,352Loss on asset impairment and sale
    
    
    
    
    
    
    79Operating income
    
    
    9,294
    
    
    
    3,042Interest expense, net
    
    
    7,805
    
    
    
    6,675Income (loss) before income taxes, minority interests and equity in
affiliates
    
    
    1,489
    
    
    
    (3,633
    )Income tax provision
    
    
    1,095
    
    
    
    101Less minority interests and equity in affiliates,
net of taxes
    
    
    
    
    
    
    (174
    )Net income (loss)
    
    
    394
    
    
    
    (3,560
    )Accretion for redemption of preferred stock
    
    
    (2,665
    )
    
    
    (2,194
    )Net loss available to common shareholders
    
    $
    (2,271
    )
    
    $
    (5,754
    )
 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 quarters ended April 4, 2004 and March 30, 2003
 Fiscal Quarter EndedApril 4,
    
    March 30,2004
    
    2003(in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    394
    
    
    $
    (3,560
    )Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating activities:Minority interests and equity in affiliates
    
    
    
    
    
    
    (174
    )Depreciation
    
    
    2,381
    
    
    
    4,759Amortization of debt issuance costs and non-cash interest
    
    
    1,107
    
    
    
    513Deferred taxes
    
    
    659
    
    
    
    (665
    )(Gain) loss on sale/disposal of property and equipment
    
    
    (55
    )
    
    
    361(Increase) decrease in receivables, net
    
    
    10,824
    
    
    
    (7,630
    )(Increase) decrease in inventory
    
    
    (395
    )
    
    
    637(Increase) decrease in prepaid expenses and other assets
    
    
    (1,546
    )
    
    
    (2,008
    )Increase (decrease) in current liabilities
    
    
    (2,725
    )
    
    
    2,058Other, net
    
    
    (282
    )
    
    
    (1,181
    )Net cash provided by (used for) operating activities
    
    
    10,362
    
    
    
    (6,890
    )Cash flows from investing activities:Capital expenditures
    
    
    (342
    )
    
    
    (2,246
    )Proceeds from sale/disposal of property and equipment
    
    
    78
    
    
    
    236Other, net
    
    
    294
    
    
    
    (299
    )Net cash provided by (used for) investing activities
    
    
    30
    
    
    
    (2,309
    )Cash flows from financing activities:Repayment of debt
    
    
    
    
    
    
    (1,394
    )Debt issuance costs
    
    
    (313
    )
    
    
    (975
    )Changes in revolving debt, net
    
    
    (634
    )
    
    
    18,719Changes in book overdrafts, net
    
    
    (3,696
    )
    
    
    (13,846
    )Net cash provided by (used for) financing activities
    
    
    (4,643
    )
    
    
    2,504Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (1,278
    )
    
    
    (354
    )Cash and cash equivalents:Increase for the period
    
    
    4,471
    
    
    
    (7,049
    )Balance, beginning of period
    
    
    36,650
    
    
    
    10,935Balance, end of period
    
    $
    41,121
    
    
    $
    3,886
 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
primarily by Citicorp and affiliates and certain members of management. We are
principally engaged in providing 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 ended April 4, 2004 and March 30, 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, the company executed several restructuring actions to reduce
operating costs and streamline its administrative infrastructure. No such
charges were recorded during the first quarter of 2004. Unfunded obligations
associated with these restructuring actions appear as reserves in the companys
balance sheet. The following table shows the activity related to restructuring
reserves for the fiscal quarter ended April 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
    
    
    (3,503
    )
    
    
    (4,454
    )
    
    
    (773
    )
    
    
    (156
    )
    
    
    (8,886
    )Reserve at April 4, 2004
    
    $
    4,529
    
    
    $
    1,500
    
    
    $
    2,312
    
    
    $
    109
    
    
    $
    8,450
 3. Accounts Receivable: Accounts receivable include both billed and unbilled receivables. Unbilled
receivables amounted to $66.1 million and $59.1 million at April 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 services
attributable to services provided by our vendors, which are passed on to
our customers. These amounts totaled $30.6 million as of April 4, 2004 and
$38.3 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 three months ended April 4, 2004: HumanCapital
    
    Business
    
    EngineeringServices
    
    Services
    
    Services
    
    TotalBalance at December 28, 2003
    
    $
    97,392
    
    
    $
    32,232
    
    
    $
    
    
    
    $
    129,624Goodwill recorded during the period
    
    
    
    
    
    
    3,800
    
    
    
    
    
    
    
    3,800Translation changes
    
    
    3
    
    
    
    (69
    )
    
    
    
    
    
    
    (66
    )Balance at April 4, 2004
    
    $
    97,395
    
    
    $
    35,963
    
    
    $
    
    
    
    $
    133,358
 During the first quarter of fiscal 2004 we recorded a contingent earnout
obligation totaling $3.8 million related to a prior year 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 atApril 4,
    
    December 28,
    
    April 4,
    
    December 28,2004
    
    2003
    
    2004
    
    2003Senior credit facility
    
    
    7.50
    %
    
    
    8.55
    %
    
    $
    
    
    
    $
    297Senior secured notes, net of unamortized discount
    
    
    11.00
    %
    
    
    11.00
    %
    
    
    74,948
    
    
    
    74,911Mezzanine term notes, net of unamortized discount
    
    
    11.50
    %
    
    
    11.50
    %
    
    
    24,373
    
    
    
    24,325Fourth lien term notes
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    18,288
    
    
    
    17,802Senior subordinated notes
    
    
    11.375
    %
    
    
    11.375
    %
    
    
    130,000
    
    
    
    130,000Satiz facility
    
    
    4.95
    %
    
    
    4.67
    %
    
    
    10,255
    
    
    
    10,519Other
    
    
    7.00
    %
    
    
    7.00
    %
    
    
    2,335
    
    
    
    2,407260,199
    
    
    
    260,261Less current portion
    
    
    
    
    
    
    
    
    
    
    10,255
    
    
    
    10,519Total long-term debt
    
    
    
    
    
    
    
    
    
    $
    249,944
    
    
    $
    249,742
 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 April 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 April 4, 2004, dividends accrued totaled $48.5 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 Loss: Our comprehensive loss was: Fiscal Quarter EndedApril 4,
    
