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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One)  [X]
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended October 3, 2004 OR  [ ]
    TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from     to Commission File Number: 333-49821 MSX International, Inc.  Delaware
    
    38-3323099(State or other jurisdictionof 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 [X]   No [ ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12(b)-2 of the Securities and Exchange Act of 1934). Yes [ ]  No [X] At November 15, 2004, 486,350 shares of Class A common stock of the Registrant
were outstanding.




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MSX INTERNATIONAL, INC.INDEX  
 PagesPART I.FINANCIAL INFORMATIONITEM 1.Financial Statements (unaudited):Condensed Consolidated Balance Sheets as of October 3, 2004 and December 28, 2003
    
    
    2Condensed Consolidated Statements of Operations for the fiscal quarters and fiscal nine months ended October 3, 2004 and September 28, 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for the fiscal nine months ended October 3, 2004 and September 28, 2003
    
    
    4Condensed Notes to Consolidated Financial Statements
    
    
    5ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24ITEM 4.Controls and Procedures
    
    
    29PART II.OTHER INFORMATIONITEM 1.Legal Proceedings
    
    
    30ITEM 5.Other Information
    
    
    30ITEM 6. Exhibits
    
    
    30SIGNATURE
    
    
    31Certification of Chief Financial Officer Pursuant to Section 302Certification of Chief Executive Officer Pursuant to Section 302Certification Pursuant to 18 U.S.C. Section 1350
  1




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PART I. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS
 MSX INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)as of October 3, 2004 and December 28, 2003 October 3,
    
    December 28,2004
    
    2003(dollars in thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    32,054
    
    
    $
    36,650Accounts receivable, net (Note 3)
    
    
    171,180
    
    
    
    219,219Inventory
    
    
    9,235
    
    
    
    8,618Prepaid expenses and other assets
    
    
    8,111
    
    
    
    6,218Deferred income taxes, net
    
    
    3,946
    
    
    
    6,896Total current assets
    
    
    224,526
    
    
    
    277,601Property and equipment, net
    
    
    13,543
    
    
    
    18,480Goodwill, net (Note 4)
    
    
    133,646
    
    
    
    129,624Other assets
    
    
    11,855
    
    
    
    13,268Deferred income taxes, net
    
    
    934
    
    
    
    Total assets
    
    $
    384,504
    
    
    $
    438,973LIABILITIES AND SHAREHOLDERS DEFICITCurrent liabilities:Notes payable and current portion of long-term debt (Note 5)
    
    $
    8,425
    
    
    $
    10,519Accounts payable and drafts
    
    
    124,008
    
    
    
    149,051Accrued payroll and benefits
    
    
    29,444
    
    
    
    29,625Other accrued liabilities
    
    
    50,588
    
    
    
    78,769Total current liabilities
    
    
    212,465
    
    
    
    267,964Long-term debt (Note 5)
    
    
    252,879
    
    
    
    249,742Long-term deferred compensation and other liabilities
    
    
    13,223
    
    
    
    12,546Deferred income taxes, net
    
    
    
    
    
    
    1,618Total liabilities
    
    
    478,567
    
    
    
    531,870Commitments and contingencies
    
    
    
    
    
    
    Series A Preferred Stock (Note 6)
    
    
    88,983
    
    
    
    81,812Shareholders deficit:Common Stock, $.01 par value, 5,000,000 aggregate shares of
Class A and Class B Common Stock authorized; 486,350
shares of Class A Common Stock issued and outstanding
    
    
    5
    
    
    
    5Additional paid-in-capital
    
    
    (24,881
    )
    
    
    (24,881
    )Common stock purchase warrants
    
    
    750
    
    
    
    750Accumulated other comprehensive loss (Note 7)
    
    
    (3,009
    )
    
    
    (2,749
    )Accumulated deficit
    
    
    (155,911
    )
    
    
    (147,834
    )Total shareholders deficit
    
    
    (183,046
    )
    
    
    (174,709
    )Total liabilities and shareholders deficit
    
    $
    384,504
    
    
    $
    438,973
 The accompanying notes
are an integral part of the consolidated financial statements. 2




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MSX INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)for the fiscal quarters and fiscal nine months ended October 3, 2004 and September 28, 2003 Fiscal Quarter Ended
    
    Fiscal Nine Months EndedOctober 3,
    
    September 28,
    
    October 3,
    
    September 28,2004
    
    2003
    
    2004
    
    2003(in thousands)Net sales
    
    $
    147,326
    
    
    $
    167,860
    
    
    $
    468,541
    
    
    $
    536,946Cost of sales
    
    
    129,903
    
    
    
    149,480
    
    
    
    411,641
    
    
    
    474,517Gross profit
    
    
    17,423
    
    
    
    18,380
    
    
    
    56,900
    
    
    
    62,429Selling, general and administrative expenses
    
    
    10,692
    
    
    
    15,232
    
    
    
    32,812
    
    
    
    47,429Restructuring and severance costs
    
    
    
    
    
    
    2,002
    
    
    
    
    
    
    
    3,902Loss on asset impairment and sale
    
    
    
    
    
    
    1,797
    
    
    
    
    
    
    
    1,893Operating income (loss)
    
    
    6,731
    
    
    
    (651
    )
    
    
    24,088
    
    
    
    9,205Interest expense, net
    
    
    8,068
    
    
    
    9,406
    
    
    
    24,223
    
    
    
    22,713Loss before income taxes, minority
interests and equity in affiliates
    
    
    (1,337
    )
    
    
    (10,057
    )
    
    
    (135
    )
    
    
    (13,508
    )Income tax provision (benefit)
    
    
    (153
    )
    
    
    14,764
    
    
    
    771
    
    
    
    14,998Less minority interests and equity in
affiliates, net of taxes
    
    
    
    
    
    
    (40
    )
    
    
    
    
    
    
    195Net loss
    
    
    (1,184
    )
    
    
    (24,861
    )
    
    
    (906
    )
    
    
    (28,311
    )Accretion for redemption of preferred stock
    
    
    (2,329
    )
    
    
    (2,329
    )
    
    
    (7,171
    )
    
    
    (6,784
    )Net loss available to common shareholders
    
    $
    (3,513
    )
    
    $
    (27,190
    )
    
    $
    (8,077
    )
    
    $
    (35,095
    )
 The accompanying notes are an integral part of the consolidated financial statements. 3




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MSX INTERNATIONAL, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)for the fiscal nine months ended October 3, 2004 and September 28, 2003 Fiscal Nine Months EndedOctober 3,
    
    September 28,2004
    
    2003(in thousands)Cash flows from operating activities:Net loss
    
    $
    (906
    )
    
    $
    (28,311
    )Adjustments to reconcile net loss
to net cash provided by operating activities:Minority interests and equity in affiliates
    
    
    
    
    
    
    (195
    )Loss on asset impairment and sale
    
    
    
    
    
    
    1,893Depreciation
    
    
    6,695
    
    
    
    13,653Amortization of debt issuance costs and non-cash interest
    
    
    3,268
    
    
    
    5,260Deferred taxes
    
    
    398
    
    
    
    (12,188
    )(Gain) loss on sale/disposal of property and equipment
    
    
    (79
    )
    
    
    627(Increase) decrease in receivables, net
    
    
    48,039
    
    
    
    (14,919
    )(Increase) decrease in inventory
    
    
    (618
    )
    
    
    (1,642
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (1,893
    )
    
    
    (991
    )Increase (decrease) in current liabilities
    
    
    (52,884
    )
    
    
    15,229Other, net
    
    
    302
    
    
    
    (334
    )Net cash provided by operating activities
    
    
    2,322
    
    
    
    2,458Cash flows from investing activities:Capital expenditures
    
    
    (1,907
    )
    
    
    (4,465
    )Proceeds from sale/disposal of property and equipment
    
    
    304
    
    
    
    2,150Other, net
    
    
    489
    
    
    
    (342
    )Net cash used for investing activities
    
    
    (1,114
    )
    
    
    (2,657
    )Cash flows from financing activities:Proceeds from issuance of debt
    
    
    
    
    
    
    99,854Repayment of debt
    
    
    
    
    
    
    (65,798
    )Debt issuance costs
    
    
    (398
    )
    
    
    (6,014
    )Changes in revolving debt, net
    
    
    (636
    )
    
    
    (15,510
    )Changes in book overdrafts, net
    
    
    (4,322
    )
    
    
    (15,241
    )Net cash used for financing activities
    
    
    (5,356
    )
    
    
    (2,709
    )Effect of foreign exchange rate changes on cash and cash
equivalents
    
    
    (448
    )
    
    
    620Cash and cash equivalents:Decrease for the period
    
    
    (4,596
    )
    
    
    (2,288
    )Balance, beginning of period
    
    
    36,650
    
    
    
    10,935Balance, end of period
    
    $
    32,054
    
    
    $
    8,647
 The accompanying notes are an integral part of the consolidated financial statements. 4




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MSX International, Inc. 
 Notes to Consolidated Financial Statements (Unaudited)
  1. Organization and Basis of Presentation: The accompanying financial statements present the consolidated assets and
liabilities and results of operations of MSX International, Inc. and its
majority owned subsidiaries (MSXI). MSXI is a holding company owned by
Citicorp and affiliates and certain members of management. We are principally
engaged in providing technical business services to automobile manufacturers
and suppliers and other industries primarily in North America and Europe. We
utilize a 52-53 week fiscal year, which ends on the Sunday nearest December 31. All intercompany transactions and balances have been eliminated. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting of normal recurring items, which
are necessary for a fair presentation. The operating results for the fiscal
quarters and fiscal nine months ended October 3, 2004 and September 28, 2003
are not necessarily indicative of the results of operations for the entire
year. Reference should be made to the consolidated financial statements and
notes thereto included in our Annual Report on Form 10-K for the fiscal year
ended December 28, 2003. Certain prior year amounts have been reclassified to
conform to the presentation adopted during the current period. 2. Restructuring and Severance: During 2003 we executed several restructuring actions to reduce operating
costs and streamline our administrative infrastructure. No significant charges
were recorded during the first nine months of 2004. These obligations are
expected to be substantially paid by the second quarter of fiscal 2005. The
following table shows the activity related to restructuring reserves for the
fiscal nine months ended October 3, 2004: OtherTermination
    
    Facility
    
    ContractualBenefits
    
    Consolidation
    
    Costs
    
    Other
    
    TotalReserve at December 28, 2003
    
    $
    8,032
    
    
    $
    5,954
    
    
    $
    3,085
    
    
    $
    265
    
    
    $
    17,336Payments in fiscal 2004
    
    
    (5,973
    )
    
    
    (5,157
    )
    
    
    (2,631
    )
    
    
    (203
    )
    
    
    (13,963
    )Reserve at October 3, 2004
    
    $
    2,059
    
    
    $
    797
    
    
    $
    454
    
    
    $
    62
    
    
    $
    3,373
 3. Accounts Receivable: Accounts receivable are presented net of aggregate allowances for doubtful
accounts of $2.8 million and $3.0 million at October 3, 2004 and December 28,
2003, respectively. Accounts receivable include both billed and unbilled
receivables. Unbilled receivables amounted to $52.6 million and $59.1 million
at October 3, 2004 and December 28, 2003, respectively. All such billings are
expected to be collected within the ensuing year. Accounts receivable also
include the portion of our billings for certain vendor management programs
attributable to services provided by our vendors, which are passed on to our
customers. These amounts totaled $47.1 million as of October 3, 2004 and $48.7
million as of December 28, 2003. A corresponding liability to our vendors for
these amounts is recorded in accounts payable at the time the receivable is
recognized. 5




