MSX INTERNATIONAL INC - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended April 4, 2004

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 333-49821

MSX International, Inc.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		38-3323099 (I.R.S. Employer Identification No.)

1950 Concept Drive, Warren, Michigan (Address of principal executive offices)		48091 (Zip Code)

(248) 299-1000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12(b)-2 of the Securities and Exchange Act of 1934). Yes [ ] No [X]

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MSX INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

as of April 4, 2004 and December 28, 2003


	April 4, 2004 (Unaudited)			December 28, 2003
	(dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	41,121		$	36,650
Accounts receivable, net (Note 3)		208,395			219,219
Inventory		9,012			8,618
Prepaid expenses and other assets		7,765			6,218
Deferred income taxes, net		6,501			6,896

Total current assets		272,794			277,601

Property and equipment, net		16,376			18,480
Goodwill, net (Note 4)		133,358			129,624
Other assets		13,016			13,268

Total assets	$	435,544		$	438,973

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Notes payable and current portion of long-term debt (Note 5)	$	10,255		$	10,519
Accounts payable and drafts		152,672			149,051
Accrued payroll and benefits		29,954			30,140
Other accrued liabilities		72,715			78,769

Total current liabilities		265,596			268,479

Long-term debt (Note 5)		249,944			249,742
Long-term deferred compensation and other liabilities		11,939			12,031
Deferred income taxes, net		1,882			1,618

Total liabilities		529,361			531,870

Commitments and contingencies		—			—
Series A Preferred Stock (Note 6)		84,477			81,812
Shareholders’ deficit:
Common Stock, $.01 par value, 5,000,000 aggregate shares of Class A and Class B Common Stock authorized; 486,354 shares of Class A Common Stock issued and outstanding		5			5
Additional paid-in-capital		(24,881	)		(24,881	)
Common stock purchase warrants		750			750
Accumulated other comprehensive loss		(4,063	)		(2,749	)
Accumulated deficit		(150,105	)		(147,834	)

Total shareholders’ deficit		(178,294	)		(174,709	)

Total liabilities and shareholders’ deficit	$	435,544		$	438,973

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

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

for the fiscal quarters ended April 4, 2004 and March 30, 2003


	Fiscal Quarter Ended
	April 4,			March 30,
	2004			2003
	(in thousands)
Net sales	$	167,314		$	183,351
Cost of sales		146,713			162,788

Gross profit		20,601			20,563

Selling, general and administrative expenses		11,307			16,090
Restructuring and severance costs		—			1,352
Loss on asset impairment and sale		—			79

Operating income		9,294			3,042

Interest expense, net		7,805			6,675

Income (loss) before income taxes, minority interests and equity in affiliates		1,489			(3,633	)

Income tax provision		1,095			101
Less minority interests and equity in affiliates, net of taxes		—			(174	)

Net income (loss)		394			(3,560	)

Accretion for redemption of preferred stock		(2,665	)		(2,194	)

Net loss available to common shareholders	$	(2,271	)	$	(5,754	)

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

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

for the fiscal quarters ended April 4, 2004 and March 30, 2003


	Fiscal Quarter Ended
	April 4,			March 30,
	2004			2003
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	394		$	(3,560	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Minority interests and equity in affiliates		—			(174	)
Depreciation		2,381			4,759
Amortization of debt issuance costs and non-cash interest		1,107			513
Deferred taxes		659			(665	)
(Gain) loss on sale/disposal of property and equipment		(55	)		361
(Increase) decrease in receivables, net		10,824			(7,630	)
(Increase) decrease in inventory		(395	)		637
(Increase) decrease in prepaid expenses and other assets		(1,546	)		(2,008	)
Increase (decrease) in current liabilities		(2,725	)		2,058
Other, net		(282	)		(1,181	)

Net cash provided by (used for) operating activities		10,362			(6,890	)

Cash flows from investing activities:
Capital expenditures		(342	)		(2,246	)
Proceeds from sale/disposal of property and equipment		78			236
Other, net		294			(299	)

Net cash provided by (used for) investing activities		30			(2,309	)