    March 30,2004
    
    2003Net income (loss)
    
    $
    394
    
    
    $
    (3,560
    )Other comprehensive income (loss) -
foreign currency translation adjustments
    
    
    (1,314
    )
    
    
    1,398Comprehensive loss
    
    $
    (920
    )
    
    $
    (2,162
    )
 8. Income Taxes: The company currently provides
 valuation allowances for a significant portion of its deferred tax assets. The effective tax rate
for the quarter ended April 4, 2004 differs from the 35% federal statutory rate primarily because
of these valuation allowances. The expense for the period relates primarily to earnings in foreign
jurisdictions for which valuation allowances have not previously been recorded. 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 quality, and
communication related customer needs. Engineering services offers 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, including the Michigan Single Business Tax and other similar
taxes, amortization and non-cash charges, (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: HumanCapital
    
    Business
    
    EngineeringServices
    
    Services
    
    Services
    
    Other
    
    TotalQuarter Ended April 4, 2004:Net sales  external
    
    $
    58,878
    
    
    $
    67,891
    
    
    $
    40,545
    
    
    $
    
    
    
    $
    167,314Net intercompany sales
    
    
    2
    
    
    
    305
    
    
    
    269
    
    
    
    (576
    )
    
    
    Segment EBITA
    
    
    3,777
    
    
    
    6,769
    
    
    
    2,882
    
    
    
    
    
    
    
    13,428Quarter Ended March 30, 2003:Net sales  external
    
    
    72,223
    
    
    
    66,932
    
    
    
    44,196
    
    
    
    
    
    
    
    183,351Net intercompany sales
    
    
    292
    
    
    
    1,528
    
    
    
    139
    
    
    
    (1,959
    )
    
    
    Segment EBITA
    
    
    4,723
    
    
    
    4,343
    
    
    
    (2,476
    )
    
    
    
    
    
    
    6,590
 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 EndedApril 4,
    
    March 30,2004
    
    2003Total segment EBITA
    
    $
    13,428
    
    
    $
    6,590Net costs not allocated to segments
    
    
    (3,348
    )
    
    
    (2,673
    )Interest expense, net
    
    
    (7,805
    )
    
    
    (6,675
    )Michigan single business tax and other similar taxes
    
    
    (786
    )
    
    
    (875
    )Consolidated income (loss) before income taxes,
minority
interests and equity in affiliates
    
    $
    1,489
    
    
    $
    (3,633
    )
 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 April
4, 2004. The following table illustrates the effect on net income (loss) for
the fiscal quarters ended April 4, 2004 and March 30, 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 EndedApril 4,
    
    March 30,2004
    
    2003Net income (loss) as reported
    
    $
    394
    
    
    $
    (3,560
    )Deduct: Total employee stock-based compensation
determined under the fair value method, net of
taxes
    
    
    
    
    
    
    (18
    )Pro forma net income (loss)
    
    $
    394
    
    
    $
    (3,578
    )
 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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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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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 April 4, 2004 Non-MSXI
    
    Guarantor
    
    Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,250
    
    
    $
    2,367
    
    
    $
    12,504
    
    
    $
    
    
    
    $
    41,121Accounts receivable, net
    
    
    
    
    
    
    88,936
    
    
    
    119,459
    
    
    
    
    
    
    
    208,395Inventory
    
    
    
    
    
    
    6,068
    
    
    
    2,944
    
    
    
    
    
    
    
    9,012Prepaid expenses and other assets
    
    
    
    
    
    
    4,762
    
    
    
    3,003
    
    
    
    
    
    
    
    7,765Deferred income taxes, net
    
    
    
    
    
    
    3,138
    
    
    
    6,830
    
    
    
    (3,467
    )
    
    
    6,501Total current assets
    
    
    26,250
    
    
    
    105,271
    
    
    
    144,740
    
    
    
    (3,467
    )
    
    
    272,794Property and equipment, net
    
    
    
    
    
    
    7,115
    
    
    
    9,261
    
    
    
    
    
    
    
    16,376Goodwill, net
    
    
    
    
    
    
    116,302
    
    
    
    17,056
    
    
    
    
    
    
    
    133,358Investment in subsidiaries
    
    
    92,550
    
    
    
    17,441
    
    
    
    
    
    
    
    (108,233
    )
    
    
    1,758Other assets
    
    
    7,138
    
    
    
    3,315
    
    
    
    805
    
    
    
    
    
    
    
    11,258Deferred income taxes, net
    
    
    
    
    
    
    1,668
    
    
    
    
    
    
    
    (1,668
    )
    
    
    Total assets
    
    $
    125,938
    
    
    $
    251,112
    
    
    $
    171,862
    
    
    $
    (113,368
    )
    
    $
    435,544LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    10,255
    
    
    $
    
    
    
    $
    10,255Accounts payable and drafts
    
    
    
    
    
    
    86,206
    
    
    
    66,466
    
    
    
    
    
    
    
    152,672Accrued liabilities
    
    
    5,151
    
    
    
    53,282
    
    
    
    44,236
    
    
    
    
    
    
    
    102,669Deferred income taxes, net
    
    
    3,467
    
    
    
    
    
    
    
    
    
    
    
    (3,467
    )
    
    
    Total current liabilities
    
    
    8,618
    
    
    
    139,488
    
    
    
    120,957
    
    
    
    (3,467
    )
    
    
    265,596Long-term debt
    
    
    231,066
    
    
    
    
    
    
    
    18,878
    
    
    
    
    
    
    
    249,944Intercompany accounts
    
    
    (21,269
    )
    
    
    16,406
    
    
    
    4,863
    
    
    
    
    
    
    
    Long-term deferred compensation and other liabilities
    
    
    
    
    
    
    2,668
    
    
    
    9,271
    
    
    
    
    
    
    
    11,939Deferred income taxes, net
    
    
    1,340
    
    
    
    
    
    
    
    2,210
    
    
    
    (1,668
    )
    
    
    1,882Total liabilities
    
    
    219,755
    
    
    
    158,562
    
    
    
    156,179
    
    
    
    (5,135
    )
    
    
    529,361Series A Preferred Stock
    
    
    84,477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,477Shareholders equity (deficit)
    
    
    (178,294
    )
    