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 4. Goodwill, net: The following summarizes changes in goodwill balances during the fiscal nine months ended October 3, 2004: Human CapitalServices
    
    Business Services
    
    Engineering Services
    
    TotalBalance at December 28, 2003
    
    $
    97,392
    
    
    $
    32,232
    
    
    $
    
    
    
    $
    129,624Goodwill recorded during the period
    
    
    
    
    
    
    3,800
    
    
    
    215
    
    
    
    4,015Translation changes
    
    
    1
    
    
    
    6
    
    
    
    
    
    
    
    7Balance at October 3, 2004
    
    $
    97,393
    
    
    $
    36,038
    
    
    $
    215
    
    
    $
    133,646
 During the first quarter of fiscal 2004 we recorded a contingent earnout
obligation totaling $3.8 million related to a prior acquisition. Payment of
this obligation is pending resolution of a dispute regarding the earnout. 5. Debt: Debt is comprised of the following: Interest Rates at
    
    Outstanding atOctober 3,
    
    December 28,
    
    October 3,
    
    December 28,2004
    
    2003
    
    2004
    
    2003Senior credit facility
    
    
    7.50
    %
    
    
    8.55
    %
    
    $
    1,758
    
    
    $
    297Senior secured notes, net of $.5 million unamortized discount
    
    
    11.00
    %
    
    
    11.00
    %
    
    
    75,028
    
    
    
    74,911Mezzanine term notes, net of $.5 million unamortized discount
    
    
    11.50
    %
    
    
    11.50
    %
    
    
    24,462
    
    
    
    24,325Fourth lien term notes
    
    
    10.00
    %
    
    
    10.00
    %
    
    
    19,224
    
    
    
    17,802Senior subordinated notes
    
    
    11.375
    %
    
    
    11.375
    %
    
    
    130,000
    
    
    
    130,000Satiz facilities
    
    
    4.98
    %
    
    
    4.67
    %
    
    
    8,425
    
    
    
    10,519Other
    
    
    7.00
    %
    
    
    7.00
    %
    
    
    2,407
    
    
    
    2,407261,304
    
    
    
    260,261Less current portion
    
    
    
    
    
    
    
    
    
    
    8,425
    
    
    
    10,519Total long-term debt
    
    
    
    
    
    
    
    
    
    $
    252,879
    
    
    $
    249,742
 The company was notified by its largest finance source in Italy, Fidis
S.p.a., of its intent to terminate the current financing arrangement with Satiz
S.r.l. in 2004. At October 3, 2004 $8.3 million was drawn on the facility,
collateralized by a corresponding amount of accounts receivable from our
largest Italian customer. Recently, the company concluded an arrangement with
an alternative financing source to replace the majority but not all of the
existing arrangement with Fidis. We have also negotiated improved payment
terms with the customer. We continue to seek additional financing. 6




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 6. Series A Preferred Stock: Effective December 29, 2003 the company amended its Restated Certificate
of Incorporation to modify the redemption provisions of our 12% Series A
Cumulative Preferred Stock (the Preferred Stock). As a result of the
amendment, the Preferred Stock is now redeemable to the extent that funds are
legally available, on or after
December 31, 2008, at the option of the company or the shareholder. As of October 3, 2004 and December 28, 2003 there are 359,448 shares of
the Preferred Stock outstanding with a stated value of $100 per share or about
$36 million in total. We are authorized to issue up to 1,500,000 shares of
Preferred Stock, divided into two classes: 500,000 shares of Series A Preferred
Stock, par value $0.01, and 1,000,000 shares of New Preferred Stock, par value
$0.01. As of October 3, 2004, dividends accrued totaled $53 million, however
we have not declared or paid any dividends. We may not declare or pay any
dividends or other distribution with respect to any common stock or other class
or series of stock ranking junior to the Preferred Stock without first
complying with restrictions specified in the Amended and Restated Stockholders
Agreement. Our ability to pay cash dividends, and to acquire or redeem the
preferred stock, is subject to restrictions contained in our debt agreements. 7. Comprehensive Income (Loss): Our comprehensive income (loss) was: Fiscal Quarter Ended
    
    Fiscal Nine Months EndedOctober 3,
    
    Sept. 28,
    
    October 3,
    
    Sept. 28,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (1,184
    )
    
    $
    (24,861
    )
    
    $
    (906
    )
    
    $
    (28,311
    )Other
comprehensive income (loss) -
foreign currency translation adjustments
    
    
    1,216
    
    
    
    188
    
    
    
    (260
    )
    
    
    5,387Comprehensive income (loss)
    
    $
    32
    
    
    $
    (24,673
    )
    
    $
    (1,166
    )
    
    $
    (22,924
    )
 8. Income Taxes: We currently provide valuation allowances for a significant portion of the
companys deferred tax assets. The effective tax rate for the quarter and nine
months ended October 3, 2004 differs from the 35% federal statutory rate
primarily because of these valuation allowances. The income tax benefit for
the quarter ended October 3, 2004 relates primarily to improved performance in
a foreign operation, which resulted in a reduction to a valuation allowance
previously recorded for this operation totaling $626 thousand. The valuation allowance benefit was
partially offset by tax on earnings in certain foreign jurisdictions for which
valuation allowances were not previously required. For the fiscal nine months
ended October 3, 2004 taxable earnings in certain foreign jurisdictions
exceeded benefits recognized from reductions of valuation allowances
that totaled $1.6 million. 7




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MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 9. Segment Information: MSXI is a global provider of technical business services to the automotive
and other industries. Our business includes: human capital services, business
services and engineering services. Human capital services include a full range
of staffing solutions, including direct support of our engineering and business
services. Our business services include solutions to our customers product
quality, aftermarket care, and communication needs. Engineering services offer
a full range of total product, custom, or single point engineering solutions.
Certain operations within each of our segments have been aggregated following
the provisions of SFAS No. 131 due to the similar characteristics of their
operations, including the nature of their service offerings, processes
supporting the delivery of the services, common customers, and marketing and
sales processes. The accounting policies of each of our segments are the same as those for
MSXI except that the financial results for each segment are presented using a
management approach. We evaluate performance based on earnings before
interest, amortization and non-cash charges, and taxes, including the Michigan
Single Business Tax and other similar taxes (EBITA). The results of each
segment include certain allocations for general, administrative, and other
shared costs. However, certain shared costs and termination and restructuring
costs are not allocated to the segments. The following is a summary of selected data for each of our segments: Human CapitalServices
    
    Business Services
    
    Engineering Services
    
    Other
    
    TotalQuarter Ended October 3, 2004:Net sales  external
    
    $
    52,722
    
    
    $
    60,862
    
    
    $
    33,742
    
    
    $
    
    
    
    $
    147,326Net intercompany sales
    
    
    
    
    
    
    1,074
    
    
    
    (974
    )
    
    
    (100
    )
    
    
    Segment EBITA
    
    
    2,595
    
    
    
    5,257
    
    
    
    1,464
    
    
    
    
    
    
    
    9,316Quarter Ended September 28, 2003:Net sales  external
    
    $
    62,785
    
    
    $
    67,135
    
    
    $
    37,940
    
    
    
    
    
    
    
    167,860Net intercompany sales
    
    
    (53
    )
    
    
    1,920
    
    
    
    86
    
    
    
    (1,953
    )
    
    
    Segment EBITA
    
    
    3,261
    
    
    
    4,224
    
    
    
    (2,381
    )
    
    
    
    
    
    
    5,104
 Human CapitalServices
    
    Business Services
    
    Engineering Services
    
    Other
    
    TotalNine Months Ended October 3, 2004:Net sales  external
    
    $
    166,793
    
    
    $
    196,203
    
    
    $
    105,545
    
    
    $
    
    
    
    $
    468,541Net intercompany sales
    
    
    9
    
    
    
    1,977
    
    
    
    
    
    
    
    (1,986
    )
    
    
    Segment EBITA
    
    
    8,966
    
    
    
    19,385
    
    
    
    5,525
    
    
    
    
    
    
    
    33,876Nine Months Ended September 28,
2003:Net sales  external
    
    $
    203,944
    
    
    $
    207,282
    
    
    $
    125,720
    
    
    
    
    
    
    $
    536,946Net intercompany sales
    
    
    262
    
    
    
    5,859
    
    
    
    377
    
    
    
    (6,498
    )
    
    
    Segment EBITA
    
    
    13,326
    
    
    
    14,805
    
    
    
    (7,177
    )
    
    
    
    
    
    
    20,954
 8




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MSX International, Inc.Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 9. Segment Information: - continued A reconciliation of total segment EBITA to consolidated income (loss)
before income taxes, minority interests and equity in affiliates is as follows: Fiscal Quarter Ended
    
    Fiscal Nine Months EndedOctober 3,
    
    September 28,
    
    October 3,
    
    September 28,2004
    
    2003
    
    2004
    
    2003Total segment EBITA
    
    $
    9,316
    
    
    $
    5,104
    
    
    $
    33,876
    
    
    $
    20,954Net costs not allocated to segments
    
    
    (2,054
    )
    
    
    (3,233
    )
    
    
    (7,870
    )
    
    
    (7,357
    )Loss on asset impairment and sale
    
    
    
    
    
    
    (1,797
    )
    
    
    
    
    
    
    (1,893
    )Interest expense, net
    
    
    (8,068
    )
    
    
    (9,406
    )
    
    
    (24,223
    )
    
    
    (22,713
    )Michigan single business tax and other similar taxes
    
    
    (531
    )
    
    
    (725
    )
    
    
    (1,918
    )
    
    
    (2,499
    )Consolidated loss before taxes, minority
interests and equity in affiliates
    
    $
    (1,337
    )
    
    $
    (10,057
    )
    
    $
    (135
    )
    
    $
    (13,508
    )
 10. Stock-Based Compensation: We account for stock options under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, and related interpretations. In
June 2003 we repriced selected outstanding stock options. In accordance with
APB 25 we now account for the options under variable plan accounting. We have
not recognized any expense related to employee stock options, as the estimated
fair value of the stock is below the exercise price of the options as of
October 3, 2004. The following table illustrates the effect on net loss for
the fiscal quarters and fiscal nine months ended October 3, 2004 and September
28, 2003 if we had applied the fair value recognition provisions of SFAS No.
123, Accounting for Stock-Based Compensation, to stock-based employee
compensation. Fiscal Quarter Ended
    
    Fiscal Nine Months EndedOctober 3,
    
    September 28,
    
    October 3,
    
    September 28,2004
    
    2003
    
    2004
    
    2003Net loss as reported
    
    $
    (1,184
    )
    
    $
    (24,861
    )
    
    $
    (906
    )
    
    $
    (28,311
    )Deduct: Total employee stock-based compensation
determined under the fair value method, net of
taxes
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    (49
    )Pro forma net loss
    
    $
    (1,184
    )
    
    $
    (24,873
    )
    
    $
    (906
    )
    
    $
    (28,360
    )
 11. New Accounting Pronouncements: In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for how
companies classify and measure in their statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that a company classify certain financial instruments as liabilities
because they embody an obligation of the company. As discussed in Note 6, the
redemption provisions of our preferred stock were amended and the adoption of
SFAS 150 during the first quarter of fiscal 2004 did not have any impact on the
companys consolidated results of operations or financial position. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46) which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable to variable
interest entities created after January 31, 2003. Variable interest entities
created prior to February 1, 2003, must be consolidated effective December 31,
2003. The adoption of FIN 46 during the first quarter of fiscal 2004 did not
have a material impact on the companys consolidated results of operations or
financial position. 9




