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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended April 3, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from           to
 Commission File Number: 333-49821 MSX International, Inc.  Delaware
    
    38-3323099(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 1950 Concept Drive, Warren, Michigan
    
    48091(Address of principal executive offices)
    
    (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 þ No o 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
o No þ At
May 16, 2005, 486,354 shares of Class A common stock
of the Registrant were outstanding.




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##### Table of Contents



MSX INTERNATIONAL, INC.
INDEX PagesPART I.FINANCIAL INFORMATIONITEM 1.Financial Statements (unaudited):Consolidated Balance Sheets as of April 3, 2005 and January 2, 2005
    2Consolidated Statements of Operations for the fiscal quarters ended April 3, 2005 and April 4, 2004
    3Consolidated Statements of Cash Flows for the fiscal quarters ended April 3, 2005 and April 4, 2004
    4Notes to Consolidated Financial Statements
    5ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23ITEM 4.Controls and Procedures
    
    
    27PART II.OTHER INFORMATIONITEM 1.Legal Proceedings
    
    
    28ITEM 4.Submission of Matters to a Vote of Security Holders
    
    
    28ITEM 6. Exhibits
    
    
    28SIGNATURE
    
    
    
    
    
    
    29Summary of the Collective Dismissal AgreementIntercreditor AgreementCertification of Chief Executive Officer to Rule 13a-15(e)Certification of Chief Financial Officer to Rule 13a-15(e)Certification Pursuant to 18 U.S.C. Section 1350
 1




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS
 MSX INTERNATIONAL, INC. 
 CONSOLIDATED BALANCE SHEETS (Unaudited)as of April 3, 2005 and January 2, 2005 April 3,
    
    
    January 2,2005
    
    
    2005(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    27,864
    
    
    $
    34,377Accounts receivable, net (Note 4)
    
    
    111,841
    
    
    
    158,640Inventory
    
    
    9,572
    
    
    
    12,160Prepaid expenses and other assets
    
    
    4,833
    
    
    
    3,402Assets held for sale (Note 2)
    
    
    50,448
    
    
    
    13,453Deferred income taxes, net
    
    
    3,899
    
    
    
    5,341Total current assets
    
    
    208,457
    
    
    
    227,373Property and equipment, net
    
    
    6,106
    
    
    
    11,195Goodwill, net (Note 5)
    
    
    116,345
    
    
    
    135,095Assets held for sale (Note 2)
    
    
    16,828
    
    
    
    2,618Deferred income taxes, net
    
    
    742
    
    
    
    Other assets
    
    
    8,858
    
    
    
    9,463Total assets
    
    $
    357,336
    
    
    $
    385,744LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Notes payable and current portion of long-term debt (Note 6)
    
    $
    2,826
    
    
    $
    10,995Accounts payable and drafts
    
    
    86,933
    
    
    
    117,251Accrued payroll and benefits
    
    
    19,389
    
    
    
    22,442Liabilities held for sale (Note 2)
    
    
    49,690
    
    
    
    10,133Other accrued liabilities
    
    
    35,242
    
    
    
    45,002Total current liabilities
    
    
    194,080
    
    
    
    205,823Long-term debt (Note 6)
    
    
    251,951
    
    
    
    249,869Long-term deferred compensation liabilities and other
    
    
    8,019
    
    
    
    18,496Liabilities held for sale (Note 2)
    
    
    9,135
    
    
    
    Deferred income taxes, net
    
    
    
    
    
    
    1,016Total liabilities
    
    
    463,185
    
    
    
    475,204Commitments and contingencies
    
    
    
    
    
    
    Redeemable Series A Preferred Stock (Note 7)
    
    
    94,044
    
    
    
    91,312Shareholders deficitCommon Stock, $.01 par value, 5,000,000 aggregate shares of each 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
    
    
    (2,445
    )
    
    
    (894
    )Retained deficit
    
    
    (173,322
    )
    
    
    (155,752
    )Total shareholders deficit
    
    
    (199,893
    )
    
    
    (180,772
    )Total liabilities and shareholders deficit
    
    $
    357,336
    
    
    $
    385,744
 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 3, 2005 and April 4, 2004 Fiscal Quarter EndedApril 3,
    
    
    April 4,2005
    
    
    2004(in thousands)Net sales
    
    $
    113,098
    
    
    $
    125,390Cost of sales
    
    
    96,149
    
    
    
    107,511Gross profit
    
    
    16,949
    
    
    
    17,879Selling, general and administrative expenses
    
    
    9,473
    
    
    
    9,354Restructuring and severance costs (Note 3)
    
    
    157
    
    
    
    Income from continuing operations before
interest and income taxes
    
    
    7,319
    
    
    
    8,525Interest expense, net
    
    
    8,504
    
    
    
    7,556Income (loss) from continuing operations before
income taxes
    
    
    (1,185
    )
    
    
    969Income tax provision
    
    
    1,278
    
    
    
    920Income (loss) from continuing operations
    
    
    (2,463
    )
    
    
    49Income (loss) from discontinued operations, net
of taxes of $(1,271)and $175, respectively (Note 2)
    
    
    (12,373
    )
    
    
    345Net income (loss)
    
    
    (14,836
    )
    
    
    394Accretion for redemption of preferred stock
    
    
    (2,732
    )
    
    
    (2,665
    )Net loss available to common shareholders
    
    $
    (17,568
    )
    
    $
    (2,271
    )
 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 3, 2005 and April 4, 2004 Fiscal Quarter EndedApril 3,
    
    
    April 4,2005
    
    
    2004(in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (14,836
    )
    
    $
    394Adjustments
to reconcile net income (loss) to net cash
provided by (used for) operating activities:Depreciation
    
    
    2,094
    
    
    
    2,381Goodwill impairment charges
    
    
    7,131
    
    
    
    Amortization of debt issuance costs
    
    
    1,142
    
    
    
    1,107Deferred income taxes (benefits)
    
    
    (316
    )
    
    
    659(Gain) on sale/disposal of property and equipment
    
    
    (8
    )
    
    
    (55
    )(Increase) decrease in receivables, net
    
    
    13,427
    
    
    
    10,824(Increase) decrease in inventory
    
    
    (318
    )
    
    
    (395
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (1,495
    )
    
    
    (1,546
    )Increase (decrease) in current liabilities
    
    
    (13,760
    )
    
    
    (2,725
    )Other, net
    
    
    (691
    )
    
    
    (282
    )Net cash provided by (used for) operating activities
    
    
    (7,630
    )
    
    
    10,362Cash flows from investing activities:Capital expenditures
    
    
    (861
    )
    
    
    (342
    )Payments for contingent consideration
    
    
    (604
    )
    
    
    Proceeds from sale/disposal of property and equipment
    
    
    95
    
    
    
    78Other, net
    
    
    
    
    
    
    294Net cash provided by (used for) investing activities
    
    
    (1,370
    )
    
    
    30Cash flows from financing activities:Debt issuance costs
    
    
    (16
    )
    
    
    (313
    )Changes in revolving debt, net
    
    
    (4,550
    )
    
    
    (634
    )Changes in book overdrafts, net
    
    
    8,067
    
    
    
    (3,696
    )Net cash provided by (used for) financing activities
    
    
    3,501
    
    
    
    (4,643
    )Effect of foreign exchange rate changes on cash and cash equivalents
    
    
    (362
    )
    
    
    (1,278
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    (5,861
    )
    
    
    4,471Balance, beginning of period
    
    
    34,377
    
    
    
    36,650Balance, end of period (including $652 of cash held for sale
as of April 3, 2005)
    
    $
    28,516
    
    
    $
    41,121
 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 technical business services to automobile
manufacturers and suppliers and other industries primarily in North America and Europe. We utilize
a 52-53 week fiscal year, which ends on the Sunday nearest December 31. All intercompany transactions and balances have been eliminated. In the opinion of
management, the accompanying unaudited consolidated financial statements contain all adjustments,
consisting of normal recurring items, which are necessary for a fair presentation. The operating
results for the fiscal quarters ended April 3, 2005 and April 4, 2004 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 January 2, 2005. Certain prior year amounts have been reclassified to
conform to the presentation adopted during the current period. Results of operations classified as discontinued at April 3, 2005 have been excluded from the
discussion of continuing operations for all periods presented and are discussed separately in Note
2. Net assets held for sale are classified as such in the period that management commits to the
plan of the sale. At April 3, 2005, net assets held for sale include substantially all engineering and
staffing business in Europe as well as our technical and commercial publishing business primarily
in Italy. Net assets held for sale at January 2, 2005 reflect only those associated with European
engineering and staffing business. 2. Discontinued Operations In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, discontinued operations include components of entities or entire entities that, through
disposal transactions, will be eliminated from the on-going operations of MSXI. Selected European
businesses are reflected as discontinued operations and eliminated from the on-going operations of
MSXI due to managements decision to divest such operations. Operations reflected as discontinued
include substantially all engineering and staffing business in Europe as well as our technical and
commercial publishing business primarily in Italy. Management has determined these businesses are
no longer core to the companys strategy due to changing competitive requirements, customer demands
and a required focus on business with higher growth and return prospects. For all businesses
reflected as discontinued a process for selling such operations has been initiated and prospective
buyers have been identified. The following summary results of operations information is derived from the businesses that
are in the disposal process: Fiscal Quarter EndedApril 3,
    