    
    92,550
    
    
    
    15,683
    
    
    
    (108,233
    )
    
    
    (178,294
    )Total liabilities and shareholders equity (deficit)
    
    $
    125,938
    
    
    $
    251,112
    
    
    $
    171,862
    
    
    $
    (113,368
    )
    
    $
    435,544
 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 Non-MSXI
    
    Guarantor
    
    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
    
    
    
    51,147
    
    
    
    48,337
    
    
    
    
    
    
    
    108,909Deferred income taxes, net
    
    
    3,093
    
    
    
    
    
    
    
    
    
    
    
    (3,093
    )
    
    
    Total current liabilities
    
    
    12,518
    
    
    
    128,672
    
    
    
    130,382
    
    
    
    (3,093
    )
    
    
    268,479Long-term debt
    
    
    230,566
    
    
    
    
    
    
    
    19,176
    
    
    
    
    
    
    
    249,742Intercompany accounts
    
    
    (39,080
    )
    
    
    29,668
    
    
    
    9,412
    
    
    
    
    
    
    
    Long-term deferred compensation and other liabilities
    
    
    
    
    
    
    2,684
    
    
    
    9,347
    
    
    
    
    
    
    
    12,031Deferred 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 April 4, 2004 and March 30, 2003 Non-MSXI
    
    Guarantor
    
    Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedFiscal Quarter Ended April 4, 2004:Net sales
    
    $
    
    
    
    $
    97,399
    
    
    $
    70,491
    
    
    $
    (576
    )
    
    $
    167,314Cost of sales
    
    
    
    
    
    
    87,569
    
    
    
    59,720
    
    
    
    (576
    )
    
    
    146,713Gross profit
    
    
    
    
    
    
    9,830
    
    
    
    10,771
    
    
    
    
    
    
    
    20,601Selling, general and administrative expenses
    
    
    
    
    
    
    6,990
    
    
    
    4,317
    
    
    
    
    
    
    
    11,307Operating income (loss)
    
    
    
    
    
    
    2,840
    
    
    
    6,454
    
    
    
    
    
    
    
    9,294Interest expense, net
    
    
    6,667
    
    
    
    1,099
    
    
    
    39
    
    
    
    
    
    
    
    7,805Income (loss) before income taxes,
minority
interests, and equity in affiliates
    
    
    (6,667
    )
    
    
    1,741
    
    
    
    6,415
    
    
    
    
    
    
    
    1,489Income tax provision (benefit)
    
    
    (622
    )
    
    
    436
    
    
    
    1,281
    
    
    
    
    
    
    
    1,095Minority interests and equity in affiliates
    
    
    6,439
    
    
    
    5,134
    
    
    
    
    
    
    
    (11,573
    )
    
    
    Net income (loss)
    
    $
    394
    
    
    $
    6,439
    
    
    $
    5,134
    
    
    $
    (11,573
    )
    
    $
    394Fiscal Quarter Ended March 30, 2003:Net sales
    
    $
    
    
    
    $
    109,031
    
    
    $
    76,279
    
    
    $
    (1,959
    )
    
    $
    183,351Cost of sales
    
    
    
    
    
    
    96,710
    
    
    
    68,423
    
    
    
    (1,959
    )
    
    
    163,174Gross profit
    
    
    
    
    
    
    12,321
    
    
    
    7,856
    
    
    
    
    
    
    
    20,177Selling, general and administrative expenses
    
    
    
    
    
    
    9,329
    
    
    
    6,375
    
    
    
    
    
    
    
    15,704Restructuring and severance costs
    
    
    
    
    
    
    957
    
    
    
    395
    
    
    
    
    
    
    
    1,352Loss on asset impairment and sale
    
    
    
    
    
    
    55
    
    
    
    24
    
    
    
   
    
    
    
    79Operating income (loss)
    
    
    
    
    
    
    1,980
    
    
    
    1,062
    
    
    
    
    
    
    
    3,042Interest expense, net
    
    
    4,346
    
    
    
    2,021
    
    
    
    308
    
    
    
    
    
    
    
    6,675Income (loss) before income taxes,
minority
interests, and equity in affiliates
    
    
    (4,346
    )
    
    
    (41
    )
    
    
    754
    
    
    
    
    
    
    
    (3,633
    )Income tax provision (benefit)
    
    
    (1,295
    )
    
    
    399
    
    
    
    997
    
    
    
    
    
    
    
    101Minority interests and equity in affiliates
    
    
    (509
    )
    
    
    (69
    )
    
    
    59
    
    
    
    693
    
    
    
    174Net income (loss)
    
    $
    (3,560
    )
    
    $
    (509
    )
    
    $
    (184
    )
    
    $
    693
    
    
    $
    (3,560
    )
 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 STATEMENT OF CASH FLOWS
for the fiscal quarter ended April 4, 2004 Non-MSXI
    
    Guarantor
    
    Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    394
    
    
    $
    6,439
    
    
    $
    5,134
    
    
    $
    (11,573
    )
    
    $
    394Adjustments to reconcile net income (loss) to
net
cash provided by (used for) operating
activities:Equity in affiliates
    
    
    (6,439
    )
    
    
    (5,134
    )
    
    
    
    
    
    
    11,573
    
    
    
    Loss on asset impairment and sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Depreciation
    
    
    
    
    
    
    1,212
    
    
    
    1,169
    
    
    
    
    
    
    
    2,381Amortization of debt issuance costs and non-cash interest
    
    
    1,028
    
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    1,107Deferred taxes
    
    
    (572
    )
    
    
    573
    
    
    
    658
    
    
    
    
    
    
    
    659(Gain) loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    3
    
    
    
    (58
    )
    
    
    
    
    
    
    (55
    )(Increase) decrease in receivables, net
    
    
    
    
    
    
    6,218
    
    
    
    4,606
    
    
    
    
    
    
    
    10,824(Increase) decrease in inventory
    
    
    
    
    
    
    (434
    )
    
    
    39
    
    
    
    
    
    
    
    (395
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    
    
    
    
    (610
    )
    
    
    (936
    )
    
    
    
    
    
    
    (1,546
    )Increase (decrease) in current liabilities
    
    
    (4,276
    )
    
    
    10,712
    
    
    