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.: Senior secured notes that are issued by MSX International, Inc. are
collateralized by security interests in substantially all of the assets of the
company and its domestic subsidiaries, subject to permitted liens. Payment
obligations under the senior secured notes as well as the senior subordinated
notes issued by MSX International, Inc. are guaranteed jointly and severally by
all 100% owned domestic subsidiaries of MSX International, Inc. The following presents condensed consolidating financial information for:  
    
    MSXIthe parent company and issuer
    
    The guarantor subsidiaries
    
    The non-guarantor subsidiaries
    
    MSXI on a consolidated basis Investments in subsidiaries are accounted for under the equity method. The
principal elimination entries are to eliminate the investments in subsidiaries
and intercompany balances and transactions. Separate financial statements for
each of the guarantor and non-guarantor subsidiaries are not presented because
management has determined such statements would not provide additional material
information to the holders of the senior subordinated or senior secured notes. 10




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. 
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of October 3, 2004 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,230
    
    
    $
    2,162
    
    
    $
    12,662
    
    
    $
    
    
    
    $
    32,054Accounts receivable, net
    
    
    
    
    
    
    81,342
    
    
    
    89,838
    
    
    
    
    
    
    
    171,180Inventory
    
    
    
    
    
    
    6,333
    
    
    
    2,902
    
    
    
    
    
    
    
    9,235Prepaid expenses and other assets
    
    
    
    
    
    
    5,425
    
    
    
    2,686
    
    
    
    
    
    
    
    8,111Deferred income taxes, net
    
    
    
    
    
    
    2,622
    
    
    
    3,986
    
    
    
    (2,662
    )
    
    
    3,946Total current assets
    
    
    17,230
    
    
    
    97,884
    
    
    
    112,074
    
    
    
    (2,662
    )
    
    
    224,526Property and equipment, net
    
    
    
    
    
    
    5,148
    
    
    
    8,395
    
    
    
    
    
    
    
    13,543Goodwill, net
    
    
    
    
    
    
    116,302
    
    
    
    17,344
    
    
    
    
    
    
    
    133,646Investment in subsidiaries
    
    
    102,188
    
    
    
    17,916
    
    
    
    
    
    
    
    (120,104
    )
    
    
    Other assets
    
    
    6,268
    
    
    
    4,902
    
    
    
    685
    
    
    
    
    
    
    
    11,855Deferred income taxes, net
    
    
    240
    
    
    
    
    
    
    
    934
    
    
    
    (240
    )
    
    
    934Total assets
    
    $
    125,926
    
    
    $
    242,152
    
    
    $
    139,432
    
    
    $
    (123,006
    )
    
    $
    384,504LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    8,425
    
    
    $
    
    
    
    $
    8,425Accounts payable and drafts
    
    
    
    
    
    
    78,087
    
    
    
    45,921
    
    
    
    
    
    
    
    124,008Accrued liabilities
    
    
    5,161
    
    
    
    39,296
    
    
    
    35,575
    
    
    
    
    
    
    
    80,032Deferred income taxes, net
    
    
    2,662
    
    
    
    
    
    
    
    
    
    
    
    (2,662
    )
    
    
    Total current liabilities
    
    
    7,823
    
    
    
    117,383
    
    
    
    89,921
    
    
    
    (2,662
    )
    
    
    212,465Long-term debt
    
    
    232,026
    
    
    
    
    
    
    
    20,853
    
    
    
    
    
    
    
    252,879Intercompany accounts
    
    
    (19,860
    )
    
    
    19,093
    
    
    
    767
    
    
    
    
    
    
    
    Long-term deferred compensation and other liabilities
    
    
    
    
    
    
    3,248
    
    
    
    9,975
    
    
    
    
    
    
    
    13,223Deferred income taxes, net
    
    
    
    
    
    
    240
    
    
    
    
    
    
    
    (240
    )
    
    
    Total liabilities
    
    
    219,989
    
    
    
    139,964
    
    
    
    121,516
    
    
    
    (2,902
    )
    
    
    478,567Series A Preferred Stock
    
    
    88,983
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,983Shareholders equity (deficit)
    
    
    (183,046
    )
    
    
    102,188
    
    
    
    17,916
    
    
    
    (120,104
    )
    
    
    (183,046
    )Total liabilities and shareholders equity (deficit)
    
    $
    125,926
    
    
    $
    242,152
    
    
    $
    139,432
    
    
    $
    (123,006
    )
    
    $
    384,504
 11




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. 
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of December 28, 2003 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,600
    
    
    $
    390
    
    
    $
    17,660
    
    
    $
    
    
    
    $
    36,650Accounts receivable, net
    
    
    
    
    
    
    95,154
    
    
    
    124,065
    
    
    
    
    
    
    
    219,219Inventory
    
    
    
    
    
    
    5,635
    
    
    
    2,983
    
    
    
    
    
    
    
    8,618Prepaid expenses and other assets
    
    
    
    
    
    
    4,151
    
    
    
    2,067
    
    
    
    
    
    
    
    6,218Deferred income taxes, net
    
    
    
    
    
    
    3,093
    
    
    
    6,896
    
    
    
    (3,093
    )
    
    
    6,896Total current assets
    
    
    18,600
    
    
    
    108,423
    
    
    
    153,671
    
    
    
    (3,093
    )
    
    
    277,601Property and equipment, net
    
    
    
    
    
    
    8,129
    
    
    
    10,351
    
    
    
    
    
    
    
    18,480Goodwill, net
    
    
    
    
    
    
    112,502
    
    
    
    17,122
    
    
    
    
    
    
    
    129,624Investment in subsidiaries
    
    
    87,423
    
    
    
    11,861
    
    
    
    
    
    
    
    (99,284
    )
    
    
    Other assets
    
    
    7,370
    
    
    
    5,246
    
    
    
    652
    
    
    
    
    
    
    
    13,268Deferred income taxes, net
    
    
    
    
    
    
    2,286
    
    
    
    
    
    
    
    (2,286
    )
    
    
    Total assets
    
    $
    113,393
    
    
    $
    248,447
    
    
    $
    181,796
    
    
    $
    (104,663
    )
    
    $
    438,973LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    10,519
    
    
    $
    
    
    
    $
    10,519Accounts payable and drafts
    
    
    
    
    
    
    77,525
    
    
    
    71,526
    
    
    
    
    
    
    
    149,051Accrued liabilities
    
    
    9,425
    
    
    
    50,632
    
    
    
    48,337
    
    
    
    
    
    
    
    108,394Deferred income taxes, net
    
    
    3,093
    
    
    
    
    
    
    
    
    
    
    
    (3,093
    )
    
    
    Total current liabilities
    
    
    12,518
    
    
    
    128,157
    
    
    
    130,382
    
    
    
    (3,093
    )
    
    
    267,964Long-term debt
    
    
    230,566
    
    
    
    
    
    
    
    19,176
    
    
    
    
    
    
    
    249,742Intercompany accounts
    
    
    (39,080
    )
    
    
    29,668
    
    
    
    9,412
    
    
    
    
    
    
    
    Long-term deferred compensation and other liabilities
    
    
    
    
    
    
    3,199
    
    
    
    9,347
    
    
    
    
    
    
    
    12,546Deferred income taxes, net
    
    
    2,286
    
    
    
    
    
    
    
    1,618
    
    
    
    (2,286
    )
    
    
    1,618Total liabilities
    
    
    206,290
    
    
    
    161,024
    
    
    
    169,935
    
    
    
    (5,379
    )
    
    
    531,870Series A Preferred Stock
    
    
    81,812
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,812Shareholders equity (deficit)
    
    
    (174,709
    )
    
    
    87,423
    
    
    
    11,861
    
    
    
    (99,284
    )
    
    
    (174,709
    )Total liabilities and shareholders equity (deficit)
    
    $
    113,393
    
    
    $
    248,447
    
    
    $
    181,796
    
    
    $
    (104,663
    )
    
    $
    438,973
 12




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.-
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended October 3, 2004 and September 28, 2003 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedFiscal Quarter Ended October 3, 2004:Net sales
    
    $
    
    
    
    $
    82,449
    
    
    $
    64,976
    
    
    $
    (99
    )
    
    $
    147,326Cost of sales
    
    
    
    
    
    
    71,028
    
    
    
    58,974
    
    
    
    (99
    )
    
    
    129,903Gross profit
    
    
    
    
    
    
    11,421
    
    
    
    6,002
    
    
    
    
    
    
    
    17,423Selling, general and administrative expenses
    
    
    
    
    
    
    6,548
    
    
    
    4,144
    
    
    
    
    
    
    
    10,692Operating income
    
    
    
    
    
    
    4,873
    
    
    
    1,858
    
    
    
    
    
    
    
    6,731Interest expense, net
    
    
    6,272
    
    
    
    1,025
    
    
    
    771
    
    
    
    
    
    
    
    8,068Income (loss) before income taxes,
minority
interests and equity in affiliates
    
    
    (6,272
    )
    
    
    3,848
    
    
    
    1,087
    
    
    
    
    
    
    
    (1,337
    )Income tax provision (benefit)
    
    
    (1,180
    )
    
    
    1,277
    
    
    
    (250
    )
    
    
    
    
    
    
    (153
    )Minority interests and equity in affiliates
    
    
    3,908
    
    
    
    1,337
    
    
    
    
    
    
    
    (5,245
    )
    
    
    Net income (loss)
    
    $
    (1,184
    )
    
    $
    3,908
    
    
    $
    1,337
    
    
    $
    (5,245
    )
    
    $
    (1,184
    )Fiscal Quarter Ended September 28, 2003:Net sales
    
    $
    
    
    
    $
    98,671
    
    
    $
    71,142
    
    
    $
    (1,953
    )
    
    $
    167,860Cost of sales
    
    
    
    
    
    
    86,077
    
    
    
    65,356
    
    
    
    (1,953
    )
    
    
    149,480Gross profit
    
    
    
    
    
    
    12,594
    
    
    
    5,786
    
    
    
    
    
    
    
    18,380Selling, general and administrative expenses
    
    
    
    
    
    
    9,081
    
    
    
    6,151
    
    
    
    
    
    
    
    15,232Restructuring and severance costs
    
    
    
    
    
    
    1,450
    
    
    
    552
    
    
    
    
    
    
    
    2,002(Gain) loss on asset impairment and sale
    
    
    
    
    
    
    
    
    
    
    1,797
    
    
    
    
    
    
    
    1,797Operating income (loss)
    
    
    
    
    
    
    2,063
    
    
    
    (2,714
    )
    
    
    
    
    
    
    (651
    )Interest expense, net
    
    
    7,697
    
    
    
    1,581
    
    
    
    128
    
    
    
    
    
    
    
    9,406Income (loss) before income taxes,
minority
interests and equity in affiliates
    
    
    (7,697
    )
    
    
    482
    
    
    
    (2,842
    )
    
    
    
    
    
    
    (10,057
    )Income tax provision (benefit)
    
    
    12,034
    
    
    
    1,561
    
    
    
    1,169
    
    
    
    
    
    
    
    14,764Minority interests and equity in affiliates
    
    
    (4,819
    )
    