    
    April 4,2005
    
    
    2004(in thousands)Net sales
    
    $
    32,838
    
    
    $
    41,925Cost of sales
    
    
    30,959
    
    
    
    39,202Gross profit
    
    
    1,879
    
    
    
    2,723Selling, general and administrative expense
    
    
    1,774
    
    
    
    1,954Restructuring and severance costs
    
    
    6,602
    
    
    
    Goodwill impairment charge
    
    
    7,131
    
    
    
    Operating income (loss)
    
    
    (13,628
    )
    
    
    769Interest expense, net
    
    
    16
    
    
    
    249Income (loss) before taxes, net
    
    
    (13,644
    )
    
    
    520Income tax provision (benefit)
    
    
    (1,271
    )
    
    
    175Income (loss) from discontinued operations
    
    $
    (12,373
    )
    
    $
    345
 Results of discontinued operations include restructuring charges totaling $6.6 million related
primarily to employment actions taken in our technical and commercial publishing business in Italy.
During the first quarter of 2005 we 5




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) entered into an agreement with various trade union organizations
that establishes a program for permanent employment reductions affecting 124 personnel. Affected employees are expected to utilize the program in the
first half of 2006. Results of discontinued operations reflect a goodwill impairment charge totaling $7.1 million
related to our technical and commercial publishing business in Italy. The impairment charge was
calculated based on the estimated fair value of this business versus the carrying value of assets
held for sale. Fair value of such assets was estimated based upon market values contemplated in
the proposed sale. The summary balance sheet information is derived from the businesses that are in the disposal
process, which management believes is representative of the net assets of the businesses held for
disposal. At April 3, 2005, assets held for sale include substantially all engineering and
staffing business in Europe as well as our technical and commercial publishing business primarily
in Italy. Net assets held for sale at January 2, 2005 include only our European engineering and
staffing business due to the timing of managements commitment to the sale. At April 3,
    
    
    At January 2,2005
    
    
    2005(in thousands)Assets:Cash and cash equivalents
    
    $
    652
    
    
    $
    Accounts receivable, net
    
    
    45,511
    
    
    
    12,140Inventory
    
    
    2,907
    
    
    
    Prepaid expenses
    
    
    1,378
    
    
    
    1,313Total current assets held for sale
    
    
    50,448
    
    
    
    13,453Property and equipment, net
    
    
    5,673
    
    
    
    2,259Goodwill, net
    
    
    11,155
    
    
    
    359Total assets held for sale
    
    $
    67,276
    
    
    $
    16,071Liabilities:Note payable and current portion of long-term debt
    
    $
    2,118
    
    
    $
    Accounts payable and drafts
    
    
    29,744
    
    
    
    2,880Accrued payroll and benefits
    
    
    12,231
    
    
    
    4,642Other accrued liabilities
    
    
    5,597
    
    
    
    2,611Total current liabilities held for sale
    
    
    49,690
    
    
    
    10,133Long-term deferred compensation liabilities and other
    
    
    9,135
    
    
    
    Total liabilities held for sale
    
    $
    58,825
    
    
    $
    10,133
 The net proceeds received from the prospective disposal may be subject to limitations in the
Companys senior credit facility. When such net proceeds become known and available, management
anticipates applying them to reduce outstanding indebtedness. 3. Restructuring and Severance: The following table shows the activity related to restructuring reserves for the fiscal
quarter ended April 3, 2005: OtherTermination
    
    
    Facility
    
    
    ContractualBenefits
    
    
    Consolidation
    
    
    Costs
    
    
    TotalReserve at January 2, 2005
    
    
    573
    
    
    
    562
    
    
    
    199
    
    
    
    1,334Charges from continuing operations at April 3, 2005
    
    
    157
    
    
    
    
    
    
    
    
    
    
    
    157Charges from discontinued operations at April 3,
2005
    
    
    5,198
    
    
    
    260
    
    
    
    1,144
    
    
    
    6,602Payments and reserve utilization
    
    
    (89
    )
    
    
    (379
    )
    
    
    (101
    )
    
    
    (569
    )Reserve at April 3, 2005
    
    $
    5,839
    
    
    $
    443
    
    
    $
    1,242
    
    
    $
    7,524
 6




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 4. Accounts Receivable: Accounts receivable include both billed and unbilled receivables. Unbilled receivables
amounted to $28.1 million and $46.5 million at April 3, 2005 and January 2, 2005, respectively,
excluding assets held for sale. 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 $41.4 million as of April 3, 2005 and
$47.6 million as of January 2, 2005. A
corresponding liability to our vendors for these amounts is recorded in accounts payable at the
time the receivable is recognized. 5. Goodwill, net: The following summarizes the changes in our goodwill balances by segment, net of assets held
for sale, as of January 2, 2005, during the three months ended April 3, 2005: Business
    
    
    Human Capital
    
    
    EngineeringServices
    
    
    Services
    
    
    Services
    
    
    TotalBalance at January 2, 2005
    
    $
    37,703
    
    
    $
    97,392
    
    
    $
    
    
    
    $
    135,095Transfer of business unit
    
    
    (1,809
    )
    
    
    1,809
    
    
    
    
    
    
    
    Goodwill
classified as held for sale during the fiscal period
    
    
    (17,816
    )
    
    
    (69
    )
    
    
    
    
    
    
    (17,885
    )Translation changes and other
    
    
    (865
    )
    
    
    
    
    
    
    
    
    
    
    (865
    )Balance at April 3, 2005
    
    $
    17,213
    
    
    $
    99,132
    
    
    $
    
    
    
    $
    116,345
 Results of discontinued operations reflect a goodwill impairment charge totaling $7.1 million
as discussed further in Note 2. 6. Debt: Debt is comprised of the following, excluding amounts held for sale: Interest Rates at
    
    
    Outstanding atApril 3,
    
    
    January 2,
    
    
    April 3,
    
    
    January 2,2005
    
    
    2005
    
    
    2005
    
    
    2005Senior credit facility
    
    
    6.00
    %
    
    
    5.50
    %
    
    $
    2,089
    
    
    $
    590Senior secured notes, net of unamortized discount
    
    
    11.00
    %
    
    
    11.00
    %
    
    
    75,103
    
    
    
    75,063Mezzanine term notes, net of unamortized discount
    
    
    11.50
    %
    
    
    11.50
    %
    
    
    24,551
    
    
    
    24,506Fourth lien term notes
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    20,208
    
    
    
    19,710Senior subordinated notes
    
    
    11.375
    %
    
    
    11.375
    %
    
    
    130,000
    
    
    
    130,000Satiz facilities
    
    
    
    
    
    
    4.455
    %
    
    
    
    
    
    
    8,065Other
    
    
    7.00
    %
    
    
    7.00
    %
    
    
    2,826
    
    
    
    2,930254,777
    
    
    
    260,864Less current portion
    
    
    
    
    
    
    
    
    
    
    2,826
    
    
    
    10,995Total long-term debt
    
    
    
    
    
    
    
    
    
    $
    251,951
    
    
    $
    249,869
 7




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 7. Redeemable Series A Preferred Stock: As of April 3, 2005 and January 2, 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. The Preferred Stock is 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 3,
2005, dividends accrued totaled $58.1 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. 8. Comprehensive Loss: Our comprehensive loss was: Fiscal
Quarter EndedApril 3,
    
    
    April 4,2005
    
    
    2004Net income (loss)
    
    $
    (14,836
    )
    
    $
    394Other comprehensive loss -
foreign currency translation
adjustments
    
    
    (1,551
    )
    
    
    (1,314

    )Comprehensive loss
    
    $
    (16,387
    )
    
    $
    (920
    )
 9. 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 3, 2005 differs from the 35%
federal statutory rate primarily because of such valuation allowances and the effect of certain
foreign tax rates. Tax expense for the period relates primarily to earnings in foreign
jurisdictions for which valuation allowances have not previously been recorded. 10. Segment Information: MSXI is a global provider of technical business services to the automotive and other
industries. Our business includes: business services, human capital services, and engineering
services. Our business services include solutions to quality, and communication related customer
needs. Human capital services include a full range of staffing solutions, including direct support
of our engineering and business services. 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. 8