    (9,161
    )
    
    
    
    
    
    
    (2,725
    )Other, net
    
    
    
    
    
    
    (143
    )
    
    
    (139
    )
    
    
    
    
    
    
    (282
    )Net cash provided by (used for) operating
activities
    
    
    (9,865
    )
    
    
    18,836
    
    
    
    1,391
    
    
    
    
    
    
    
    10,362Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (200
    )
    
    
    (142
    )
    
    
    
    
    
    
    (342
    )Proceeds from sale/disposal of property
and equipment
    
    
    
    
    
    
    2
    
    
    
    76
    
    
    
    
    
    
    
    78Other, net
    
    
    
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    294Net cash provided by (used for) investing
activities
    
    
    
    
    
    
    96
    
    
    
    (66
    )
    
    
    
    
    
    
    30Cash flows from financing activities:Transactions with subsidiaries
    
    
    17,811
    
    
    
    (13,261
    )
    
    
    (4,550
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    (296
    )
    
    
    
    
    
    
    (17
    )
    
    
    
    
    
    
    (313
    )Changes in revolving debt, net
    
    
    
    
    
    
    
    
    
    
    (634
    )
    
    
    
    
    
    
    (634
    )Changes in book overdrafts, net
    
    
    
    
    
    
    (3,696
    )
    
    
    
    
    
    
    
    
    
    
    (3,696
    )Net cash provided by (used for) financing
activities
    
    
    17,515
    
    
    
    (16,957
    )
    
    
    (5,201
    )
    
    
    
    
    
    
    (4,643
    )Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (1,278
    )
    
    
    
    
    
    
    (1,278
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    7,650
    
    
    
    1,975
    
    
    
    (5,154
    )
    
    
    
    
    
    
    4,471Balance, beginning of period
    
    
    18,600
    
    
    
    391
    
    
    
    17,659
    
    
    
    
    
    
    
    36,650Balance, end of period
    
    $
    26,250
    
    
    $
    2,366
    
    
    $
    12,505
    
    
    $
    
    
    
    $
    41,121
 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 quarter ended March 30, 2003 Non-MSXI
    
    Guarantor
    
    Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (3,560
    )
    
    $
    (509
    )
    
    $
    (184
    )
    
    $
    693
    
    
    $
    (3,560
    )Adjustments to reconcile net income (loss) to
net cash provided by (used for) operating
activities:Equity in affiliates
    
    
    509
    
    
    
    70
    
    
    
    (60
    )
    
    
    (693
    )
    
    
    (174
    )Depreciation
    
    
    
    
    
    
    2,375
    
    
    
    2,384
    
    
    
    
    
    
    
    4,759Amortization of debt issuance costs
    
    
    513
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    513Deferred taxes
    
    
    
    
    
    
    
    
    
    
    (665
    )
    
    
    
    
    
    
    (665
    )Loss on sale/disposal of property and equipment
    
    
    
    
    
    
    60
    
    
    
    301
    
    
    
    
    
    
    
    361(Increase) decrease in receivables, net
    
    
    (6
    )
    
    
    (5,988
    )
    
    
    (1,636
    )
    
    
    
    
    
    
    (7,630
    )(Increase) decrease in inventory
    
    
    
    
    
    
    240
    
    
    
    397
    
    
    
    
    
    
    
    637(Increase) decrease in prepaid expenses and
other assets
    
    
    9
    
    
    
    (1,620
    )
    
    
    167
    
    
    
    
    
    
    
    (1,444
    )Increase (decrease) in current liabilities
    
    
    (4,279
    )
    
    
    9,068
    
    
    
    (3,295
    )
    
    
    
    
    
    
    1,494Other, net
    
    
    
    
    
    
    (1,098
    )
    
    
    (83
    )
    
    
    
    
    
    
    (1,181
    )Net cash provided by (used for) operating activities
    
    
    (6,814
    )
    
    
    2,598
    
    
    
    (2,674
    )
    
    
    
    
    
    
    (6,890
    )Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (1,189
    )
    
    
    (1,057
    )
    
    
    
    
    
    
    (2,246
    )Proceeds from sale/disposal of property
and equipment
    
    
    
    
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    236Other, net
    
    
    
    
    
    
    (299
    )
    
    
    
    
    
    
    
    
    
    
    (299
    )Net cash used for investing activities
    
    
    
    
    
    
    (1,252
    )
    
    
    (1,057
    )
    
    
    
    
    
    
    (2,309
    )Cash flows from financing activities:Transactions with subsidiaries
    
    
    (9,418
    )
    
    
    14,110
    
    
    
    (4,692
    )
    
    
    
    
    
    
    Repayment of debt
    
    
    (1,385
    )
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    (1,394
    )Debt issuance costs
    
    
    (975
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (975
    )Changes in revolving debt, net
    
    
    18,592
    
    
    
    
    
    
    
    127
    
    
    
    
    
    
    
    18,719Changes in book overdrafts, net
    
    
    
    
    
    
    (15,470
    )
    
    
    1,624
    
    
    
    
    
    
    
    (13,846
    )Net cash provided by (used for) financing activities
    
    
    6,814
    
    
    
    (1,369
    )
    
    
    (2,941
    )
    
    
    
    
    
    
    2,504Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (354
    )
    
    
    
    
    
    
    (354
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    
    
    
    
    (23
    )
    
    
    (7,026
    )
    
    
    
    
    
    
    (7,049
    )Balance, beginning of period
    
    
    
    
    
    
    154
    
    
    
    10,781
    
    
    
    
    
    
    
    10,935Balance, end of period
    
    $
    
    
    
    $
    131
    
    
    $
    3,755
    
    
    $
    
    
    
    $
    3,886
 15




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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. 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- continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of April 4, 2004 MSXI
    
    
    
    
    
    Non-MSXI
    
    Limited
    
    Guarantor
    
    Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    26,250
    
    
    $
    99
    
    
    $
    2,367
    
    
    $
    12,405
    
    
    $
    
    
    
    $
    41,121Accounts receivable, net
    
    
    
    
    
    
    19,860
    
    
    
    88,936
    
    
    
    99,599
    
    
    
    
    
    
    
    208,395Inventory
    
    
    
    
    
    
    3
    
    
    