    
    (3,741
    )
    
    
    35
    
    
    
    8,485
    
    
    
    (40
    )Net income (loss)
    
    $
    (24,550
    )
    
    $
    (4,820
    )
    
    $
    (3,976
    )
    
    $
    8,485
    
    
    $
    (24,861
    )
 13




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.-
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal nine months ended October 3, 2004 and September 28, 2003 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedFiscal Nine Months Ended October 3, 2004:Net sales
    
    $
    
    
    
    $
    266,864
    
    
    $
    203,689
    
    
    $
    (2,012
    )
    
    $
    468,541Cost of sales
    
    
    
    
    
    
    234,435
    
    
    
    179,218
    
    
    
    (2,012
    )
    
    
    411,641Gross profit
    
    
    
    
    
    
    32,429
    
    
    
    24,471
    
    
    
    
    
    
    
    56,900Selling, general and administrative expenses
    
    
    
    
    
    
    20,100
    
    
    
    12,712
    
    
    
    
    
    
    
    32,812Operating income
    
    
    
    
    
    
    12,329
    
    
    
    11,759
    
    
    
    
    
    
    
    24,088Interest expense, net
    
    
    18,994
    
    
    
    3,287
    
    
    
    1,942
    
    
    
    
    
    
    
    24,223Income (loss) before income taxes,
minority
interests and equity in affiliates
    
    
    (18,994
    )
    
    
    9,042
    
    
    
    9,817
    
    
    
    
    
    
    
    (135
    )Income tax provision (benefit)
    
    
    (3,064
    )
    
    
    3,015
    
    
    
    820
    
    
    
    
    
    
    
    771Minority interests and equity in affiliates
    
    
    15,024
    
    
    
    8,997
    
    
    
    
    
    
    
    (24,021
    )
    
    
    Net income (loss)
    
    $
    (906
    )
    
    $
    15,024
    
    
    $
    8,997
    
    
    $
    (24,021
    )
    
    $
    (906
    )Fiscal Nine Months Ended September 28, 2003:Net sales
    
    $
    
    
    
    $
    316,556
    
    
    $
    226,888
    
    
    $
    (6,498
    )
    
    $
    536,946Cost of sales
    
    
    
    
    
    
    274,760
    
    
    
    205,944
    
    
    
    (6,187
    )
    
    
    474,517Gross profit
    
    
    
    
    
    
    41,796
    
    
    
    20,944
    
    
    
    (311
    )
    
    
    62,429Selling, general and administrative expenses
    
    
    
    
    
    
    27,190
    
    
    
    20,239
    
    
    
    
    
    
    
    47,429Restructuring and severance costs
    
    
    
    
    
    
    2,407
    
    
    
    1,495
    
    
    
    
    
    
    
    3,902Loss on asset impairment and sale
    
    
    
    
    
    
    
    
    
    
    1,893
    
    
    
    
    
    
    
    1,893Operating income (loss)
    
    
    
    
    
    
    12,199
    
    
    
    (2,683
    )
    
    
    (311
    )
    
    
    9,205Interest expense, net
    
    
    16,391
    
    
    
    5,708
    
    
    
    614
    
    
    
    
    
    
    
    22,713Income (loss) before income taxes,
minority
interests and equity in affiliates
    
    
    (16,391
    )
    
    
    6,491
    
    
    
    (3,297
    )
    
    
    (311
    )
    
    
    (13,508
    )Income tax provision (benefit)
    
    
    10,591
    
    
    
    2,428
    
    
    
    1,979
    
    
    
    
    
    
    
    14,998Minority interests and equity in affiliates
    
    
    (1,018
    )
    
    
    (5,082
    )
    
    
    155
    
    
    
    6,140
    
    
    
    195Net income (loss)
    
    $
    (28,000
    )
    
    $
    (1,019
    )
    
    $
    (5,121
    )
    
    $
    5,829
    
    
    $
    (28,311
    )
 14




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. 
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal nine months ended October 3, 2004 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (906
    )
    
    $
    15,024
    
    
    $
    8,997
    
    
    $
    (24,021
    )
    
    $
    (906
    )Adjustments to reconcile net income (loss) to
net
cash provided by (used for) operating
activities:Equity in affiliates
    
    
    (15,024
    )
    
    
    (8,997
    )
    
    
    
    
    
    
    24,021
    
    
    
    Depreciation
    
    
    
    
    
    
    3,358
    
    
    
    3,337
    
    
    
    
    
    
    
    6,695Amortization of debt issuance costs and
non-cash interest
    
    
    3,024
    
    
    
    
    
    
    
    244
    
    
    
    
    
    
    
    3,268Deferred taxes
    
    
    (2,957
    )
    
    
    2,997
    
    
    
    358
    
    
    
    
    
    
    
    398(Gain) loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    3
    
    
    
    (82
    )
    
    
    
    
    
    
    (79
    )(Increase) decrease in receivables, net
    
    
    
    
    
    
    13,812
    
    
    
    34,227
    
    
    
    
    
    
    
    48,039(Increase) decrease in inventory
    
    
    
    
    
    
    (699
    )
    
    
    81
    
    
    
    
    
    
    
    (618
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    
    
    
    
    (1,274
    )
    
    
    (619
    )
    
    
    
    
    
    
    (1,893
    )Increase (decrease) in current liabilities
    
    
    (4,265
    )
    
    
    (10,252
    )
    
    
    (38,367
    )
    
    
    
    
    
    
    (52,884
    )Other, net
    
    
    
    
    
    
    (103
    )
    
    
    405
    
    
    
    
    
    
    
    302Net cash provided by (used for) operating
activities
    
    
    (20,128
    )
    
    
    13,869
    
    
    
    8,581
    
    
    
    
    
    
    
    2,322Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (395
    )
    
    
    (1,512
    )
    
    
    
    
    
    
    (1,907
    )Proceeds from sale/disposal of property
and equipment
    
    
    
    
    
    
    22
    
    
    
    282
    
    
    
    
    
    
    
    304Other, net
    
    
    
    
    
    
    489
    
    
    
    
    
    
    
    
    
    
    
    489Net cash provided by (used for) investing
activities
    
    
    
    
    
    
    116
    
    
    
    (1,230
    )
    
    
    
    
    
    
    (1,114
    )Cash flows from financing activities:Intercompany
    
    
    19,220
    
    
    
    (10,574
    )
    
    
    (8,646
    )
    
    
    
    
    
    
    Transactions with subsidiaries
    
    
    
    
    
    
    2,683
    
    
    
    (2,683
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    (462
    )
    
    
    
    
    
    
    64
    
    
    
    
    
    
    
    (398
    )Changes in revolving debt, net
    
    
    
    
    
    
    
    
    
    
    (636
    )
    
    
    
    
    
    
    (636
    )Changes in book overdrafts, net
    
    
    
    
    
    
    (4,322
    )
    
    
    
    
    
    
    
    
    
    
    (4,322
    )Net cash provided by (used for) financing
activities
    
    
    18,758
    
    
    
    (12,213
    )
    
    
    (11,901
    )
    
    
    
    
    
    
    (5,356
    )Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    
    
    
    
    (448
    )
    
    
    
    
    
    
    (448
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    (1,370
    )
    
    
    1,772
    
    
    
    (4,998
    )
    
    
    
    
    
    
    (4,596
    )Balance, beginning of period
    
    
    18,600
    
    
    
    390
    
    
    
    17,660
    
    
    
    
    
    
    
    36,650Balance, end of period
    
    $
    17,230
    
    
    $
    2,162
    
    
    $
    12,662
    
    
    $
    
    
    
    $
    32,054
 15




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.
continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal nine months ended September 28, 2003 MSXI
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (28,000
    )
    
    $
    (1,018
    )
    
    $
    (5,122
    )
    
    $
    5,829
    
    
    $
    (28,311
    )Adjustments to reconcile net income (loss) to
net
cash provided by (used for) operating
activities:Equity in affiliates
    
    
    1,018
    
    
    
    5,082
    
    
    
    (155
    )
    
    
    (6,140
    )
    
    
    (195
    )Loss on asset impairment and sale
    
    
    
    
    
    
    
    
    
    
    1,893
    
    
    
    
    
    
    
    1,893Depreciation
    
    
    
    
    
    
    6,974
    
    
    
    6,679
    
    
    
    
    
    
    
    13,653Amortization of debt issuance costs
    
    
    5,217
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    5,260Deferred taxes
    
    
    10,223
    
    
    
    2,631
    
    
    
    (666
    )
    
    
    
    
    
    
    12,188Loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    98
    
    
    
    529
    
    
    
    
    
    
    
    627(Increase) decrease in receivables, net
    
    
    135
    
    
    
    (3,778
    )
    
    
    (11,276
    )
    
    
    
    
    
    
    (14,919
    )(Increase) decrease in inventory
    
    
    
    
    
    
    (646
    )
    
    
    (996
    )
    
    
    
    
    
    
    (1,642
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    7
    
    
    
    (1,748
    )
    
    
    750
    
    
    
    
    
    
    
    (991
    )Increase (decrease) in current liabilities.
    
    
    (2,800
    )
    
    
    10,690
    
    
    
    7,339
    
    
    
    
    
    
    
    15,229Other, net
    
    
    (55
    )
    
    
    (829
    )
    
    
    550
    
    
    
    
    
    
    
    (334
    )Net cash provided by (used for) operating
activities
    
    
    (14,255
    )
    
    
    17,456
    
    
    
    (432
    )
    
    
    (311
    )
    
    
    2,458Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (2,438
    )
    
    
    (2,027
    )
    
    
    
    
    
    
    (4,465
    )Proceeds from sale/disposal of property
and equipment
    
    
    
    
    
    
    545
    
    
    
    1,605
    
    
    
    
    
    
    
    2,150Other, net
    
    
    
    
    
    
    (341
    )
    
    
    (1
    )
    
    
    
    
    
    
    (342
    )Net cash used for investing activities
    
    
    
    
    
    
    (2,234
    )
    
    
    (423
    )
    
    
    
    
    
    
    (2,657
    )Cash flows from financing activities:Transactions with subsidiaries
    
    
    11,051
    
    
    
    (4,810
    )
    
    
    (17,339
    )
    
    
    11,098
    
    
    
    Proceeds from issuance of debt
    
    
    83,482
    
    
    
    
    
    
    
    16,372
    
    
    
    
    
    
    
    99,854Repayment of debt
    
    
    (65,798
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,798
    )Debt issuance costs
    
    
    (5,518
    )
    
    
    
    
    
    
    (496
    )
    
    
    
    
    
    
    (6,014
    )Changes in revolving debt, net
    
    
    (11,946
    )
    
    
    
    
    
    
    (3,564
    )
    
    
    
    
    
    
    (15,510
    )Changes in book overdrafts, net
    
    
    
    
    
    
    (15,189
    )
    
    
    (52
    )
    
    
    
    
    
    
    (15,241
    )Net cash provided by (used for) financing
activities
    
    
    11,271
    
    
    
    (19,999
    )
    
    
    (5,079
    )
    
    
    11,098
    
    
    
    (2,709
    )Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    5,384
    
    
    
    5,381
    
    
    
    642
    
    
    
    (10,787
    )
    
    
    620Cash and cash equivalents:Increase (decrease) for the period
    
    
    2,400
    
    
    
    604
    
    
    
    (5,292
    )
    
    
    
    
    
    
    (2,288
    )Balance, beginning of period
    
    
    
    
    