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) The following is a summary of selected data for each of our segments, excluding discontinued
operations: HumanBusiness
    
    
    Capital
    
    
    EngineeringServices
    
    
    Services
    
    
    Services
    
    
    Other
    
    
    TotalQuarter Ended April 3, 2005Net sales  external
    
    $
    43,169
    
    
    $
    46,741
    
    
    $
    23,188
    
    
    $
    
    
    
    $
    113,098Net intercompany sales
    
    
    14
    
    
    
    
    
    
    
    15
    
    
    
    (29
    )
    
    
    EBITA
    
    
    5,561
    
    
    
    2,896
    
    
    
    2,022
    
    
    
    
    
    
    
    10,479Quarter Ended April 4, 2004Net sales  external
    
    $
    45,694
    
    
    $
    51,401
    
    
    $
    28,295
    
    
    $
    
    
    
    $
    125,390Net intercompany sales
    
    
    305
    
    
    
    2
    
    
    
    269
    
    
    
    (576
    )
    
    
    EBITA
    
    
    6,189
    
    
    
    3,702
    
    
    
    2,544
    
    
    
    
    
    
    
    12,435
 A reconciliation of total segment EBITA to consolidated income (loss) from continuing
operations before income taxes is as follows: Fiscal Quarter EndedApril 3,
    
    
    April 4,2005
    
    
    2004Total segment EBITA
    
    $
    10,479
    
    
    $
    12,435Net costs not allocated to segments
    
    
    (2,637
    )
    
    
    (3,348
    )Interest expense
    
    
    (8,504
    )
    
    
    (7,556
    )Michigan single business tax and other similar taxes
    
    
    (523
    )
    
    
    (562
    )Consolidated income (loss) from continuing operations before
taxes
    
    $
    (1,185
    )
    
    $
    969
 9




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 11. Stock-Based Compensation: We account for stock options under the recognition and measurement principles of Accounting
Principles Board Opinion No. 25 (APB Opinion No. 25), Accounting for Stock Issued to
Employees, and related interpretations. In June, 2003 we repriced selected outstanding stock
options. In accordance with APB Opinion No. 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 3, 2005. Applying
the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
would have no effect on our reported results of operations. 12. New Accounting Pronouncements: SFAS No. 123-R,:Accounting for Stock-Based Compensation- Revised:Issued by the FASB in
December 2004, this standard establishes the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods and services that are based on the fair value of
the entitys equity instruments or that may be settled by the issuance of those equity instruments.
The new statement is now effective for public companies for annual periods beginning after June
15, 2005. MSXI is in the process of studying this statement, and has yet to determine the effects,
if any, on its consolidated financial statements. 10




---



##### 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 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. 11




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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 MSX International, Inc.  continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of April 3, 2005 MSXI
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    MSXI(Issuer)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    13,893
    
    
    $
    13,971
    
    
    $
    
    
    
    $
    27,864Accounts receivable, net
    
    
    
    
    
    
    65,383
    
    
    
    46,459
    
    
    
    
    
    
    
    111,842Inventory
    
    
    
    
    
    
    9,565
    
    
    
    6
    
    
    
    
    
    
    
    9,571Prepaid expenses and other assets
    
    
    
    
    
    
    3,281
    
    
    
    1,552
    
    
    
    
    
    
    
    4,833Assets held for sale
    
    
    
    
    
    
    
    
    
    
    50,448
    
    
    
    
    
    
    
    50,448Deferred income taxes, net
    
    
    
    
    
    
    2,370
    
    
    
    3,899
    
    
    
    (2,370
    )
    
    
    3,899Total current assets
    
    
    
    
    
    
    94,492
    
    
    
    116,335
    
    
    
    (2,370
    )
    
    
    208,457Property and equipment, net
    
    
    
    
    
    
    3,850
    
    
    
    2,256
    
    
    
    
    
    
    
    6,106Goodwill, net
    
    
    
    
    
    
    116,302
    
    
    
    43
    
    
    
    
    
    
    
    116,345Investments in subsidiaries
    
    
    100,048
    
    
    
    11,425
    
    
    
    
    
    
    
    (111,473
    )
    
    
    Assets held for sale
    
    
    
    
    
    
    
    
    
    
    16,828
    
    
    
    
    
    
    
    16,828Other assets
    
    
    5,258
    
    
    
    2,973
    
    
    
    627
    
    
    
    
    
    
    
    8,858Deferred income taxes, net
    
    
    1,876
    
    
    
    
    
    
    
    742
    
    
    
    (1,876
    )
    
    
    742Total assets
    
    $
    107,182
    
    
    $
    229,042
    
    
    $
    136,831
    
    
    $
    (115,719
    )
    
    $
    357,336LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion
of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    2,826
    
    
    $
    
    
    
    $
    2,826Accounts payable and drafts
    
    
    
    
    
    
    65,602
    
    
    
    21,331
    
    
    
    
    
    
    
    86,933Accrued liabilities
    
    
    4,824
    
    
    
    26,647
    
    
    
    23,160
    
    
    
    
    
    
    
    54,631Liabilities held for sale
    
    
    
    
    
    
    
    
    
    
    49,690
    
    
    
    
    
    
    
    49,690Deferred income taxes, net
    
    
    2,370
    
    
    
    
    
    
    
    
    
    
    
    (2,370
    )
    
    
    Total current liabilities
    
    
    7,194
    
    
    
    92,249
    
    
    
    97,007
    
    
    
    (2,370
    )
    
    
    194,080Long-term debt
    
    
    235,116
    
    
    
    
    
    
    
    16,835
    
    
    
    
    
    
    
    251,951Intercompany accounts
    
    
    (29,279
    )
    
    
    28,033
    
    
    
    1,246
    
    
    
    
    
    
    
    Long-term deferred compensation and other liabilities
    
    
    
    
    
    
    6,836
    
    
    
    1,183
    
    
    
    
    
    
    
    8,019Liabilities held for sale
    
    
    
    
    
    
    
    
    
    
    9,135
    
    
    
    
    
    
    
    9,135Deferred income taxes, net
    
    
    
    
    
    
    1,876
    
    
    
    
    
    
    
    (1,876
    )
    
    
    Total liabilities
    
    
    213,031
    
    
    
    128,994
    
    
    
    125,406
    
    
    
    (4,246
    )
    
    
    463,185Redeemable Series A Preferred Stock
    
    
    94,044
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,044Shareholders equity (deficit)
    
    
    (199,893
    )
    
    
    100,048
    
    
    
    11,425
    
    
    
    (111,473
    )
    
    
    (199,893
    )Total liabilities and shareholders
equity (deficit)
    
    $
    107,182
    
    
    $
    229,042
    
    
    $
    136,831
    
    
    $
    (115,719
    )
    
    $
    357,336
 12




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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 MSX International, Inc.  continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of January 2, 2005 MSXI
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    MSXI(Issuer)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,650
    
    
    $
    11,570
    
    
    $
    17,157
    
    
    $
    
    
    
    $
    34,377Accounts receivable, net
    
    
    
    
    
    
    68,099
    
    
    
    90,541
    
    
    
    
    
    
    
    158,640Inventory
    
    
    
    
    
    
    9,121
    
    
    
    3,039
    
    
    
    
    
    
    
    12,160Prepaid expenses and other assets
    
    
    
    
    
    
    2,736
    
    
    
    666
    
    
    
    
    
    
    
    3,402Assets held for sale
    
    
    
    
    
    
    
    
    
    
    13,453
    
    
    
    
    
    
    
    13,453Deferred income taxes, net
    
    
    
    
    
    
    2,569
    
    
    
    5,341
    
    
    
    (2,569
    )
    
    
    5,341Total current assets
    
    
    5,650
    
    
    
    94,095
    
    
    
    130,197
    
    
    
    (2,569
    )
    
    
    227,373Property and equipment, net
    
    
    
    
    
    
    4,367
    
    
    
    6,828
    
    
    
    
    
    
    
    11,195Goodwill, net
    
    
    
    
    
    
    116,302
    
    
    
    18,793
    
    
    
    
    
    
    
    135,095Investment in subsidiaries
    
    
    110,993
    
    
    
    23,829
    
    
    
    
    
    
    
    (134,822
    )
    
    
    Assets held for sale
    
    
    
    
    
    
    
    
    
    
    2,618
    
    
    
    
    
    
    
    2,618Other assets
    
    
    5,767
    
    
    
    3,032
    
    
    
    664
    
    
    
    
    
    
    
    9,463Deferred income taxes, net
    
    
    1,257
    
    
    
    
    
    
    
    
    
    
    
    (1,257
    )
    