    6,068
    
    
    
    2,941
    
    
    
    
    
    
    
    9,012Prepaid expenses and other assets
    
    
    
    
    
    
    785
    
    
    
    4,762
    
    
    
    2,218
    
    
    
    
    
    
    
    7,765Deferred income taxes, net
    
    
    
    
    
    
    423
    
    
    
    3,138
    
    
    
    6,407
    
    
    
    (3,467
    )
    
    
    6,501Total current assets
    
    
    26,250
    
    
    
    21,170
    
    
    
    105,271
    
    
    
    123,570
    
    
    
    (3,467
    )
    
    
    272,794Property and equipment, net
    
    
    
    
    
    
    2,330
    
    
    
    7,115
    
    
    
    6,931
    
    
    
    
    
    
    
    16,376Goodwill, net
    
    
    
    
    
    
    104
    
    
    
    116,302
    
    
    
    16,952
    
    
    
    
    
    
    
    133,358Investment in subsidiaries
    
    
    92,550
    
    
    
    11
    
    
    
    17,441
    
    
    
    (2,312
    )
    
    
    (105,932
    )
    
    
    1,758Other assets
    
    
    7,138
    
    
    
    601
    
    
    
    3,315
    
    
    
    204
    
    
    
    
    
    
    
    11,258Deferred income taxes, net
    
    
    
    
    
    
    
    
    
    
    1,668
    
    
    
    
    
    
    
    (1,668
    )
    
    
    Total assets
    
    $
    125,938
    
    
    $
    24,216
    
    
    $
    251,112
    
    
    $
    145,345
    
    
    $
    (111,067
    )
    
    $
    435,544LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of
long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,255
    
    
    $
    
    
    
    $
    10,255Accounts payable and drafts
    
    
    
    
    
    
    9,545
    
    
    
    86,206
    
    
    
    56,921
    
    
    
    
    
    
    
    152,672Accrued liabilities
    
    
    5,151
    
    
    
    10,309
    
    
    
    53,282
    
    
    
    33,927
    
    
    
    
    
    
    
    102,669Deferred income taxes, net
    
    
    3,467
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,467
    )
    
    
    Total current liabilities
    
    
    8,618
    
    
    
    19,854
    
    
    
    139,488
    
    
    
    101,103
    
    
    
    (3,467
    )
    
    
    265,596Long-term debt
    
    
    231,066
    
    
    
    16,542
    
    
    
    
    
    
    
    2,336
    
    
    
    
    
    
    
    249,944Intercompany accounts
    
    
    (21,269
    )
    
    
    (10,672
    )
    
    
    16,406
    
    
    
    15,535
    
    
    
    
    
    
    
    Long-term deferred compensation and other
liabilities
    
    
    
    
    
    
    254
    
    
    
    2,668
    
    
    
    9,017
    
    
    
    
    
    
    
    11,939Deferred income taxes, net
    
    
    1,340
    
    
    
    539
    
    
    
    
    
    
    
    1,671
    
    
    
    (1,668
    )
    
    
    1,882Total liabilities
    
    
    219,755
    
    
    
    26,517
    
    
    
    158,562
    
    
    
    129,662
    
    
    
    (5,135
    )
    
    
    529,361Series A Preferred
Stock
    
    
    84,477
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,477Shareholders equity (deficit)
    
    
    (178,294
    )
    
    
    (2,301
    )
    
    
    92,550
    
    
    
    15,683
    
    
    
    (105,932
    )
    
    
    (178,294
    )Total liabilities and shareholders equity
(deficit)
    
    $
    125,938
    
    
    $
    24,216
    
    
    $
    251,112
    
    
    $
    145,345
    
    
    $
    (111,067
    )
    
    $
    435,544
 17




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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  continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of December 28, 2003


MSXI
    
    
    
    
    
    Non-MSXI
    
    Limited
    
    Guarantor
    
    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
    
    
    
    13,215
    
    
    
    51,147
    
    
    
    35,122
    
    
    
    
    
    
    
    108,909Deferred income taxes, net
    
    
    3,093
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,093
    )
    
    
    Total current liabilities
    
    
    12,518
    
    
    
    28,243
    
    
    
    128,672
    
    
    
    102,139
    
    
    
    (3,093
    )
    
    
    268,479Long-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
    
    
    
    
    
    
    240
    
    
    
    2,684
    
    
    
    9,107
    
    
    
    
    
    
    
    12,031Deferred 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


18



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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  continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended April 4, 2004 and March 30, 2003 MSXI
    
    
    
    
    
    Non-MSXI
    
    Limited
    
    Guarantor
    
    Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedFiscal Quarter Ended April 4, 2004Net sales
    
    $
    
    
    
    $
    19,000
    
    
    $
    97,399
    
    
    $
    51,491
    
    
    $
    (576
    )
    
    $
    167,314Cost of sales
    
    
    
    
    
    
    16,554
    
    
    
    87,569
    
    
    
    43,166
    
    
    
    (576
    )
    
    
    146,713Gross profit
    
    
    
    
    
    
    2,446
    
    
    
    9,830
    
    
    
    8,325
    
    
    
    
    
    
    
    20,601Selling, general and administrative expenses
    
    
    
    
    
    
    1,233
    
    
    
    6,990
    
    
    
    3,084
    
    
    
    
    
    
    
    11,307Operating income
    
    
    
    
    
    
    1,213
    
    
    
    2,840
    
    
    
    5,241
    
    
    
    
    
    
    
    9,294Interest expense (income), net
    
    
    6,667
    
    
    
    (178
    )
    
    
    1,099
    
    
    
    217
    
    
    
    
    
    
    
    7,805Income (loss) before income taxes,
minority interests and equity in affiliates
    
    
    (6,667
    )
    
    
    1,391
    
    
    
    1,741
    
    
    
    5,024
    
    
    
    
    
    
    
    1,489Income tax provision (benefit)
    
    
    (622
    )
    
    
    423
    
    
    
    436
    
    
    
    858
    
    
    
    
    
    
    
    1,095Minority interests and equity in affiliates
    
    
    6,439
    
    
    
    
    
    
    
    5,134
    
    
    
    968
    
    
    
    (12,541
    )
    
    
    Net income (loss)
    