    
    154
    
    
    
    10,781
    
    
    
    
    
    
    
    10,935Balance, end of period
    
    $
    2,400
    
    
    $
    758
    
    
    $
    5,489
    
    
    $
    
    
    
    $
    8,647
 16




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited: Senior secured notes that are issued by MSXI Limited, an indirect
subsidiary of MSX International, Inc., are collateralized by the accounts
receivable of MSXI Limited and substantially all of the assets of MSXI and its
domestic subsidiaries, subject to permitted liens. Payment obligations under
the senior secured notes issued by MSXI Limited are guaranteed jointly and
severally by MSX International, Inc. and all of its 100% owned domestic
subsidiaries. Because of the parent and subsidiary guarantee structure, we
present the following condensed consolidating financial information for:  
    
    MSXI  the parent company
    
    MSXI Limited  the issuer
    
    The guarantor subsidiaries
    
    The non-guarantor subsidiaries
    
    MSXI on a consolidated basis Investments in subsidiaries are accounted for under the equity method. The
principal elimination entries are to eliminate the investments in subsidiaries
and intercompany balances and transactions. Separate financial statements for
each of the guarantor and non-guarantor subsidiaries are not presented because
management has determined such statements would not provide additional material
information to the holders of the senior secured notes. 17




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of October 3, 2004 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,230
    
    
    $
    132
    
    
    $
    2,162
    
    
    $
    12,530
    
    
    $
    
    
    
    $
    32,054Accounts receivable, net
    
    
    
    
    
    
    17,942
    
    
    
    81,342
    
    
    
    71,896
    
    
    
    
    
    
    
    171,180Inventory
    
    
    
    
    
    
    4
    
    
    
    6,333
    
    
    
    2,898
    
    
    
    
    
    
    
    9,235Prepaid expenses and other assets
    
    
    
    
    
    
    1,036
    
    
    
    5,425
    
    
    
    1,650
    
    
    
    
    
    
    
    8,111Deferred income taxes, net
    
    
    
    
    
    
    496
    
    
    
    2,622
    
    
    
    3,490
    
    
    
    (2,662
    )
    
    
    3,946Total current assets
    
    
    17,230
    
    
    
    19,610
    
    
    
    97,884
    
    
    
    92,464
    
    
    
    (2,662
    )
    
    
    224,526Property and equipment, net
    
    
    
    
    
    
    1,703
    
    
    
    5,148
    
    
    
    6,692
    
    
    
    
    
    
    
    13,543Goodwill, net
    
    
    
    
    
    
    101
    
    
    
    116,302
    
    
    
    17,243
    
    
    
    
    
    
    
    133,646Investment in subsidiaries
    
    
    102,188
    
    
    
    11
    
    
    
    17,916
    
    
    
    (2,338
    )
    
    
    (117,777
    )
    
    
    Other assets
    
    
    6,268
    
    
    
    505
    
    
    
    4,902
    
    
    
    180
    
    
    
    
    
    
    
    11,855Deferred income taxes, net
    
    
    240
    
    
    
    
    
    
    
    
    
    
    
    1,430
    
    
    
    (736
    )
    
    
    934Total assets
    
    $
    125,926
    
    
    $
    21,930
    
    
    $
    242,152
    
    
    $
    115,671
    
    
    $
    (121,175
    )
    
    $
    384,504LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of
long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,425
    
    
    $
    
    
    
    $
    8,425Accounts payable and drafts
    
    
    
    
    
    
    6,892
    
    
    
    78,087
    
    
    
    39,029
    
    
    
    
    
    
    
    124,008Accrued liabilities
    
    
    5,161
    
    
    
    8,018
    
    
    
    39,296
    
    
    
    27,557
    
    
    
    
    
    
    
    80,032Deferred income taxes, net
    
    
    2,662
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,662
    )
    
    
    Total current liabilities
    
    
    7,823
    
    
    
    14,910
    
    
    
    117,383
    
    
    
    75,011
    
    
    
    (2,662
    )
    
    
    212,465Long-term debt
    
    
    232,026
    
    
    
    18,414
    
    
    
    
    
    
    
    2,439
    
    
    
    
    
    
    
    252,879Intercompany accounts
    
    
    (19,860
    )
    
    
    (9,872
    )
    
    
    19,093
    
    
    
    10,639
    
    
    
    
    
    
    
    Long-term deferred compensation and
other liabilities
    
    
    
    
    
    
    309
    
    
    
    3,248
    
    
    
    9,666
    
    
    
    
    
    
    
    13,223Deferred income taxes, net
    
    
    
    
    
    
    496
    
    
    
    240
    
    
    
    
    
    
    
    (736
    )
    
    
    Total liabilities
    
    
    219,989
    
    
    
    24,257
    
    
    
    139,964
    
    
    
    97,755
    
    
    
    (3,398
    )
    
    
    478,567Series A Preferred Stock
    
    
    88,983
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,983Shareholders equity (deficit)
    
    
    (183,046
    )
    
    
    (2,327
    )
    
    
    102,188
    
    
    
    17,916
    
    
    
    (117,777
    )
    
    
    (183,046
    )Total liabilities and shareholders
equity (deficit)
    
    $
    125,926
    
    
    $
    21,930
    
    
    $
    242,152
    
    
    $
    115,671
    
    
    $
    (121,175
    )
    
    $
    384,504
 18




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited  continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING BALANCE SHEET
as of December 28, 2003 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalents
    
    $
    18,600
    
    
    $
    5,639
    
    
    $
    390
    
    
    $
    12,021
    
    
    $
    
    
    
    $
    36,650Accounts receivable, net
    
    
    
    
    
    
    23,876
    
    
    
    95,154
    
    
    
    100,189
    
    
    
    
    
    
    
    219,219Inventory
    
    
    
    
    
    
    
    
    
    
    5,635
    
    
    
    2,983
    
    
    
    
    
    
    
    8,618Prepaid expenses and other assets
    
    
    
    
    
    
    715
    
    
    
    4,151
    
    
    
    1,352
    
    
    
    
    
    
    
    6,218Deferred income taxes, net
    
    
    
    
    
    
    391
    
    
    
    3,093
    
    
    
    6,506
    
    
    
    (3,094
    )
    
    
    6,896Total current assets
    
    
    18,600
    
    
    
    30,621
    
    
    
    108,423
    
    
    
    123,051
    
    
    
    (3,094
    )
    
    
    277,601Property and equipment, net
    
    
    
    
    
    
    2,614
    
    
    
    8,129
    
    
    
    7,737
    
    
    
    
    
    
    
    18,480Goodwill, net
    
    
    
    
    
    
    99
    
    
    
    112,502
    
    
    
    17,023
    
    
    
    
    
    
    
    129,624Investment in subsidiaries
    
    
    87,423
    
    
    
    10
    
    
    
    11,861
    
    
    
    (2,638
    )
    
    
    (96,656
    )
    
    
    Other assets
    
    
    7,370
    
    
    
    594
    
    
    
    5,246
    
    
    
    58
    
    
    
    
    
    
    
    13,268Deferred income taxes, net
    
    
    
    
    
    
    
    
    
    
    2,286
    
    
    
    
    
    
    
    (2,286
    )
    
    
    Total assets
    
    $
    113,393
    
    
    $
    33,938
    
    
    $
    248,447
    
    
    $
    145,231
    
    
    $
    (102,036
    )
    
    $
    438,973LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIT)Current liabilities:Notes payable and current portion of
long-term debt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    10,519
    
    
    $
    
    
    
    $
    10,519Accounts payable and drafts
    
    
    
    
    
    
    15,028
    
    
    
    77,525
    
    
    
    56,498
    
    
    
    
    
    
    
    149,051Accrued liabilities
    
    
    9,425
    
    
    
    12,700
    
    
    
    51,147
    
    
    
    35,122
    
    
    
    
    
    
    
    108,394Deferred income taxes, net
    
    
    3,093
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,093
    )
    
    
    Total current liabilities
    
    
    12,518
    
    
    
    27,728
    
    
    
    128,672
    
    
    
    102,139
    
    
    
    (3,093
    )
    
    
    267,964Long-term debt
    
    
    230,566
    
    
    
    16,471
    
    
    
    
    
    
    
    2,705
    
    
    
    
    
    
    
    249,742Intercompany accounts
    
    
    (39,080
    )
    
    
    (8,779
    )
    
    
    29,668
    
    
    
    18,191
    
    
    
    
    
    
    
    Long-term deferred compensation and other
liabilities
    
    
    
    
    
    
    755
    
    
    
    2,684
    
    
    
    9,107
    
    
    
    
    
    
    
    12,546Deferred income taxes, net
    
    
    2,286
    
    
    
    391
    
    
    
    
    
    
    
    1,228
    
    
    
    (2,287
    )
    
    
    1,618Total liabilities
    
    
    206,290
    
    
    
    36,566
    
    
    
    161,024
    
    
    
    133,370
    
    
    
    (5,380
    )
    
    
    531,870Series A Preferred Stock
    
    
    81,812
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,812Shareholders equity (deficit)
    
    
    (174,709
    )
    
    
    (2,628
    )
    
    
    87,423
    
    
    
    11,861
    
    
    
    (96,656
    )
    
    
    (174,709
    )Total liabilities and shareholders equity
(deficit)
    
    $
    113,393
    
    
    $
    33,938
    
    
    $
    248,447
    
    
    $
    145,231
    
    
    $
    (102,036
    )
    
    $
    438,973
 19




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended October 3, 2004 and September 28, 2003 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedFiscal Quarter Ended October 3, 2004Net sales
    
    $
    
    
    
    $
    16,871
    
    
    $
    82,449
    
    
    $
    48,105
    
    
    $
    (1,337
    )
    
    $
    147,326Cost of sales
    
    
    
    
    
    
    15,205
    
    
    
    71,028
    
    
    
    43,769
    
    
    
    (1,337
    )
    
    
    129,903Gross profit
    
    
    
    
    
    
    1,666
    
    
    
    11,421
    
    
    
    4,336
    
    
    
    
    
    
    
    17,423Selling, general and administrative expenses
    
    
    
    
    
    
    1,194
    
    
    
    6,548
    
    
    
    2,950
    
    
    
    
    
    
    
    10,692Operating income
    
    
    
    
    
    
    472
    
    
    
    4,873
    
    
    
    1,386
    
    
    
    
    
    
    
    6,731Interest expense (income), net
    
    
    (6,272
    )
    
    
    670
    
    
    
    1,025
    
    
    
    101
    
    
    
    
    
    
    
    8,068Income (loss) before income taxes,
minority interests and equity in affiliates
    
    
    (6,272
    )
    
    
    (198
    )
    
    
    3,848
    
    
    
    1,285
    
    
    
    
    
    
    
    (1,337
    )Income tax provision (benefit)
    
    
    (1,180
    )
    
    
    
    
    
    
    1,277
    
    
    
    (250
    )
    
    
    
    
    
    
    (153
    )Minority interests and equity in affiliates
    
    
    3,908
    
    
    
    
    
    
    
    1,337
    
    
    
    (198
    )
    
    
    (5,047
    )
    
    
    Net income (loss)
    
    $
    (1,184
    )
    
    $
    (198
    )
    
    $
    3,908
    
    
    $
    1,337
    
    
    $
    (5,047
    )
    
    $
    (1,184
    )Fiscal Quarter Ended September 28, 2003Net sales
    
    $
    
    
    