    
    Total assets
    
    $
    123,667
    
    
    $
    241,625
    
    
    $
    159,100
    
    
    $
    (138,648
    )
    
    $
    385,744LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion
of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    10,995
    
    
    $
    
    
    
    $
    10,995Accounts payable and drafts
    
    
    
    
    
    
    62,594
    
    
    
    54,657
    
    
    
    
    
    
    
    117,251Accrued liabilities
    
    
    10,998
    
    
    
    27,447
    
    
    
    28,999
    
    
    
    
    
    
    
    67,444Liabilities held for sale
    
    
    
    
    
    
    
    
    
    
    10,133
    
    
    
    
    
    
    
    10,133Deferred income taxes, net
    
    
    2,569
    
    
    
    
    
    
    
    
    
    
    
    (2,569
    )
    
    
    Total current liabilities
    
    
    13,567
    
    
    
    90,041
    
    
    
    104,784
    
    
    
    (2,569
    )
    
    
    205,823Long-term debt
    
    
    232,521
    
    
    
    
    
    
    
    17,348
    
    
    
    
    
    
    
    249,869Intercompany accounts
    
    
    (32,963
    )
    
    
    31,929
    
    
    
    1,034
    
    
    
    
    
    
    
    Long-term deferred compensation and other liabilities
    
    
    
    
    
    
    7,405
    
    
    
    11,091
    
    
    
    
    
    
    
    18,496Deferred income taxes, net
    
    
    
    
    
    
    1,257
    
    
    
    1,016
    
    
    
    (1,257
    )
    
    
    1,016Total liabilities
    
    
    213,125
    
    
    
    130,632
    
    
    
    135,273
    
    
    
    (3,826
    )
    
    
    475,204Redeemable Series A Preferred Stock
    
    
    91,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,312Shareholders equity (deficit)
    
    
    (180,770
    )
    
    
    110,993
    
    
    
    23,827
    
    
    
    (134,822
    )
    
    
    (180,772
    )Total liabilities and shareholders
equity (deficit)
    
    $
    123,667
    
    
    $
    241,625
    
    
    $
    159,100
    
    
    $
    (138,648
    )
    
    $
    385,744
 13




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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 MSX International, Inc.- continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended April 3, 2005 and April 4, 2004 MSXI
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    MSXI(Issuer)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Fiscal Quarter Ended April 3, 2005Net sales
    
    $
    
    
    
    $
    80,869
    
    
    $
    32,257
    
    
    $
    (28
    )
    
    $
    113,098Cost of sales
    
    
    
    
    
    
    69,962
    
    
    
    26,215
    
    
    
    (28
    )
    
    
    96,149Gross profit
    
    
    
    
    
    
    10,907
    
    
    
    6,042
    
    
    
    
    
    
    
    16,949Selling, general and administrative expenses
    
    
    
    
    
    
    7,198
    
    
    
    2,275
    
    
    
    
    
    
    
    9,473Restructuring and severance costs
    
    
    
    
    
    
    132
    
    
    
    25
    
    
    
    
    
    
    
    157Income (loss) from continuing operations before
interest, income taxes, and equity in
affiliates
    
    
    
    
    
    
    3,577
    
    
    
    3,742
    
    
    
    
    
    
    
    7,319Interest expense, net
    
    
    6,253
    
    
    
    1,291
    
    
    
    960
    
    
    
    
    
    
    
    8,504Income (loss) from continuing operations before
income taxes, and equity in affiliates
    
    
    (6,253
    )
    
    
    2,286
    
    
    
    2,782
    
    
    
    
    
    
    
    (1,185
    )Income tax provision (benefit)
    
    
    (808
    )
    
    
    827
    
    
    
    1,259
    
    
    
    
    
    
    
    1,278Equity in affiliates
    
    
    2,982
    
    
    
    1,523
    
    
    
    
    
    
    
    (4,505
    )
    
    
    Income (loss) from continuing operations
    
    
    (2,463
    )
    
    
    2,982
    
    
    
    1,523
    
    
    
    (4,505
    )
    
    
    (2,463
    )Income from discontinued operations, net
    
    
    (12,373
    )
    
    
    (12,373
    )
    
    
    (12,373
    )
    
    
    24,746
    
    
    
    (12,373
    )Net income (loss)
    
    $
    (14,836
    )
    
    $
    (9,391
    )
    
    $
    (10,850
    )
    
    $
    20,241
    
    
    $
    (14,836
    )Fiscal Quarter Ended April 4, 2004Net sales
    
    $
    
    
    
    $
    97,399
    
    
    $
    28,567
    
    
    $
    (576
    )
    
    $
    125,390Cost of sales
    
    
    
    
    
    
    87,569
    
    
    
    20,518
    
    
    
    (576
    )
    
    
    107,511Gross profit
    
    
    
    
    
    
    9,830
    
    
    
    8,049
    
    
    
    
    
    
    
    17,879Selling, general and administrative expenses
    
    
    
    
    
    
    6,991
    
    
    
    2,363
    
    
    
    
    
    
    
    9,354Income from continuing operations before
interest, income taxes, and equity in
affiliates
    
    
    
    
    
    
    2,839
    
    
    
    5,686
    
    
    
    
    
    
    
    8,525Interest expense, net
    
    
    6,667
    
    
    
    1,099
    
    
    
    (210
    )
    
    
    
    
    
    
    7,556Income from continuing operations before
income taxes, and equity in affiliates
    
    
    (6,667
    )
    
    
    1,740
    
    
    
    5,896
    
    
    
    
    
    
    
    969Income tax provision (benefit)
    
    
    (622
    )
    
    
    436
    
    
    
    1,106
    
    
    
    
    
    
    
    920Equity in affiliates
    
    
    6,095
    
    
    
    4,789
    
    
    
    
    
    
    
    (10,884
    )
    
    
    Income from continuing operations
    
    
    50
    
    
    
    6,093
    
    
    
    4,790
    
    
    
    (10,884
    )
    
    
    49Income from discontinued operations, net
    
    
    345
    
    
    
    345
    
    
    
    345
    
    
    
    (690
    )
    
    
    345Net income (loss)
    
    $
    395
    
    
    $
    6,438
    
    
    $
    5,135
    
    
    $
    (11,574
    )
    
    $
    394
 14




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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 MSX International, Inc.  continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
for the fiscal quarter ended April 3, 2005 MSXI
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    MSXI(Issuer)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (14,836
    )
    
    $
    (9,391
    )
    
    $
    (10,850
    )
    
    $
    20,241
    
    
    $
    (14,836
    )Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:Equity in affiliates, including discontinued operations
    
    
    9,391
    
    
    
    10,850
    
    
    
    
    
    
    
    (20,241
    )
    
    
    Depreciation
    
    
    
    
    
    
    820
    
    
    
    1,274
    
    
    
    
    
    
    
    2,094Goodwill impairment charges
    
    
    
    
    
    
    
    
    
    
    7,131
    

    
    
    

    
    
    
    7,131Amortization of debt issuance costs
    
    
    1,030
    
    
    
    
    
    
    
    112
    
    
    
    
    
    
    
    1,142Deferred taxes
    
    
    (818
    )
    
    
    818
    
    
    
    (316
    )
    
    
    
    
    
    
    (316
    )(Gain) Loss on sale/disposal of property
and equipment
    
    
    
    
    
    
    (5
    )
    
    
    (3
    )
    
    
    
    
    
    
    (8
    )(Increase) decrease in receivables, net
    
    
    
    
    
    
    2,716
    
    
    
    10,711
    
    
    
    
    
    
    
    13,427(Increase) decrease in inventory
    
    
    
    
    
    
    (444
    )
    
    
    126
    
    
    
    
    
    
    
    (318
    )(Increase) decrease in prepaid expenses
and other assets
    
    
    
    
    
    
    (544
    )
    
    
    (951
    )
    
    
    
    
    
    
    (1,495
    )Increase (decrease) in current liabilities
    
    
    (6,174
    )
    
    
    (5,861
    )
    
    
    (1,725
    )
    
    
    
    
    
    
    (13,760
    )Other, net
    
    
    
    
    
    
    95
    
    
    
    (786
    )
    
    
    
    
    
    
    (691
    )Net cash provided by (used for) operating activities
    
    
    (11,407
    )
    
    
    (946
    )
    
    
    4,723
    
    
    
    
    
    
    
    (7,630
    )Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (305
    )
    
    
    (556
    )
    
    
    
    
    
    
    (861
    )Payments for contingent consideration
    
    
    
    
    
    
    (604
    )
    
    
    
    
    
    
    
    
    
    
    (604
    )Proceeds from sale/disposal of property and equipment
    
    
    
    
    
    
    7
    
    
    