    $
    394
    
    
    $
    968
    
    
    $
    6,439
    
    
    $
    5,134
    
    
    $
    (12,541
    )
    
    $
    394Fiscal Quarter Ended March 30, 2003Net sales
    
    $
    
    
    
    $
    22,933
    
    
    $
    109,031
    
    
    $
    53,346
    
    
    $
    (1,959
    )
    
    $
    183,351Cost of sales
    
    
    
    
    
    
    20,378
    
    
    
    96,710
    
    
    
    48,045
    
    
    
    (1,959
    )
    
    
    163,174Gross profit
    
    
    
    
    
    
    2,555
    
    
    
    12,321
    
    
    
    5,301
    
    
    
    
    
    
    
    20,177Selling, general and administrative expenses
    
    
    
    
    
    
    3,086
    
    
    
    9,329
    
    
    
    3,289
    
    
    
    
    
    
    
    15,704Restructuring and severance costs
    
    
    
    
    
    
    370
    
    
    
    957
    
    
    
    25
    
    
    
    
    
    
    
    1,352(Gain)/loss on asset impairment and sale
    
    
    
    
    
    
    241
    
    
    
    55
    
    
    
    (217
    )
    
    
    
    
    
    
    79Operating income (loss)
    
    
    
    
    
    
    (1,142
    )
    
    
    1,980
    
    
    
    2,204
    
    
    
    
    
    
    
    3,042Interest expense, net
    
    
    4,346
    
    
    
    262
    
    
    
    2,021
    
    
    
    46
    
    
    
    
    
    
    
    6,675Income (loss) before income taxes,
minority interests and equity in
affiliates
    
    
    (4,346
    )
    
    
    (1,404
    )
    
    
    (41
    )
    
    
    2,158
    
    
    
    
    
    
    
    (3,633
    )Income tax provision (benefit)
    
    
    (1,295
    )
    
    
    (523
    )
    
    
    399
    
    
    
    1,520
    
    
    
    
    
    
    
    101Minority interests and equity in affiliates
    
    
    (509
    )
    
    
    
    
    
    
    (69
    )
    
    
    (823
    )
    
    
    1,575
    
    
    
    174Net income (loss)
    
    $
    (3,560
    )
    
    $
    (881
    )
    
    $
    (509
    )
    
    $
    (185
    )
    
    $
    1,575
    
    
    $
    (3,560
    )
 19




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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  continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal quarter ended April 4, 2004 MSXI
    
    
    
    
    
    Non-MSXI
    
    Limited
    
    Guarantor
    
    Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    394
    
    
    $
    968
    
    
    $
    6,439
    
    
    $
    5,134
    
    
    $
    (12,541
    )
    
    $
    394Adjustments to reconcile net income (loss) to
net
cash provided by (used for) operating
activities:Equity in affiliates
    
    
    (6,439
    )
    
    
    
    
    
    
    (5,134
    )
    
    
    (968
    )
    
    
    12,541
    
    
    
    Depreciation
    
    
    
    
    
    
    401
    
    
    
    1,212
    
    
    
    768
    
    
    
    
    
    
    
    2,381Amortization of debt issuance costs and non-cash interest
    
    
    1,028
    
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,107Deferred taxes
    
    
    (572
    )
    
    
    116
    
    
    
    573
    
    
    
    542
    
    
    
    
    
    
    
    659(Gain) loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    (70
    )
    
    
    3
    
    
    
    12
    
    
    
    
    
    
    
    (55
    )(Increase) decrease in receivables, net
    
    
    
    
    
    
    4,016
    
    
    
    6,218
    
    
    
    590
    
    
    
    
    
    
    
    10,824(Increase) decrease in inventory
    
    
    
    
    
    
    (3
    )
    
    
    (434
    )
    
    
    42
    
    
    
    
    
    
    
    (395
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    
    
    
    
    (70
    )
    
    
    (610
    )
    
    
    (866
    )
    
    
    
    
    
    
    (1,546
    )Increase (decrease) in current liabilities
    
    
    (4,276
    )
    
    
    (8,389
    )
    
    
    10,712
    
    
    
    (772
    )
    
    
    
    
    
    
    (2,725
    )Other, net
    
    
    
    
    
    
    49
    
    
    
    (143
    )
    
    
    (188
    )
    
    
    
    
    
    
    (282
    )Net cash provided by (used for) operating
activities
    
    
    (9,865
    )
    
    
    (2,903
    )
    
    
    18,836
    
    
    
    4,294
    
    
    
    
    
    
    
    10,362Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (51
    )
    
    
    (200
    )
    
    
    (91
    )
    
    
    
    
    
    
    (342
    )Proceeds from sale/disposal of property and
equipment
    
    
    
    
    
    
    66
    
    
    
    2
    
    
    
    10
    
    
    
    
    
    
    
    78Other, net
    
    
    
    
    
    
    
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    294Net cash provided by (used for) investing
activities
    
    
    
    
    
    
    15
    
    
    
    96
    
    
    
    (81
    )
    
    
    
    
    
    
    30Cash flows from financing activities:Transactions with subsidiaries
    
    
    17,811
    
    
    
    (1,894
    )
    
    
    (13,261
    )
    
    
    (2,656
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    (296
    )
    
    
    (17
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (313
    )Changes in revolving debt, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (634
    )
    
    
    
    
    
    
    (634
    )Changes in book overdrafts, net
    
    
    
    
    
    
    
    
    
    
    (3,696
    )
    
    
    
    
    
    
    
    
    
    
    (3,696
    )Net cash provided by (used for) financing
activities
    
    
    17,515
    
    
    
    (1,911
    )
    
    
    (16,957
    )
    
    
    (3,290
    )
    
    
    
    
    
    
    (4,643
    )Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    (741
    )
    
    
    
    
    
    
    (537
    )
    
    
    
    
    
    
    (1,278
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    7,650
    
    
    
    (5,540
    )
    
    
    1,975
    
    
    
    386
    
    
    
    
    
    
    
    4,471Balance, beginning of period
    
    
    18,600
    
    
    
    5,639
    
    
    
    391
    
    
    
    12,020
    
    
    
    
    
    
    