    $
    19,777
    
    
    $
    98,671
    
    
    $
    51,365
    
    
    $
    (1,953
    )
    
    $
    167,860Cost of sales
    
    
    
    
    
    
    18,285
    
    
    
    86,077
    
    
    
    47,071
    
    
    
    (1,953
    )
    
    
    149,480Gross profit
    
    
    
    
    
    
    1,492
    
    
    
    12,594
    
    
    
    4,294
    
    
    
    
    
    
    
    18,380Selling, general and administrative expenses
    
    
    
    
    
    
    1,604
    
    
    
    9,081
    
    
    
    4,547
    
    
    
    
    
    
    
    15,232Restructuring and severance costs
    
    
    
    
    
    
    58
    
    
    
    1,450
    
    
    
    494
    
    
    
    
    
    
    
    2,002(Gain)/loss on asset impairment and sale
    
    
    
    
    
    
    787
    
    
    
    
    
    
    
    1,010
    
    
    
    
    
    
    
    1,797Operating income (loss)
    
    
    
    
    
    
    (957
    )
    
    
    2,063
    
    
    
    (1,757
    )
    
    
    
    
    
    
    (651
    )Interest expense (income), net
    
    
    7,697
    
    
    
    53
    
    
    
    1,581
    
    
    
    75
    
    
    
    
    
    
    
    9,406Income (loss) before income taxes,
minority interests and equity in
affiliates
    
    
    (7,697
    )
    
    
    (1,010
    )
    
    
    482
    
    
    
    (1,832
    )
    
    
    
    
    
    
    (10,057
    )Income tax provision (benefit)
    
    
    12,034
    
    
    
    296
    
    
    
    1,561
    
    
    
    873
    
    
    
    
    
    
    
    14,764Minority interests and equity in affiliates
    
    
    (4,819
    )
    
    
    
    
    
    
    (3,741
    )
    
    
    (1,271
    )
    
    
    9,791
    
    
    
    (40
    )Net income (loss)
    
    $
    (24,550
    )
    
    $
    (1,306
    )
    
    $
    (4,820
    )
    
    $
    (3,976
    )
    
    $
    9,791
    
    
    $
    (24,861
    )
 20




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal nine months ended October 3, 2004 and September 28, 2003 MSXI
    
    
    
    
    
    Non-MSXI
    
    Limited
    
    Guarantor
    
    Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedFiscal Nine Months Ended October 3, 2004Net sales
    
    $
    
    
    
    $
    53,011
    
    
    $
    266,864
    
    
    $
    150,678
    
    
    $
    (2,012
    )
    
    $
    468,541Cost of sales
    
    
    
    
    
    
    47,161
    
    
    
    234,435
    
    
    
    132,057
    
    
    
    (2,012
    )
    
    
    411,641Gross profit
    
    
    
    
    
    
    5,850
    
    
    
    32,429
    
    
    
    18,621
    
    
    
    
    
    
    
    56,900Selling, general and administrative expenses
    
    
    
    
    
    
    3,779
    
    
    
    20,100
    
    
    
    8,933
    
    
    
    
    
    
    
    32,812Operating income
    
    
    
    
    
    
    2,071
    
    
    
    12,329
    
    
    
    9,688
    
    
    
    
    
    
    
    24,088Interest expense (income), net
    
    
    18,994
    
    
    
    1,403
    
    
    
    3,287
    
    
    
    539
    
    
    
    
    
    
    
    24,223Income (loss) before income taxes,
minority interests and equity in affiliates
    
    
    (18,994
    )
    
    
    668
    
    
    
    9,042
    
    
    
    9,149
    
    
    
    
    
    
    
    (135
    )Income tax provision (benefit)
    
    
    (3,064
    )
    
    
    68
    
    
    
    3,015
    
    
    
    752
    
    
    
    
    
    
    
    771Minority interests and equity in affiliates
    
    
    15,024
    
    
    
    
    
    
    
    8,997
    
    
    
    600
    
    
    
    (24,621
    )
    
    
    Net income (loss)
    
    $
    (906
    )
    
    $
    600
    
    
    $
    15,024
    
    
    $
    8,997
    
    
    $
    (24,621
    )
    
    $
    (906
    )Fiscal Nine Months Ended September 28, 2003Net sales
    
    $
    
    
    
    $
    64,209
    
    
    $
    316,556
    
    
    $
    162,679
    
    
    $
    (6,498
    )
    
    $
    536,946Cost of sales
    
    
    
    
    
    
    61,579
    
    
    
    274,760
    
    
    
    144,365
    
    
    
    (6,187
    )
    
    
    474,517Gross profit
    
    
    
    
    
    
    2,630
    
    
    
    41,796
    
    
    
    18,314
    
    
    
    (311
    )
    
    
    62,429Selling, general and administrative expenses
    
    
    
    
    
    
    5,452
    
    
    
    27,190
    
    
    
    14,787
    
    
    
    
    
    
    
    47,429Restructuring and severance costs
    
    
    
    
    
    
    792
    
    
    
    2,407
    
    
    
    703
    
    
    
    
    
    
    
    3,902(Gain)/loss on asset impairment and sale
    
    
    
    
    
    
    787
    
    
    
    
    
    
    
    1,106
    
    
    
    
    
    
    
    1,893Operating income (loss)
    
    
    
    
    
    
    (4,401
    )
    
    
    12,199
    
    
    
    1,718
    
    
    
    (311
    )
    
    
    9,205Interest expense (income), net
    
    
    16,391
    
    
    
    598
    
    
    
    5,708
    
    
    
    16
    
    
    
    
    
    
    
    22,713Income (loss) before income taxes,
minority interests and equity in
affiliates
    
    
    (16,391
    )
    
    
    (4,999
    )
    
    
    6,491
    
    
    
    1,702
    
    
    
    (311
    )
    
    
    (13,508
    )Income tax provision (benefit)
    
    
    10,591
    
    
    
    (871
    )
    
    
    2,428
    
    
    
    2,850
    
    
    
    
    
    
    
    14,998Minority interests and equity in affiliates
    
    
    (1,018
    )
    
    
    
    
    
    
    (5,081
    )
    
    
    (3,974
    )
    
    
    10,268
    
    
    
    195Net income (loss)
    
    $
    (28,000
    )
    
    $
    (4,128
    )
    
    $
    (1,018
    )
    
    $
    (5,122
    )
    
    $
    9,957
    
    
    $
    (28,311
    )
 21




---



##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal nine months ended October 3, 2004 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (906
    )
    
    $
    600
    
    
    $
    15,024
    
    
    $
    8,997
    
    
    $
    (24,621
    )
    
    $
    (906
    )Adjustments to reconcile net income (loss) to
net
cash provided by (used for) operating
activities:Equity in affiliates
    
    
    (15,024
    )
    
    
    
    
    
    
    (8,997
    )
    
    
    (600
    )
    
    
    24,621
    
    
    
    Depreciation
    
    
    
    
    
    
    1,177
    
    
    
    3,358
    
    
    
    2,160
    
    
    
    
    
    
    
    6,695Amortization of debt issuance costs
    
    
    3,024
    
    
    
    244
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,268Deferred taxes
    
    
    (2,957
    )
    
    
    
    
    
    
    2,997
    
    
    
    358
    
    
    
    
    
    
    
    398(Gain) loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    (95
    )
    
    
    3
    
    
    
    13
    
    
    
    
    
    
    
    (79
    )(Increase) decrease in receivables, net
    
    
    
    
    
    
    5,934
    
    
    
    13,812
    
    
    
    28,293
    
    
    
    
    
    
    
    48,039(Increase) decrease in inventory
    
    
    
    
    
    
    (4
    )
    
    
    (699
    )
    
    
    85
    
    
    
    
    
    
    
    (618
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    
    
    
    
    (321
    )
    
    
    (1,274
    )
    
    
    (298
    )
    
    
    
    
    
    
    (1,893
    )Increase (decrease) in current liabilities
    
    
    (4,265
    )
    
    
    (13,333
    )
    
    
    (10,252
    )
    
    
    (25,034
    )
    
    
    
    
    
    
    (52,884
    )Other, net
    
    
    
    
    
    
    80
    
    
    
    (103
    )
    
    
    325
    
    
    
    
    
    
    
    302Net cash provided by (used for) operating
activities
    
    
    (20,128
    )
    
    
    (5,718
    )
    
    
    13,869
    
    
    
    14,299
    
    
    
    
    
    
    
    2,322Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (260
    )
    
    
    (395
    )
    
    
    (1,252
    )
    
    
    
    
    
    
    (1,907
    )Proceeds from sale/disposal of property and
equipment
    
    
    
    
    
    
    99
    
    
    
    22
    
    
    
    183
    
    
    
    
    
    
    
    304Other, net
    
    
    
    
    
    
    
    
    
    
    489
    
    
    
    
    
    
    
    
    
    
    
    489Net cash provided by (used for) investing
activities
    
    
    
    
    
    
    (161
    )
    
    
    116
    
    
    
    (1,069
    )
    
    
    
    
    
    
    (1,114
    )Cash flows from financing activities:Intercompany
    
    
    19,220
    
    
    
    (1,094
    )
    
    
    (10,574
    )
    
    
    (7,552
    )Transactions with subsidiaries
    
    
    
    
    
    
    
    
    
    
    2,683
    
    
    
    (2,683
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    (462
    )
    
    
    64
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (398
    )Changes in revolving debt, net
    
    
    
    
    
    
    1,724
    
    
    
    
    
    
    
    (2,360
    )
    
    
    
    
    
    
    (636
    )Changes in book overdrafts, net
    
    
    
    
    
    
    
    
    
    
    (4,322
    )
    
    
    
    
    
    
    
    
    
    
    (4,322
    )Net cash provided by (used for) financing
activities
    
    
    18,758
    
    
    
    694
    
    
    
    (12,213
    )
    
    
    (12,595
    )
    
    
    
    
    
    
    (5,356
    )Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    
    
    
    
    (322
    )
    
    
    
    
    
    
    (126
    )
    
    
    
    
    
    
    (448
    )Cash and cash equivalents:Increase (decrease) for the period
    
    
    (1,370
    )
    
    
    (5,507
    )
    
    
    1,772
    
    
    
    509
    
    
    
    
    
    
    
    (4,596
    )Balance, beginning of period
    
    
    18,600
    
    
    
    5,639
    
    
    
    390
    
    
    
    12,021
    
    
    
    
    
    
    
    36,650Balance, end of period
    
    $
    17,230
    
    
    $
    132
    
    
    $
    2,162
    
    
    $
    12,530
    
    
    $
    
    
    
    $
    32,054
 22




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##### Table of Contents



MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited)  continued
(dollars in thousands unless otherwise stated) 13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited continued MSX INTERNATIONAL, INC. CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal nine months ended September 28, 2003 MSXIMSXI
    
    Limited
    
    Guarantor
    
    Non-Guarantor
    
    
    
    
    
    MSXI(Parent)
    
    (Issuer)
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedCash flows from operating activities:Net income (loss)
    
    $
    (28,000
    )
    
    $
    (4,129
    )
    
    $
    (1,018
    )
    
    $
    (5,122
    )
    
    $
    9,958
    
    
    $
    (28,311
    )Adjustments to reconcile net income (loss) to
net
cash provided by (used for) operating
activities:Cumulative effect of accounting change for
goodwill impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Equity in affiliates
    
    
    1,018
    
    
    
    
    
    
    
    5,082
    
    
    
    3,974
    
    
    