    88
    
    
    
    
    
    
    
    95Net cash used for investing activities
    
    
    
    
    
    
    (902
    )
    
    
    (468
    )
    
    
    
    
    
    
    (1,370
    )Cash flows from financing activities:Transactions with subsidiaries
    
    
    3,684
    
    
    
    (3,896
    )
    
    
    212
    
    
    
    
    
    
    
    Debt issuance costs
    
    
    (16
    )
    
    
    
    

    

    
    

    
    
    
    
    
    
    
    (16
    )Changes in revolving debt, net
    
    
    2,089
    
    
    
    
    
    
    
    (6,639
    )
    
    
    
    
    
    
    (4,550
    )Change in book overdrafts
    
    
    
    
    
    
    8,067
    
    
    
    
    
    
    
    
    
    
    
    8,067Net cash provided by (used for) financing activities
    
    
    5,757
    
    
    
    4,171
    
    
    
    (6,427
    )
    
    
    
    
    
    
    3,501Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (362
    )
    
    
    
    
    
    
    (362
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    (5,650
    )
    
    
    2,323
    
    
    
    (2,534
    )
    
    
    
    
    
    
    (5,861
    )Balance, beginning of period
    
    
    5,650
    
    
    
    11,570
    
    
    
    17,157
    
    
    
    
    
    
    
    34,377Balance, end of period
    
    $
    
    
    
    $
    13,893
    
    
    $
    14,623
    
    
    $
    
    
    
    $
    28,516
 15




---



##### 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 MSX International, Inc. continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
for the fiscal quarter ended April 4, 2004 MSXI
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    MSXI(Issuer)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    394
    
    
    $
    6,439
    
    
    $
    5,134
    
    
    $
    (11,573
    )
    
    $
    394Adjustments to reconcile net income to net
cash provided by (used for) operating activities:Equity in affiliates, including discontinued operations
    
    
    (6,439
    )
    
    
    (5,134
    )
    
    
    
    
    
    
    11,573
    
    
    
    Depreciation
    
    
    
    
    
    
    1,212
    
    
    
    1,169
    
    
    
    
    
    
    
    2,381Amortization of debt issuance costs
    
    
    1,028
    
    
    
    
    
    
    
    79
    
    
    
    
    
    
    
    1,107Deferred taxes
    
    
    (572
    )
    
    
    573
    
    
    
    658
    
    
    
    
    
    
    
    659Loss 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/disposition of property and equipment
    
    
    
    
    
    
    2
    
    
    
    76
    
    
    
    
    
    
    
    78Other, net
    
    
    
    
    
    
    294
    
    
    
    0
    
    
    
    
    
    
    
    294Net cash 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
    )Change in book overdrafts
    
    
    
    
    
    
    (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
 16




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 14. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited: Senior secured notes that are issued by MSXI Limited, an indirect subsidiary of MSX
International, Inc., are collateralized by the accounts receivable of MSXI Limited and
substantially all of the assets of MSXI and its domestic subsidiaries, subject to permitted liens.
Payment obligations under the senior secured notes issued by MSXI Limited are guaranteed jointly
and severally by MSX International, Inc. and all of its domestic subsidiaries. Because of the
parent and subsidiary guarantee structure, we present the following condensed consolidating
financial information for:  
    MSXI  the parent company
    MSXI Limited  the issuer
    The guarantor subsidiaries
    The non-guarantor subsidiaries
    MSXI on a consolidated basis Investments in subsidiaries are accounted for under the equity method. The principal
elimination entries are to eliminate the investments in subsidiaries and intercompany balances and
transactions. Separate financial statements for each of the guarantor and non-guarantor
subsidiaries are not presented because management has determined such statements would not provide
additional material information to the holders of the senior secured notes. 17




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 14. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of April 3, 2005 MSXIMSXI
    
    
    Limited
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    MSXI(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    1,456
    
    
    $
    13,893
    
    
    $
    12,515
    
    
    $
    
    
    
    $
    27,864Accounts receivable, net
    
    
    
    
    
    
    9,757
    
    
    
    65,383
    
    
    
    36,702
    
    
    
    
    
    
    
    111,842Inventory
    
    
    
    
    
    
    
    
    
    
    9,565
    
    
    
    6
    
    
    
    
    
    
    
    9,571Prepaid expenses and other assets
    
    
    
    
    
    
    454
    
    
    
    3,281
    
    
    
    1,098
    
    
    
    
    
    
    
    4,833Assets held for sale
    
    
    
    
    
    
    9,991
    
    
    
    
    
    
    
    40,457
    
    
    
    
    
    
    
    50,448Deferred income taxes, net
    
    
    
    
    
    
    540
    
    
    
    2,370
    
    
    
    3,359
    
    
    
    (2,370
    )
    
    
    3,899Total current assets
    
    
    
    
    
    
    22,198
    
    
    
    94,492
    
    
    
    94,137
    
    
    
    (2,370
    )
    
    
    208,457Property and equipment, net
    
    
    
    
    
    
    880
    
    
    
    3,850
    
    
    
    1,376
    
    
    
    
    
    
    
    6,106Goodwill, net
    
    
    
    
    
    
    32
    
    
    
    116,302
    
    
    
    11
    
    
    
    
    
    
    
    116,345Investments in subsidiaries
    
    
    100,048
    
    
    
    
    
    
    
    11,425
    
    
    
    9,628
    
    
    
    (121,101
    )
    
    
    Assets held for sale
    
    
    
    
    
    
    609
    
    
    
    
    
    
    
    16,219
    
    
    
    
    
    
    
    16,828Other assets
    
    
    5,258
    
    
    
    443
    
    
    
    2,973
    
    
    
    184
    
    
    
    
    
    
    
    8,858Deferred income taxes, net
    
    
    1,876
    
    
    
    
    
    
    
    
    
    
    
    1,281
    
    
    
    (2,415
    )
    
    
    742Total assets
    
    $
    107,182
    
    
    $
    24,162
    
    
    $
    229,042
    
    
    $
    122,836
    
    
    $
    (125,886
    )
    
    $
    357,336LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion
of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,826
    
    
    $
    
    
    
    $
    2,826Accounts payable and drafts
    
    
    
    
    
    
    5,331
    
    
    
    65,602
    
    
    
    16,000
    
    
    
    
    
    
    
    86,933Accrued liabilities
    
    
    4,824
    
    
    
    4,490
    
    
    
    26,647
    
    
    
    18,670
    
    
    
    
    
    
    
    54,631Liabilities held for sale
    
    
    
    
    
    
    5,944
    
    
    
    
    
    
    
    43,746
    
    
    
    
    
    
    
    49,690Deferred income taxes, net
    
    
    2,370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,370
    )
    
    
    Total current liabilities
    
    
    7,194
    
    
    
    15,765
    
    
    
    92,249
    
    
    
    81,242
    
    
    
    (2,370
    )
    
    
    194,080Long-term debt
    
    
    235,116
    
    
    
    16,835
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    251,951Intercompany accounts
    
    
    (29,279
    )
    
    
    (19,011
    )
    
    
    28,033
    
    
    
    20,257
    
    
    
    
    
    
    
    Long-term deferred compensation and
other liabilities
    
    
    
    
    
    
    403
    
    
    
    6,836
    
    
    
    780
    
    
    
    
    
    
    
    8,019Liabilities held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,135
    
    
    
    
    
    
    
    9,135Deferred income taxes, net
    
    
    
    
    
    
    539
    
    
    
    1,876
    
    
    
    
    
    
    
    (2,415
    )
    
    
    Total liabilities
    
    
    213,031
    
    
    
    14,531
    
    
    
    128,994
    
    
    
    111,414
    
    
    
    (4,785
    )
    
    
    463,185Redeemable Series A Preferred Stock
    
    
    94,044
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,044Shareholders equity (deficit)
    
    
    (199,893
    )
    
    
    9,631
    
    
    
    100,048
    
    
    
    11,422
    
    
    
    (121,101
    )
    
    
    (199,893
    )Total liabilities and shareholders
equity (deficit)
    
    $
    107,182
    
    
    $
    24,162
    
    
    $
    229,042
    
    
    $
    122,836
    
    
    $
    (125,886
    )
    
    $
    357,336
 18




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 14. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited  continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of January 2, 2005 MSXIMSXI
    
    
    Limited
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    MSXI(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    5,650
    
    
    $
    18
    
    
    $
    11,570
    
    
    $
    17,139
    
    
    $
    
    
    
    $
    34,377Accounts receivable, net
    
    
    
    
    
    
    12,867
    
    
    
    68,099
    
    
    
    77,674
    
    
    
    
    
    
    
    158,640Inventory
    
    
    
    
    
    
    
    
    