    36,650Balance, end of period
    
    $
    26,250
    
    
    $
    99
    
    
    $
    2,366
    
    
    $
    12,406
    
    
    $
    
    
    
    $
    41,121
 20




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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  continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal quarter ended March 30, 2003 MSXI
    
    
    
    
    
    Non-MSXI
    
    Limited
    
    Guarantor
    
    Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (3,560
    )
    
    $
    (882
    )
    
    $
    (509
    )
    
    $
    (184
    )
    
    $
    1,575
    
    
    $
    (3,560
    )Adjustments to reconcile net income (loss) to
net
cash provided by (used for) operating
activities:Equity in affiliates
    
    
    509
    
    
    
    
    
    
    
    70
    
    
    
    822
    
    
    
    (1,575
    )
    
    
    (174
    )Depreciation
    
    
    
    
    
    
    755
    
    
    
    2,375
    
    
    
    1,629
    
    
    
    
    
    
    
    4,759Amortization of debt issuance costs
    
    
    513
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    513Deferred taxes
    
    
    
    
    
    
    49
    
    
    
    
    
    
    
    (714
    )
    
    
    
    
    
    
    (665
    )Loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    18
    
    
    
    60
    
    
    
    283
    
    
    
    
    
    
    
    361(Increase) decrease in receivables, net
    
    
    (6
    )
    
    
    4,274
    
    
    
    (5,988
    )
    
    
    (5,910
    )
    
    
    
    
    
    
    (7,630
    )(Increase) decrease in inventory
    
    
    
    
    
    
    
    
    
    
    240
    
    
    
    397
    
    
    
    
    
    
    
    637(Increase) decrease in prepaid expenses and
other assets
    
    
    9
    
    
    
    138
    
    
    
    (1,620
    )
    
    
    29
    
    
    
    
    
    
    
    (1,444
    )Increase (decrease) in current liabilities
    
    
    (4,279
    )
    
    
    752
    
    
    
    9,068
    
    
    
    (4,047
    )
    
    
    
    
    
    
    1,494Other, net
    
    
    
    
    
    
    (12
    )
    
    
    (1,098
    )
    
    
    (71
    )
    
    
    
    
    
    
    (1,181
    )Net cash provided by (used for) operating
activities
    
    
    (6,814
    )
    
    
    5,092
    
    
    
    2,598
    
    
    
    (7,766
    )
    
    
    
    
    
    
    (6,890
    )Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (409
    )
    
    
    (1,189
    )
    
    
    (648
    )
    
    
    
    
    
    
    (2,246
    )Loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    
    
    
    
    236
    
    
    
    
    
    
    
    
    
    
    
    236Other, net
    
    
    
    
    
    
    
    
    
    
    (299
    )
    
    
    
    
    
    
    
    
    
    
    (299
    )Net cash used for investing activities
    
    
    
    
    
    
    (409
    )
    
    
    (1,252
    )
    
    
    (648
    )
    
    
    
    
    
    
    (2,309
    )Cash flows from financing activities:Transactions with subsidiaries
    
    
    (9,418
    )
    
    
    (4,391
    )
    
    
    14,110
    
    
    
    (301
    )
    
    
    
    
    
    
    Repayment of debt
    
    
    (1,385
    )
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    (1,394
    )Debt issuance costs
    
    
    (975
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (975
    )Changes in revolving debt, net
    
    
    18,592
    
    
    
    77
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    18,719Changes in book overdrafts, net
    
    
    
    
    
    
    
    
    
    
    (15,470
    )
    
    
    1,624
    
    
    
    
    
    
    
    (13,846
    )Net cash provided by (used for) financing
activities
    
    
    6,814
    
    
    
    (4,314
    )
    
    
    (1,369
    )
    
    
    1,373
    
    
    
    
    
    
    
    2,504Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    (347
    )
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (354
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    
    
    
    
    22
    
    
    
    (23
    )
    
    
    (7,048
    )
    
    
    
    
    
    
    (7,049
    )Balance, beginning of period
    
    
    
    
    
    
    116
    
    
    
    154
    
    
    
    10,665
    
    
    
    
    
    
    
    10,935Balance, end of period
    
    $
    
    
    
    $
    138
    
    
    $
    131
    
    
    $
    3,617
    
    
    $
    
    
    
    $
    3,886
 21




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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 acquisitions, 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. We believe that automotive OEM budgets will
generally remain stable in the next 12 to 24 months as our customers pursue
cost reductions on their existing platforms and launch new concepts and
products. Economic growth in North America and Europe is also expected to
support the continuing development of our business. Operating trends in the
first quarter of 2004 appear to support the key assumptions in 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 strategies 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 quarter of fiscal 2004, consolidated net sales decreased
$16.0 million, or 8.7%, from $183.4 million in the first quarter of fiscal 2003
to $167.3 million during fiscal 2004. Overall, the decline in sales reflects
lower demand for automotive engineering and human capital services and
reductions from the closure/sale of certain unprofitable operations. Our sales
by segment, net of intercompany sales, were as follows: Fiscal Quarter Ended
    
    ChangeApril 4,
    
    March 30,2004
    
    2003
    
    $
    
    %(dollars in thousands)Human Capital
Services
    
    $
    58,878
    
    
    $
    72,223
    
    
    $
    (13,345
    )
    
    
    (18.5
    %)Business Services
    
    
    67,891
    
    
    
    66,932
    
    
    
    959
    
    
    
    1.4
    %Engineering Services
    
    
    40,545
    
    
    
    44,196
    
    
    
    (3,651
    )
    
    
    (8.3
    %)Total net sales
    
    $
    167,314
    
    
    $
    183,351
    
    
    $
    (16,037
    )
    
    
    (8.7
    %)
 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. In addition, our vendor management programs have been
impacted by price reductions negotiated with customers to secure contract
extensions. 22