    (10,269
    )
    
    
    (195
    )Loss on asset impairment and sale
    
    
    
    
    
    
    787
    
    
    
    
    
    
    
    1,106
    
    
    
    
    
    
    
    1,893Depreciation
    
    
    
    
    
    
    2,599
    
    
    
    6,974
    
    
    
    4,080
    
    
    
    
    
    
    
    13,653Amortization of debt issuance costs
    
    
    5,217
    
    
    
    43
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,260Deferred taxes
    
    
    10,223
    
    
    
    (1,081
    )
    
    
    2,631
    
    
    
    415
    
    
    
    
    
    
    
    12,188(Gain) loss on sale/disposal of property and
equipment
    
    
    
    
    
    
    358
    
    
    
    98
    
    
    
    171
    
    
    
    
    
    
    
    627(Increase) decrease in receivables, net
    
    
    135
    
    
    
    4,774
    
    
    
    (3,778
    )
    
    
    (16,050
    )
    
    
    
    
    
    
    (14,919
    )(Increase) decrease in inventory
    
    
    
    
    
    
    (5
    )
    
    
    (646
    )
    
    
    (991
    )
    
    
    
    
    
    
    (1,642
    )(Increase) decrease in prepaid expenses and
other assets
    
    
    7
    
    
    
    288
    
    
    
    (1,748
    )
    
    
    462
    
    
    
    
    
    
    
    (991
    )Increase (decrease) in current liabilities
    
    
    (2,800
    )
    
    
    1,185
    
    
    
    10,690
    
    
    
    6,154
    
    
    
    
    
    
    
    15,229Other, net
    
    
    (55
    )
    
    
    (74
    )
    
    
    (829
    )
    
    
    624
    
    
    
    
    
    
    
    (334
    )Net cash provided by (used for) operating
activities
    
    
    (14,255
    )
    
    
    4,745
    
    
    
    17,456
    
    
    
    (5,177
    )
    
    
    (311
    )
    
    
    2,458Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (617
    )
    
    
    (2,438
    )
    
    
    (1,410
    )
    
    
    
    
    
    
    (4,465
    )Proceeds from sale/disposal of property and
equipment
    
    
    
    
    
    
    564
    
    
    
    545
    
    
    
    1,041
    
    
    
    
    
    
    
    2,150Other, net
    
    
    
    
    
    
    
    
    
    
    (341
    )
    
    
    (1
    )
    
    
    
    
    
    
    (342
    )Net cash used for investing activities
    
    
    
    
    
    
    (53
    )
    
    
    (2,234
    )
    
    
    (370
    )
    
    
    
    
    
    
    (2,657
    )Cash flows from financing activities:Transactions with subsidiaries
    
    
    11,051
    
    
    
    (19,212
    )
    
    
    (4,810
    )
    
    
    1,873
    
    
    
    11,098
    
    
    
    Proceeds from issuance of debt
    
    
    83,482
    
    
    
    16,372
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99,854Repayment of debt
    
    
    (65,798
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,798
    )Debt issuance costs
    
    
    (5,518
    )
    
    
    (496
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,014
    )Changes in revolving debt, net
    
    
    (11,946
    )
    
    
    (429
    )
    
    
    
    
    
    
    (3,135
    )
    
    
    
    
    
    
    (15,510
    )Changes in book overdrafts, net
    
    
    
    
    
    
    
    
    
    
    (15,189
    )
    
    
    (52
    )
    
    
    
    
    
    
    (15,241
    )Net cash provided by (used for) financing
activities
    
    
    11,271
    
    
    
    (3,765
    )
    
    
    (19,999
    )
    
    
    (1,314
    )
    
    
    11,098
    
    
    
    (2,709
    )Effect of foreign exchange rate changes on cash
and cash equivalents
    
    
    5,384
    
    
    
    (884
    )
    
    
    5,381
    
    
    
    1,526
    
    
    
    (10,787
    )
    
    
    620Cash and cash equivalents:Increase (decrease) for the period
    
    
    2,400
    
    
    
    43
    
    
    
    604
    
    
    
    (5,335
    )
    
    
    
    
    
    
    (2,288
    )Balance, beginning of period
    
    
    
    
    
    
    116
    
    
    
    154
    
    
    
    10,665
    
    
    
    
    
    
    
    10,935Balance, end of period
    
    $
    2,400
    
    
    $
    159
    
    
    $
    758
    
    
    $
    5,330
    
    
    $
    
    
    
    $
    8,647
 23




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Results of Operations Outlook We are a significant supplier of technical business services and have
developed, through internal growth and acquisition, extensive international
service delivery capability. We are executing the following business strategy
to leverage our commercial strengths:  
    
    Capitalize on the growing trend toward outsourcing
    
    Grow our non-automotive and non-traditional client base
    
    Increase market share by delivering integrated services and cross-selling
    
    Increase margins through emphasis on higher return service
offerings in service segments with higher growth prospects Our business segments are affected by differing industry dynamics. As a
result of recent industry and economic trends, our overall revenue declined
during the past three years. Our revenue remains under pressure from
continuing cost containment actions at our major customers. In response to
difficult industry conditions we completed a significant restructuring plan in
2003 that reduced our headcount, consolidated underutilized facilities and
eliminated unfavorable leases. General economic trends in North America and
Europe appear to support the continuing development of our business and the
achievement of the companys 2004 operating plan. We remain focused on building our customized services into standardized
and scalable product offerings. Specific areas of emphasis include
non-automotive technical staffing and warranty- and aftermarket-related
business services. We believe that this positioning of our services as
integrated solutions will improve our value proposition to existing and
prospective customers. Our strategy is to sell high value solutions by
leveraging our global organization and existing customer base. As we continue
to expand our services with current customers in the automotive industry, an
important strategy is to expand our customer relationships to new automotive
customers and to other industries. Our targeted markets include transportation,
medical products, and financial services, among others. Although we cannot
provide assurance about the future, our actions are expected to enhance
profitability on existing business and increase operating efficiencies while we
work to expand our customer base. Net Sales For the first nine months of fiscal 2004, consolidated net sales decreased
$68.4 million, or 12.7%, from $536.9 million in fiscal 2003 to $468.5 million
during fiscal 2004. For the third quarter of fiscal 2004, consolidated net
sales decreased $20.5 million, or 12.2%, from $167.9 million in fiscal 2003 to
$147.3 million during fiscal 2004. Our sales by segment, net of intercompany
sales, were as follows: Change2004
    
    2003
    
    $
    
    %(dollars in thousands)Fiscal Quarter:Human Capital Services
    
    $
    52,722
    
    
    $
    62,785
    
    
    $
    (10,063
    )
    
    
    (16.0
    %)Business Services
    
    
    60,862
    
    
    
    67,135
    
    
    
    (6,273
    )
    
    
    (9.3
    %)Engineering Services
    
    
    33,742
    
    
    
    37,940
    
    
    
    (4,198
    )
    
    
    (11.1
    %)Total net sales
    
    $
    147,326
    
    
    $
    167,860
    
    
    $
    (20,534
    )
    
    
    (12.2
    %)Fiscal Nine Months:Human Capital Services
    
    $
    166,793
    
    
    $
    203,944
    
    
    $
    (37,151
    )
    
    
    (18.2
    %)Business Services
    
    
    196,203
    
    
    
    207,282
    
    
    
    (11,079
    )
    
    
    (5.3
    %)Engineering Services
    
    
    105,545
    
    
    
    125,720
    
    
    
    (20,175
    )
    
    
    (16.0
    %)Total net sales
    
    $
    468,541
    
    
    $
    536,946
    
    
    $
    (68,405
    )
    
    
    (12.7
    %)
 24




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS The decline in human capital services primarily reflects reduced volumes
in our engineering staffing and IT and technical staffing services in North
America. Volume reductions reflect year over year declines in development
programs and related contract staffing at automotive OEMs and selected
non-automotive clients. Sales of business services declined versus 2003 primarily due to reduced
demand for custom communication services in our Italian operations, in part due
to commercial challenges confronting our principal customer, Fiat Auto. We
executed a three year extension of our contract with Fiat Auto covering most
services on commercially reasonable terms that include price reductions, but
accelerated invoice payment terms. The overall decline in business services
was partially offset by favorable exchange rates impacting our European
results. The net impact of year over year exchange rate changes was to
increase sales of business services by about $3.1 million for the third quarter
of 2004 and $11.6 million for the first nine months of 2004. Excluding the
impact of foreign exchange rate changes, sales of business services for the
third quarter and first nine months of 2004 decreased about $9.3 million, or
13.9% and $22.7 million or 10.9%, respectively, versus the comparable periods
for 2003. Sales of engineering services reflect declining volumes partially offset
by exchange rate movement totaling $0.9 million and $3.3 million on sales for
the third quarter and first nine months of 2004, respectively. After adjusting
for changes due to exchange rate movements, our engineering operations reflect
a net decrease of $5.1 million, or 13.5% and $23.5 million, or 18.7% for the
third quarter and for the first nine months of 2004, respectively, compared to
the comparable periods of fiscal 2003. The sales decline is due primarily to
lower customer demand in Europe and reductions in manufacturing engineering and
specialty vehicle programs. Operating Profit Our consolidated gross profit, selling, general and administrative
expenses and operating income for the periods presented were: Change2004
    
    2003
    
    $
    
    %(dollars in thousands)Fiscal Quarter:Gross profit
    
    $
    17,423
    
    
    $
    18,380
    
    
    $
    (957
    )
    
    
    (5.2
    %)% of net sales
    
    
    11.8
    %
    
    
    10.9
    %
    
    
    n/a
    
    
    
    n/aSelling, general
and
administrative
expenses
    
    $
    10,692
    
    
    $
    15,232
    
    
    $
    (4,540
    )
    
    
    (29.8
    %)% of net sales
    
    
    7.3
    %
    
    
    9.1
    %
    
    
    n/a
    
    
    
    n/aOperating income
    
    $
    6,731
    
    
    $
    (651
    )
    
    $
    7,382
    
    
    
    % of net sales
    
    
    4.6
    %
    
    
    (0.4
    %)
    
    
    n/a
    
    
    
    n/aFiscal Nine Months:Gross profit
    
    $
    56,900
    
    
    $
    62,429
    
    
    $
    (5,529
    )
    
    
    (8.8
    %)% of net sales
    
    
    12.1
    %
    
    
    11.6
    %
    
    
    n/a
    
    
    
    n/aSelling, general
and
administrative
expenses
    
    $
    32,812
    
    
    $
    47,429
    
    
    $
    (14,617
    )
    
    
    (30.8
    %)% of net sales
    
    
    7.0
    %
    
    
    8.8
    %
    
    
    n/a
    
    
    
    n/aOperating income
    
    $
    24,088
    
    
    $
    9,205
    
    
    $
    14,883
    
    
    