    
    9,121
    
    
    
    3,039
    
    
    
    
    
    
    
    12,160Prepaid expenses and other assets
    
    
    
    
    
    
    188
    
    
    
    2,736
    
    
    
    478
    
    
    
    
    
    
    
    3,402Assets held for sale
    
    
    
    
    
    
    7,420
    
    
    
    
    
    
    
    6,033
    
    
    
    
    
    
    
    13,453Deferred income taxes, net
    
    
    
    
    
    
    350
    
    
    
    2,569
    
    
    
    4,991
    
    
    
    (2,569
    )
    
    
    5,341Total current assets
    
    
    5,650
    
    
    
    20,843
    
    
    
    94,095
    
    
    
    109,354
    
    
    
    (2,569
    )
    
    
    227,373Property and equipment, net
    
    
    
    
    
    
    1,084
    
    
    
    4,367
    
    
    
    5,744
    
    
    
    
    
    
    
    11,195Goodwill, net
    
    
    
    
    
    
    108
    
    
    
    116,302
    
    
    
    18,685
    
    
    
    
    
    
    
    135,095Investment in subsidiaries
    
    
    110,993
    
    
    
    
    
    
    
    23,829
    
    
    
    10,102
    
    
    
    (144,924
    )
    
    
    Assets held for sale
    
    
    
    
    
    
    526
    
    
    
    
    
    
    
    2,092
    
    
    
    
    
    
    
    2,618Other assets
    
    
    5,767
    
    
    
    493
    
    
    
    3,032
    
    
    
    171
    
    
    
    
    
    
    
    9,463Deferred income taxes, net
    
    
    1,257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,257
    )
    
    
    Total assets
    
    $
    123,667
    
    
    $
    23,054
    
    
    $
    241,625
    
    
    $
    146,148
    
    
    $
    (148,750
    )
    
    $
    385,744LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion
of long-term debt
    
    $
    
    
    
    $
    590
    
    
    $
    
    
    
    $
    10,405
    
    
    $
    
    
    
    $
    10,995Accounts payable and drafts
    
    
    
    
    
    
    6,538
    
    
    
    62,594
    
    
    
    48,119
    
    
    
    
    
    
    
    117,251Accrued liabilities
    
    
    10,998
    
    
    
    4,548
    
    
    
    27,447
    
    
    
    24,451
    
    
    
    
    
    
    
    67,444Liabilities held for sale
    
    
    
    
    
    
    5,542
    
    
    
    
    
    
    
    4,591
    
    
    
    
    
    
    
    10,133Deferred income taxes, net
    
    
    2,569
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,569
    )
    
    
    Total current liabilities
    
    
    13,567
    
    
    
    17,218
    
    
    
    90,041
    
    
    
    87,566
    
    
    
    (2,569
    )
    
    
    205,823Long-term debt
    
    
    232,521
    
    
    
    16,758
    
    
    
    
    
    
    
    590
    
    
    
    
    
    
    
    249,869Intercompany accounts
    
    
    (32,963
    )
    
    
    (21,753
    )
    
    
    31,929
    
    
    
    22,787
    
    
    
    
    
    
    
    Long-term deferred compensation and
other liabilities
    
    
    
    
    
    
    378
    
    
    
    7,405
    
    
    
    10,713
    
    
    
    
    
    
    
    18,496Deferred income taxes, net
    
    
    
    
    
    
    349
    
    
    
    1,257
    
    
    
    667
    
    
    
    (1,257
    )
    
    
    1,016Total liabilities
    
    
    213,125
    
    
    
    12,950
    
    
    
    130,632
    
    
    
    122,323
    
    
    
    (3,826
    )
    
    
    475,204Redeemable Series A Preferred Stock
    
    
    91,312
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,312Shareholders equity (deficit)
    
    
    (180,770
    )
    
    
    10,104
    
    
    
    110,993
    
    
    
    23,825
    
    
    
    (144,924
    )
    
    
    (180,772
    )Total liabilities and shareholders
equity (deficit)
    
    $
    123,667
    
    
    $
    23,054
    
    
    $
    241,625
    
    
    $
    146,148
    
    
    $
    (148,750
    )
    
    $
    385,744
 19




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 14. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended April 3, 2005 MSXIMSXI
    
    
    Limited
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    MSXI(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Fiscal Quarter Ended April 3, 2005Net sales
    
    $
    
    
    
    $
    5,985
    
    
    $
    80,869
    
    
    $
    26,272
    
    
    $
    (28
    )
    
    $
    113,098Cost of sales
    
    
    
    
    
    
    4,537
    
    
    
    69,962
    
    
    
    21,678
    
    
    
    (28
    )
    
    
    96,149Gross profit
    
    
    
    
    
    
    1,448
    
    
    
    10,907
    
    
    
    4,594
    
    
    
    
    
    
    
    16,949Selling, general and administrative expenses
    
    
    
    
    
    
    547
    
    
    
    7,198
    
    
    
    1,728
    
    
    
    
    
    
    
    9,473Restructuring and severance costs
    
    
    
    
    
    
    
    
    
    
    132
    
    
    
    25
    
    
    
    
    
    
    
    157Income (loss) from continuing operations
before interest, income taxes, and equity in
affiliates
    
    
    
    
    
    
    901
    
    
    
    3,577
    
    
    
    2,841
    
    
    
    
    
    
    
    7,319Interest expense (income), net
    
    
    6,253
    
    
    
    737
    
    
    
    1,291
    
    
    
    223
    
    
    
    
    
    
    
    8,504Income (loss) from continuing operations
before income taxes, and equity in affiliates
    
    
    (6,253
    )
    
    
    164
    
    
    
    2,286
    
    
    
    2,618
    
    
    
    
    
    
    
    (1,185
    )Income tax provision (benefit)
    
    
    (808
    )
    
    
    
    
    
    
    827
    
    
    
    1,259
    
    
    
    
    
    
    
    1,278Equity in affiliates
    
    
    2,982
    
    
    
    
    
    
    
    1,523
    
    
    
    164
    
    
    
    (4,669
    )
    
    
    Income (loss) from continuing operations
    
    
    (2,463
    )
    
    
    164
    
    
    
    2,982
    
    
    
    1,523
    
    
    
    (4,669
    )
    
    
    (2,463
    )Income from discontinued operations, net
    
    
    (12,373
    )
    
    
    198
    
    
    
    (12,373
    )
    
    
    (12,373
    )
    
    
    24,548
    
    
    
    (12,373
    )Net income (loss)
    
    $
    (14,836
    )
    
    $
    362
    
    
    $
    (9,391
    )
    
    $
    (10,850
    )
    
    $
    19,879
    
    
    $
    (14,836
    )Fiscal Quarter Ended April 4, 2004Net sales
    
    $
    
    
    
    $
    5,843
    
    
    $
    97,399
    
    
    $
    22,724
    
    
    $
    (576
    )
    
    $
    125,390Cost of sales
    
    
    
    
    
    
    4,277
    
    
    
    87,569
    
    
    
    16,241
    
    
    
    (576
    )
    
    
    107,511Gross profit
    
    
    
    
    
    
    1,566
    
    
    
    9,830
    
    
    
    6,483
    
    
    
    
    
    
    
    17,879Selling, general and administrative expenses
    
    
    
    
    
    
    993
    
    
    
    6,991
    
    
    
    1,370
    
    
    
    
    
    
    
    9,354Income from continuing operations
before interest, income taxes, and
equity in affiliates
    
    
    
    
    
    
    573
    
    
    
    2,839
    
    
    
    5,113
    
    
    
    
    
    
    
    8,525Interest expense (income), net
    
    
    6,667
    
    
    
    (216
    )
    
    
    1,099
    
    
    
    6
    
    
    
    
    
    
    
    7,556Income (loss) from continuing operations
before income taxes, and equity in affiliates
    
    
    (6,667
    )
    
    
    789
    
    
    
    1,740
    
    
    
    5,107
    
    
    
    
    
    
    
    969Income tax provision (benefit)
    
    
    (622
    )
    
    
    422
    
    
    
    436
    
    
    
    684
    
    
    
    
    
    
    
    920Minority interests and equity in affiliates,
net of taxes
    
    
    6,095
    
    
    
    
    
    
    
    4,789
    
    
    
    367
    
    
    
    (11,251
    )
    
    
    Income (loss) from continuing operations
    
    
    50
    
    
    
    367
    
    
    
    6,093
    
    
    
    4,790
    
    
    
    (11,251
    )
    
    
    49Income (loss) from discontinued operations
    
    
    345
    
    
    
    602
    
    
    
    345
    
    
    
    345
    
    
    
    (1,292
    )
    
    
    345Net income (loss)
    