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS The small improvement in sales of business services versus 2003 reflects
favorable exchange rate changes affecting our European operations. The net
impact of year over year exchange rate changes was to increase sales of
business services by about $5.8 million for the first quarter of 2004.
Excluding the impact of foreign exchange rate changes, sales of business
services for the first quarter of 2004 decreased about $4.8 million, or 7.2%
versus 2003. The decrease primarily reflects reduced demand for custom
communication services in our Italian operations. Sales of engineering services reflect declining volumes in our European
operations partially offset by a favorable exchange impact of $1.6 million on
sales. After adjusting for the impact of exchange rate variances, our European
engineering operations reflect a net decrease of $5.9 million compared to
fiscal 2003. Sales from our North and South American engineering operations
increased $0.8 million compared to fiscal 2003, reflecting relatively stable
demand versus the first quarter of fiscal 2003. Operating Profit Our consolidated gross profit, selling, general and administrative
expenses and operating income for the periods presented were: Fiscal Quarter Ended
    
    ChangeApril 4,
    
    March 30,2004
    
    2003
    
    $
    
    %(dollars in thousands)Gross profit
    
    $
    20,601
    
    
    $
    20,563
    
    
    $
    38
    
    
    
    0.2
    %% of net sales
    
    
    12.3
    %
    
    
    11.2
    %
    
    
    n/a
    
    
    
    n/aSelling, general and administrative expenses
    
    $
    11,307
    
    
    $
    16,090
    
    
    $
    (4,783
    )
    
    
    (29.7
    %)% of net sales
    
    
    6.8
    %
    
    
    8.8
    %
    
    
    n/a
    
    
    
    n/aOperating income
    
    $
    9,294
    
    
    $
    3,042
    
    
    $
    6,252
    
    
    
    205.5
    %% of net sales
    
    
    5.6
    %
    
    
    1.7
    %
    
    
    n/a
    
    
    
    n/a
 Overall, gross profit for the first quarter of fiscal 2004 approximately
equaled gross profit of the comparable period of fiscal 2003. This was a
result of the cost reductions implemented throughout the company during fiscal
2003 offset by volume reductions. 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 $4.2 million for the first quarter of 2004 and we anticipate
total annualized savings of $19.0 million during 2004. The impact of the cost
reductions was offset by reduced volumes and pricing pressures, primarily in
our human capital and engineering services. Volume reductions resulted in a
decrease in gross margins by approximately $4.1 million versus 2003. Gross
profit as a percentage of sales improved to 12.4% for the first quarter of 2004
compared to 11.2% for the first quarter of 2003. Our cost reduction
program is also expected to result in annualized selling, general and
administrative savings of approximately $15.4 million during 2004. Interest expense Interest expense increased from $6.7 million during the first quarter of
2003 to $7.8 million during the first quarter of 2004, a $1.1 million increase.
The increase in interest expense compared to 2003 primarily resulted from
increased interest rates on debt outstanding as a result of the senior secured
debt refinancing completed August 1, 2003. Income taxes The company currently provides valuation
allowances for a significant portion of its deferred tax assets. The effective tax rate for the quarter
ended April 4, 2004 differs from the 35% federal statutory rate primarily because of these valuation
allowances. The expense for the period relates primarily to earnings in foreign jurisdictions
for which valuation allowances have not previously been recorded. 23




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 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 and 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. Operating Activities. Net cash provided by operating activities was $10.4
million for the first quarter of fiscal 2004 compared to net cash used for
operating activities of $6.9 million during fiscal 2003. The increase reflects
a $2.3 million increase in earnings before depreciation, amortization and other
non-cash charges. The remaining change in net cash is related to changes in
our working capital due primarily to the collection of accounts receivable
relative to the close of the fiscal period. Investing Activities.Net cash provided by investing activities was $30
thousand for the first quarter of 2004 compared to net cash used for investing
activities of $2.3 million for the first quarter of 2003. Capital expenditure
requirements for current programs decreased commensurate with the current
business volumes. Investments in other initiatives declined due to changes in
strategic priorities. Financing Activities. Net cash used in financing activities was $4.6
million for the first quarter of 2004 compared to net cash provided by
financing activities of $2.5 million for the first quarter of 2003. Financing
requirements during the first quarter of 2003 increased to fund investments and
provide for changes in working capital. Financing activities during 2004 also
includes a decrease in book overdrafts, of $10.2 million, compared to 2003 due
to the timing of vendor payments. Liquidity and Available Financings Our total indebtedness as of April 4, 2004 consists of senior secured
notes, mezzanine term notes, fourth lien term notes, senior subordinated notes
and borrowings under various short-term arrangements. In addition to our total
indebtedness, we also have contingent commitments related to letters of credit
totaling about $4.6 million at April 4, 2004. Available borrowings under our credit facility as of April 4, 2004 are
subject to accounts receivable balance requirements. As of April 4, 2004 we
have $38.9 million available for immediate borrowing based on eligible accounts
receivable as determined in accordance with our credit agreement, as amended. We believe that our financing arrangements provide us with sufficient
financial flexibility to fund our operations and debt service requirements
through the term of our senior credit facility, which expires in July 2006,
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. 24




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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. 25




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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. 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. 26




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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 is a proceeding in both federal court
and in an arbitration proceeding. It involves claims and counter claims
asserted by both parties in connection with a contingent earnout obligation
related to the acquisition of Lexstra International, Inc. and Lexus
Temporaries, Inc. and various other claims by and against two former employees.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the first quarter of fiscal 2004 the following matters were
ratified and approved by the consent of a majority of our stockholders:  
    
    An amendment to the Restated Certificate of Incorporation of
MSXI to modify the redemption provisions of the companys 12% Series
A Cumulative Preferred Stock.
    
    The following persons were elected to the MSX International, Inc. Board of Directors: Robert Netolicka
Thomas T. Stallkamp
Erwin H. Billig
David E. Cole
Charles E. Corpening
Michael A. Delaney
Richard J. Puricelli 
 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits:  3.1(a)
    
    Certificate of Amendment to Amended and Restated
Certificate of Incorporation31.1
    
    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:  
    
    March 22, 2004 reporting under Item 12.
Results of Operations and Financial Condition we furnished the
press release announcing our financial results for the fiscal year ended
December 28, 2003. 27




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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:  May 7, 2004 MSX INTERNATIONAL, INC.
(Registrant) By:
    
    /s/ Frederick K. MinturnFrederick K. MinturnExecutive Vice President andChief Financial Officer
 (Chief accounting officer
and authorized signatory) 28




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description3.1(a)
    
    Certificate of Amendment to Amended and Restated
Certificate of Incorporation31.2
    
    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