    161.7
    %% of net sales
    
    
    5.1
    %
    
    
    1.7
    %
    
    
    n/a
    
    
    
    n/a
 25




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Overall, gross profit declined year over year as a result of reduced
volumes and pricing pressures. Reductions in program volumes resulted in a
decrease in gross margin of $2.2 million and $9.0 million for the third quarter
and first nine months of 2004, respectively. The impact of these factors on
gross profit were partially offset by cost reductions implemented throughout
the company during fiscal 2003. Our cost reduction programs have focused
primarily on indirect labor and related fringe benefit costs, elimination of
unprofitable operations, consolidation of facilities and reductions of other
indirect operating costs. These initiatives resulted in savings to our cost of
sales of approximately $3.8 million for the third quarter of 2004 and $11.4
million for the first nine months of 2004. Gross profit as a percentage of
sales increased to 11.8% for the third quarter of 2004 compared to 10.9% for
the third quarter of 2003. For the first nine months of 2004 gross profit as a
percentage of net sales improved to 12.1% compared to 11.6% for the
corresponding period of 2003. For the first nine months of 2004 our cost
reduction program has resulted in total savings of $26.0 million in both cost
of sales and in selling, general and administrative expenses compared to the
first nine months of 2003. Interest expense Interest expense decreased to $8.1 million during the third quarter of
2004 from $9.4 million during the third quarter of 2003, a $1.3 million
reduction. For the first nine months of 2004, interest expense net of interest
income on invested cash balances increased $1.5 million versus 2003. Interest
expense for both the quarter and first nine months of 2003 included charges
totaling $2.4 million related to the refinancing of our bank debt outstanding
as of August 1, 2003. The increase in interest expense compared to 2003, after
adjusting for the $2.4 million charge, primarily resulted from increased
interest rates on fixed-rate debt and an increase in average debt outstanding
after the senior secured debt refinancing. Income taxes We currently provide valuation allowances for a significant portion of the
companys deferred tax assets. The effective tax rate for the quarter and nine
months ended October 3, 2004 differs from the 35% federal statutory rate
primarily because of these valuation allowances. The income tax benefit for
the quarter ended October 3, 2004 relates primarily to improved performance in
a foreign operation, which resulted in a reduction to a valuation allowance
previously recorded for this operation totaling $626 thousand. The valuation allowance benefit was
partially offset by tax on earnings in certain foreign jurisdictions for which
valuation allowances were not previously required. For the fiscal nine months
ended October 3, 2004 taxable earnings in certain foreign jurisdictions
exceeded benefits recognized from reductions of valuation allowances that totaled $1.6 million. Liquidity and Capital Resources Cash Flows General.Historically, our principal capital requirements are for working
capital, product development initiatives, and capital expenditures for customer
programs. These requirements have been met through a combination of senior
secured debt, issuance of senior subordinated notes and cash from operations.
In response to lower sales volumes and a de-emphasis on capital intensive
businesses we have reduced our capital expenditures for existing programs and
selected new product development initiatives. We also emphasize disciplined
management of working capital. Capital expenditure requirements for current
programs have decreased commensurate with reduced demand for selected services
and by redeploying underutilized assets. Days sales outstanding, accounts
receivable agings, and other working capital metrics are monitored closely to
minimize investments in working capital. We believe that such metrics are
important to identify opportunities and potential problems, particularly those
associated with the automated payment processes of our large automotive
customers. Cash balances in excess of amounts required to fund daily operations
are used to pay down any amounts outstanding under our credit facility.
Thereafter, surplus funds are invested in short term, money market investments. We typically pay our employees on a weekly basis. In some cases,
including in Europe, employees are paid on a monthly or bi-weekly basis. We
receive payment from our customers within invoicing terms, which is generally a
30 to 60 day period after the invoice date. However, in connection with
certain of our vendor management services, we collect related receivables at
approximately the same time we make payment to suppliers. 26




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS Operating Activities. Net cash provided by operating activities was $2.3
million for the first nine months of fiscal 2004 compared to net cash provided
by operating activities of $2.5 million during fiscal 2003. The modest overall
change reflects a $48.0 million decrease in receivables resulting from the
timing of accounts receivable collections relative to the close of the fiscal
period, lower days sales outstanding, and lower sales volume. Lower investment
in accounts receivable was offset by a $52.9 million reduction in current
liabilities in the nine months ended October 3, 2004. Disbursements included
$14.0 million in payments related to our 2003 cost reduction program and a
$10.0 million one-time remittance, which was previously recorded, to a customer
related to a process change in our procurement services program. All other
changes in our net income and working capital contributed $7.2 million of net
cash provided by operating activities during the first nine months of 2004. Investing Activities.Net cash used for investing activities was $1.1
million for the first nine months of 2004 compared to net cash used for
investing activities of $2.7 million for the comparable period of 2003. Capital
expenditure requirements for current programs decreased commensurate with the
current business volumes, while discretionary spending is lower due to
increased strategic emphasis on high return services with lower capital
investment requirements. Financing Activities. Net cash used for financing activities was $5.4
million for the first nine months of 2004 compared to net cash used for
financing activities of $2.7 million for the first nine months of 2003.
During the first nine months of 2004, net cash used for financing activities
included a $4.3 impact related to the timing of working capital funding
requirements. The comparable impact of timing on funding of disbursements for
the first nine months of 2003 was $15.2 million, which was substantially offset
by the net proceeds of our August 2003 refinancing. Liquidity and Available Financings Our total indebtedness as of October 3, 2004 consists of senior secured
notes, mezzanine term notes, fourth lien term notes, senior subordinated notes
and borrowings under various short-term arrangements. As of October 3, 2004
there was approximately $1.8 million drawn pursuant to our multiple-country
senior credit facility. In addition to our total indebtedness, we also have
contingent commitments related to letters of credit totaling about $4.3 million
at October 3, 2004. Available borrowings under our credit facility as of October 3, 2004 are
subject to accounts receivable balance requirements. As of October 3, 2004 we
have $38.2 million available for immediate borrowing based on eligible accounts
receivable as determined in accordance with our credit agreement, as amended. The company was notified by its largest finance source in Italy, Fidis
S.p.a., of its intent to terminate the current financing arrangement with Satiz
S.r.l. in 2004. At October 3, 2004 $8.3 million was drawn on the facility,
collateralized by a corresponding amount of accounts receivable from our
largest Italian customer. Recently, the company concluded an arrangement with
an alternative financing source to replace the majority but not all of the
existing arrangement with Fidis. We have also negotiated improved payment
terms with the customer. We continue to seek additional financing. We believe that our financing arrangements, including 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 1. Legal Proceedings) through the term
of our senior credit facility, although there can be no assurance that will be
the case. Financing requirements beyond July 2006 will require additional
access to capital markets. Our ability to access additional capital in the
long term depends on availability of capital markets and pricing on
commercially reasonable terms as well as our credit profile at the time we are
seeking funds. From time to time, we review our long-term financing and
capital structure. As a result of our review, we may periodically explore
alternatives to our current financing, including the issuance of additional
long-term debt, refinancing our new credit facility and other restructurings or
financings. In addition, we may from time to time seek to retire our
outstanding notes in open market purchases, privately negotiated transactions
or otherwise. These repurchases, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions and other
factors. The amount of repurchases of our notes may be material and may
involve significant amounts of cash and/or financing availability. In connection with a procurement services program, we agreed with our
customer to modify the process by which we receive funds and disburse payments
to vendors. The process change resulted in a one-time remittance to the
customer in the third quarter totaling $10.0 million. The $10 million
obligation was previously recorded on our balance sheet and had no impact on
results of operation during the third quarter or first nine months of 2004. 27




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS New Accounting Pronouncements In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for how
companies classify and measure in their statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that a company classify certain financial instruments as liabilities
because they embody an obligation of the company. As discussed in Note 6, the
redemption provisions of our preferred stock were amended and the adoption of
SFAS 150 during the first quarter of fiscal 2004 did not have any impact on the
companys consolidated results of operations or financial position. In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities (FIN 46) which requires the consolidation of
variable interest entities, as defined. FIN 46 is applicable to variable
interest entities created after January 31, 2003. Variable interest entities
created prior to February 1, 2003, must be consolidated effective December 31,
2003. The adoption of FIN 46 during the first quarter of fiscal 2004 did not
have a material impact on the companys consolidated results of operations or
financial position. Forward  Looking Statements Certain of the statements made in this report on Form 10-Q, including the
success of restructuring activities and other operational improvements,
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements may be identified by
the use of forward looking terminology such as believes, expects,
estimates, will, should, plans, anticipates or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. Such forward-looking statements are based on current management
projections and expectations. They involve significant risks and
uncertainties. As such, they are not guarantees of future performance. MSX
International disclaims any intent or obligation to update such statements. Actual results may vary materially from those in the forward-looking
statements as a result of any number of factors, many of which are beyond the
control of management. These important factors include: our leverage and
related exposure to changes in interest rates; our reliance on major customers
in the automotive industry and the timing of their product development and
other initiatives; the market demand for our technical business services in
general; our ability to recruit and place qualified personnel; delays or
unexpected costs associated with cost reduction efforts; risks associated with
operating internationally, including economic, political and currency risks;
and risks associated with our acquisition strategy. Additional information
concerning these and other factors are discussed in MSX Internationals
Registration Statement on Form S-4 (dated November 19, 2003) and in other
filings with the Securities and Exchange Commission. 28




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of MSX
International, Inc.s Disclosure Committee and management, including the Chief
Executive Officer and the Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon this evaluation the
Chief Executive Officer and the Chief Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed in our periodic SEC reports is recorded, processed,
summarized, and reported as and when required. There are inherent limitations to the effectiveness of any system of disclosure
controls and procedures, including the possibility of human error and the
circumvention or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives. There has been no change in the Companys internal control over financial
reporting during the fiscal quarter ended October 3, 2004, that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. 29




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##### Table of Contents



PART II. OTHER INFORMATION 
 ITEM 1. LEGAL PROCEEDINGS We are involved in various legal proceedings incidental to the ordinary
conduct of our business. One such matter involves claims and counter claims
asserted by both parties in connection with a contingent earnout obligation
related to the acquisition of Lexstra International, Inc. and Lexus
Temporaries, Inc. and various other claims by and against two former employees.
The parties agreed to terms of settlement with regard to this matter on June
29, 2004. The monetary terms of settlement are consistent in present value
with amounts previously reserved by the company, with 40% of the settlement
amount expected to be paid in the fourth quarter of 2004 and the balance paid
in equal quarterly installments over three years. Another such matter is an arbitration and related action in state court to
enforce/vacate a March 2004 arbitration award totaling $3.8 million. The
underlying dispute involves a claim for a contingent earnout payment under the
terms of a purchase agreement for the acquisition of Management Resources, Inc.
On October 4, 2004, the state court granted MSXIs motion to vacate the
arbitration award and subsequently ordered that the matter be re-arbitrated in
its entirety before a new arbitrator. The opposing party may file an appeal.
Litigation is subject to significant uncertainty and any final result could be
greater or less than what management anticipates. However, we believe that
none of the legal proceedings will have a material adverse effect on our
financial condition, results of operation or long-term cash flows. 
 ITEM 5. OTHER INFORMATION None. 
 ITEM 6. EXHIBITS  31.1
    
    Certification of Chief Financial Officer pursuant
to rules 13a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Executive Officer pursuant
to rules 13a-15(e) and 15d-15(e) promulgated under the
Securities Exchange Act of 1934, as amended.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to section 906 of the Sarbanes  Oxley Act
of 2002 30




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##### Table of Contents



SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Date: November 15, 2004 MSX INTERNATIONAL, INC.
(Registrant) By:
    
    /s/ Frederick K. Minturn

Frederick K. MinturnExecutive Vice President andChief Financial Officer
 (Chief accounting officer and authorized signatory) 31




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##### Table of Contents



EXHIBIT INDEX  EXHIBIT NO.
    DESCRIPTION  EX-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.  EX-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.  EX-32.1
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes  Oxley Act of 2002