    $
    395
    
    
    $
    969
    
    
    $
    6,438
    
    
    $
    5,135
    
    
    $
    (12,543
    )
    
    $
    394
 20




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 14. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
for the fiscal quarter ended April 3, 2005 MSXIMSXI
    
    
    Limited
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    MSXI(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash flows from operating activities:Net income (loss)
    
    $
    (14,836
    )
    
    $
    362
    
    
    $
    (9,391
    )
    
    $
    (10,850
    )
    
    $
    19,879
    
    
    $
    (14,836
    )Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:Equity in affiliates, including discontinued
operations
    
    
    9,391
    
    
    
    
    
    
    
    10,850
    
    
    
    (362
    )
    
    
    (19,879
    )
    
    
    Depreciation
    
    
    
    
    
    
    300
    
    
    
    820
    
    
    
    974
    
    
    
    
    
    
    
    2,094Goodwill impairment charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,131
    
    
    
    

    
    
    
    7,131Amortization of debt issuance costs
    
    
    1,030
    
    
    
    112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,142Deferred taxes
    
    
    (818
    )
    
    
    1
    
    
    
    818
    
    
    
    (317
    )
    
    
    
    
    
    
    (316
    )(Gain) on sale/disposal of property
and equipment
    
    
    
    
    
    
    (3
    )
    
    
    (5
    )
    
    
    
    
    
    
    
    
    
    
    (8
    )(Increase) decrease in receivable, net
    
    
    
    
    
    
    341
    
    
    
    2,716
    
    
    
    10,370
    
    
    
    
    
    
    
    13,427(Increase) decrease in inventory
    
    
    
    
    
    
    
    
    
    
    (444
    )
    
    
    126
    
    
    
    
    
    
    
    (318
    )(Increase) decrease in prepaid expenses
and other assets
    
    
    
    
    
    
    (69
    )
    
    
    (544
    )
    
    
    (882
    )
    
    
    
    
    
    
    (1,495
    )Increase (decrease) in current liabilities
    
    
    (6,174
    )
    
    
    (864
    )
    
    
    (5,861
    )
    
    
    (861
    )
    
    
    
    
    
    
    (13,760
    )Other, net
    
    
    
    
    
    
    28
    
    
    
    95
    
    
    
    (814
    )
    
    
    
    
    
    
    (691
    )Net cash provided by (used for) operating activities
    
    
    (11,407
    )
    
    
    208
    
    
    
    (946
    )
    
    
    4,515
    
    
    
    
    
    
    
    (7,630
    )Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (130
    )
    
    
    (305
    )
    
    
    (426
    )
    
    
    
    
    
    
    (861
    )Payments for contingent consideration
    
    
    
    
    
    
    
    
    
    
    (604
    )
    
    
    
    
    
    
    
    
    
    
    (604
    )Proceeds from sale/disposal of property and
equipment
    
    
    
    
    
    
    3
    
    
    
    7
    
    
    
    85
    
    
    
    
    
    
    
    95Net cash used for investing activities
    
    
    
    
    
    
    (127
    )
    
    
    (902
    )
    
    
    (341
    )
    
    
    
    
    
    
    (1,370
    )Cash flows from financing activities:Transactions with subsidiaries
    
    
    3,684
    
    
    
    2,742
    
    
    
    (3,896
    )
    
    
    (2,530
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    (16
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16
    )Changes in revolving debt, net
    
    
    2,089
    
    
    
    (588
    )
    
    
    
    
    
    
    (6,051
    )
    
    
    
    
    
    
    (4,550
    )Changes in book overdrafts, net
    
    
    
    
    
    
    
    
    
    
    8,067
    
    
    
    
    
    
    
    
    
    
    
    8,067Net cash provided by (used for) financing activities
    
    
    5,757
    
    
    
    2,154
    
    
    
    4,171
    
    
    
    (8,581
    )
    
    
    
    
    
    
    3,501Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    (797
    )
    
    
    
    
    
    
    435
    
    
    
    
    
    
    
    (362
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    (5,650
    )
    
    
    1,438
    
    
    
    2,323
    
    
    
    (3,972
    )
    
    
    
    
    
    
    (5,861
    )Balance, beginning of period
    
    
    5,650
    
    
    
    18
    
    
    
    11,570
    
    
    
    17,139
    
    
    
    
    
    
    
    34,377Balance, end of period
    
    $
    
    
    
    $
    1,456
    
    
    $
    13,893
    
    
    $
    13,167
    
    
    $
    
    
    
    $
    28,516
 21




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 14. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal quarter ended April 4, 2004 MSXIMSXI
    
    
    Limited
    
    
    Guarantor
    
    
    Non-Guarantor
    
    
    
    
    
    
    MSXI(Parent)
    
    
    (Issuer)
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    Consolidated(in thousands)Cash 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, including discontinued
operations
    
    
    (6,439
    )
    
    
    
    
    
    
    (5,134
    )
    
    
    (968
    )
    
    
    12,541
    
    
    
    Depreciation
    
    
    
    
    
    
    401
    
    
    
    1,212
    
    
    
    768
    
    
    
    
    
    
    
    2,381Amortization of debt issuance costs
    
    
    1,028
    
    
    
    79
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,107Deferred taxes
    
    
    (572
    )
    
    
    116
    
    
    
    573
    
    
    
    542
    
    
    
    
    
    
    
    659Loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    (70
    )
    
    
    3
    
    
    
    12
    
    
    
    
    
    
    
    (55
    )(Increase) decrease in receivable, 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
    )Loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    66
    
    
    
    2
    
    
    
    10
    
    
    
    
    
    
    
    78Other, net
    
    
    
    
    
    
    
    
    
    
    294
    
    
    
    
    
    
    
    
    
    
    
    294Net cash 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
 22




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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 Our business segments are affected by differing industry dynamics. As a result of trends, we
have experienced an overall revenue decline during the past several years. Our revenue remains
under pressure from continuing cost containment actions at our major customers. We believe that
automotive OEM budgets will continue to be challenged due to excess capacity, competition for
market share, and pressure to reduce costs. 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 and new customers in the automotive industry, an important
strategy is to expand our customer relationships to other industries. Our targeted markets include
transportation, medical products, and financial services, among others. Although we cannot provide
assurance about the future, our actions are expected to enhance profitability on existing business
and increase operating efficiencies while we work to expand our customer base. We are continually enhancing our overall business strategy by evaluating the rate of return on
our portfolio of service offerings. During the fourth quarter of fiscal 2004, we determined we
would seek to divest substantially all of our engineering and staffing businesses in Europe.
During the first quarter of 2005, we determined we would seek to divest our technical and
commercial publishing business primarily in Italy. Management will continue to explore and
evaluate additional development alternatives to focus the company on business units with excellent
growth prospects, particularly in the areas of warranty and dealership consulting. Operations
classified as discontinued at April 3, 2005 have been excluded from the discussion of continuing
operations and are discussed separately under the heading Discontinued Operations. Net Sales For the first quarter of fiscal
2005, consolidated net sales decreased $12.3 million, or 9.8%,
from $125.4 million in the first quarter of fiscal 2004 to $113.1 million during fiscal 2005.
First quarter 2005 reflect one week less sales for selected
businesses due to the 53rd week included in the first quarter of 2004
as a result of our fiscal calendar. This reduction in billable days
along with reduced demand from our traditional automotive customers
resulted in a 9.8% reduction in net sales from continuing operations. Our sales by segment, net of intercompany sales, were as follows: Fiscal Quarter EndedApril 3,
    
    
    April 4,
    
    
    (Dec) vs. 20042005
    
    
    2004
    
    
    $
    
    
    %(dollars in thousands)Business Services
    
    $
    43,169
    
    
    $
    45,694
    
    
    $
    (2,525
    )
    
    
    (5.5
    %)Human Capital
Services
    
    
    46,741
    
    
    
    51,401
    
    
    
    (4,660
    )
    
    
    (9.1
    %)Engineering Services
    
    
    23,188
    
    
    
    28,295
    
    
    
    (5,107
    )
    
    
    (18.0
    %)Total net sales
    
    $
    113,098
    
    
    $
    125,390
    
    
    $
    (12,292
    )
    
    
    (9.8
    %)
 The decline in business services
reflects reduced volumes in our U.S. programs offset by
favorable volumes on warranty and retail improvement programs in Europe. U.S. program volumes have
declined primarily due to the exit/cancellation of certain non-core or low margin business.
Several new programs were launched in late 2004 and during the first quarter of 2005, partially offsetting
these losses. European volume improvements reflects the impact of
new programs and included a
$1.4 million benefit from favorable exchange rates versus 2004. The decline in human capital services primarily reflects reduced volumes in our engineering
staffing and IT and technical staffing service. Volume reductions reflect a 11.6% decline in
automotive contract staffing volumes while other human capital services volumes decreased 5.1%
versus fiscal 2004. The decline in automotive staffing volumes reflect continued pressures from
auto clients to reduce costs in response to lower sales volumes. Sales of engineering services reflect declining volumes in outsourced OEM engineering programs
and specialty vehicle programs due to reduced OEM budgets. 23




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Operating Profit Our consolidated gross profit, selling, general and administrative expenses and operating
income for the periods presented were: Fiscal Quarter EndedInc / (Dec) vs. 2004April 3,
    
    
    April 4,2005
    
    
    2004
    
    
    $
    
    
    %(dollars in thousands)Gross profit
    
    $
    16,949
    
    
    $
    17,879
    
    
    $
    (930
    )
    
    
    (5.2
    )%% of net sales
    
    
    15.0
    %
    
    
    14.3
    %
    
    
    n/a
    
    
    
    n/aSelling, general and administrative expenses
    
    $
    9,473
    
    
    $
    9,354
    
    
    $
    119
    
    
    
    1.3
    %% of net sales
    
    
    8.4
    %
    
    
    7.5
    %
    
    
    n/a
    
    
    
    n/aOperating income (loss)
    
    $
    (1,185
    )
    
    $
    969
    
    
    $
    (2,154
    )
    
    
    (222.3
    %)% of net sales
    
    
    (1.0
    %)
    
    
    0.8
    %
    
    
    n/a
    
    
    
    n/a
 Overall
gross profit declined quarter over quarter due to reduced volumes across our business
segments. Such volume reductions resulted in a decrease in gross margins of approximately $1.7
million versus 2004. The impact of reduced volumes was partially offset by improved profits on
2005 programs due to reductions in operating costs and displacement of lower margin programs. As a
result of profit improvement initiatives gross margin as a percent of sales improved versus 2004.
Selling, general and administrative costs increased as a percentage of sales from 2004 as a result
of reduced volumes and increased investment in sales initiatives
during 2005. We will continue to review such costs relative to projected levels of business
and implement additional reductions as necessary. Operating results during 2005 also include
restructuring costs totaling $0.2 million related to employment related actions taken during the
first quarter. Interest expense Interest expense increased from $7.6 million during the first quarter of 2004 to $8.5 million
during the first quarter of 2005, a $0.9 million increase. The increase in interest expense
compared to 2004 primarily resulted from the impact of foreign exchange rates on the recorded value
of U.S. dollar denominated debt issued by our U.K. subsidiary. Such rates resulted in an adverse
impact in the first quarter of 2005 and a favorable impact in the
comparable period of 2004. 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 3, 2005 differs from the 35%
federal statutory rate primarily because of these valuation allowances. Tax expense for the period
relates primarily to earnings in foreign jurisdictions for which valuation allowances have not
previously been recorded. Discontinued Operations Selected European businesses are reflected as discontinued operations and eliminated from the
on-going operations of MSXI due to managements decision to divest such operations. Operations
reflected as discontinued include substantially all engineering and staffing business in Europe as
well as our technical and commercial publishing business primarily in Italy. Management has
determined these businesses are no longer core to the companys strategy due to changing
competitive requirements, customer demands and our focus on
businesses with higher growth and
return prospects. For all businesses reflected as discontinued a process for selling such
operations has been initiated and prospective buyers have been identified. In accordance with SFAS
No. 144, discontinued operations have been eliminated from the on-going operations of MSXI. Results of discontinued
operations include restructuring charges totaling $6.6 million related
primarily to employment actions taken in our technical and commercial publishing business in Italy.
During the first quarter of 2005 we entered into an agreement with various trade union organizations
that establishes a program for permanent employment reductions affecting 124 personnel. Affected
employees are expected to utilize the program in the
first half of 2006. 24




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Results of discontinued operations also reflect a goodwill impairment charge totaling $7.1
million related to our technical and commercial publishing business in Italy. The impairment
charge was calculated based on the estimated fair value of this business versus the carrying value
of assets held for sale. The fair value of such assets was estimated based upon market values
contemplated in the proposed sale. 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 used for operating activities was $7.6 million for the first
quarter of fiscal 2005 compared to net cash provided by operating activities of $10.4 million
during fiscal 2004. The reduction in cash from operating activities primarily reflects
improvements in accounts receivable collections offset by negative changes in working capital due
to the timing of vendor payments. Due to the timing of vendor payments a significant portion of
our vendor payments are reflected as bank overdrafts during 2005 versus accounts payable during
2004. In addition, operating cash flows in 2005 reflect the payment of management bonuses totaling
$2.4 million. The remaining reduction in operating cash flows reflects lower earnings versus 2004.
As of April 3, 2005, $16.5 million of cash balances were held on behalf of a vendor management solutions partner. Subsequent to the first fiscal quarter in 2005, approximately
$13.0 million of such balances were paid to the partner in accordance with normal terms. Investing Activities.Net cash used for investing activities was $1.4 million for the first
quarter of 2005 compared to net cash provided by investing activities of $30 thousand for the first
quarter of 2004. During the first quarter of 2005, net cash used for investing activities included
a $0.6 million payment related to the settlement of a contingent earnout obligation. Financing Activities. Net cash provided by financing activities was $3.5 million for the first
quarter of 2005 compared to net cash used for financing activities of $4.6 million for the first
quarter of 2004. Financing activities during 2005 also includes an increase in book overdrafts, of
$8.1 million, compared to 2004 due to the timing of vendor payments. Liquidity and Available Financings Our total indebtedness as of April 3, 2005 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 $5.3 million at April 3, 2005. Available borrowings under our credit facility as of April 3, 2005 are subject to accounts
receivable balance requirements. As of April 3, 2005 we have $35.2 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, including further expected changes to arrangements
in Italy, provide us with sufficient financial flexibility to fund our operations, debt service
requirements and contingent earnout obligations (see part II, Item I. Legal Proceedings) through
the term of our senior credit facility, although there can be no assurance that will be the case.
We expect to obtain a suitable extension to our amended and restated credit facility on or before
its expiration.
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 25




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 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. New Accounting Pronouncements SFAS No. 123-R,:Accounting for Stock-Based Compensation- Revised:Issued by the FASB in
December 2004, this standard establishes the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods and services that are based on the fair value of
the entitys equity instruments or that may be settled by the issuance of those equity instruments.
The new statement is now effective for public companies for annual periods beginning after June
15, 2005. MSXI is in the process of studying this statement, and has yet to determine the effects,
if any, on its consolidated financial statements. Forward  Looking Statements Certain of the statements made in this report on Form 10-Q, including those concerning
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 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. 26




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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. There have been no significant changes in internal control over financial reporting that have
materially affected, or is reasonably likely to materially affect our internal control over
financial reporting. 27




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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 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. In October 2004, the state court granted MSXIs motion to vacate the
arbitration award and ordered that the matter be re-arbitrated before a new arbitrator. The
opposing party has filed an appeal with the Michigan Court of Appeals. In addition, we and our
subsidiaries are parties to various legal proceedings arising in the normal course of business.
While litigation is subject to inherent uncertainties, management currently believes that the
ultimate outcome of these proceedings, individually and in the aggregate, will not have a material
adverse effect on the Companys consolidated financial condition, results of operation or cash
flows. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the first quarter of fiscal 2005 the following matter was ratified and approved by the
consent of a majority of the holders of our outstanding common stock:  
    The following persons were elected to the MSX International, Inc. Board of Directors: Robert Netolicka
  Erwin H. Billig
  David E. Cole
  Charles E. Corpening
  Michael A. Delaney
  Richard J. Puricelli
  Thomas Stallkamp 
 ITEM 6. EXHIBITS (a) Exhibits: 10.1
    
    
    Summary of the Collective Dismissal Agreement between Satiz
Srl and the Trade Union Organizations.10.2
    
    
    Intercreditor Agreement.31.1
    
    
    Certification of Chief Financial Officer pursuant to rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934, as amended.31.2
    
    
    Certification of Chief Executive Officer pursuant to rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of
1934, as amended.32.1
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes  Oxley Act of 2002.
 28




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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 18, 2005 MSX INTERNATIONAL, INC.
(Registrant) By:
    
    /s/ Frederick K. MinturnFrederick K. MinturnExecutive Vice President andChief Financial Officer
 (Chief accounting officer
and authorized signatory) 29




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EXHIBIT INDEX EX
    
    DESCRIPTION10.1
    
    Summary of the Collective Dismissal Agreement between Satiz
Srl and the Trade Union Organizations.10.2
    
    Intercreditor Agreement.31.1
    
    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.31.2
    
    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.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 906 of the Sarbanes  Oxley Act of 2002.
 30