Cash flows from financing activities:
Repayment of debt		—			(1,394	)
Debt issuance costs		(313	)		(975	)
Changes in revolving debt, net		(634	)		18,719
Changes in book overdrafts, net		(3,696	)		(13,846	)

Net cash provided by (used for) financing activities		(4,643	)		2,504

Effect of foreign exchange rate changes on cash and cash equivalents		(1,278	)		(354	)

Cash and cash equivalents:
Increase for the period		4,471			(7,049	)
Balance, beginning of period		36,650			10,935

Balance, end of period	$	41,121		$	3,886

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

MSX International, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(dollars in thousands unless otherwise stated)

1. Organization and Basis of Presentation:

The accompanying financial statements present the consolidated assets and liabilities and results of operations of MSX International, Inc. and its majority owned subsidiaries (“MSXI”). MSXI is a holding company owned primarily by Citicorp and affiliates and certain members of management. We are principally engaged in providing business services to automobile manufacturers and suppliers and other industries primarily in North America and Europe. We utilize a 52-53 week fiscal year, which ends on the Sunday nearest December 31.

All intercompany transactions and balances have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items, which are necessary for a fair presentation. The operating results for the fiscal quarters ended April 4, 2004 and March 30, 2003 are not necessarily indicative of the results of operations for the entire year. Reference should be made to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2003. Certain prior year amounts have been reclassified to conform to the presentation adopted during the current period.

2. Restructuring and Severance:

During 2003, the company executed several restructuring actions to reduce operating costs and streamline its administrative infrastructure. No such charges were recorded during the first quarter of 2004. Unfunded obligations associated with these restructuring actions appear as reserves in the company’s balance sheet. The following table shows the activity related to restructuring reserves for the fiscal quarter ended April 4, 2004:


							Other
	Termination			Facility			Contractual
	Benefits			Consolidation			Costs			Other			Total
Reserve at December 28, 2003	$	8,032		$	5,954		$	3,085		$	265		$	17,336
Payments and reserve utilization in fiscal 2004		(3,503	)		(4,454	)		(773	)		(156	)		(8,886	)

Reserve at April 4, 2004	$	4,529		$	1,500		$	2,312		$	109		$	8,450

3. Accounts Receivable:

Accounts receivable include both billed and unbilled receivables. Unbilled receivables amounted to $66.1 million and $59.1 million at April 4, 2004 and December 28, 2003, respectively. All such billings are expected to be collected within the ensuing year. Accounts receivable also include the portion of our billings for certain vendor management services attributable to services provided by our vendors, which are passed on to our customers. These amounts totaled $30.6 million as of April 4, 2004 and $38.3 million as of December 28, 2003. A corresponding liability to our vendors for these amounts is recorded in accounts payable at the time the receivable is recognized.

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

4. Goodwill, net:

The following summarizes the changes in our goodwill balances during the three months ended April 4, 2004:


	Human
	Capital		Business			Engineering
	Services		Services			Services		Total
Balance at December 28, 2003	$	97,392	$	32,232		$	—	$	129,624
Goodwill recorded during the period		—		3,800			—		3,800
Translation changes		3		(69	)		—		(66	)

Balance at April 4, 2004	$	97,395	$	35,963		$	—	$	133,358

During the first quarter of fiscal 2004 we recorded a contingent earnout obligation totaling $3.8 million related to a prior year acquisition. Payment of this obligation is pending resolution of a dispute regarding the earnout.

5. Debt:

Debt is comprised of the following:


	Interest Rates at						Outstanding at
	April 4,			December 28,			April 4,		December 28,
	2004			2003			2004		2003
Senior credit facility		7.50	%		8.55	%	$	—	$	297
Senior secured notes, net of unamortized discount		11.00	%		11.00	%		74,948		74,911
Mezzanine term notes, net of unamortized discount		11.50	%		11.50	%		24,373		24,325
Fourth lien term notes		10.00	%		10.00	%		18,288		17,802
Senior subordinated notes		11.375	%		11.375	%		130,000		130,000
Satiz facility		4.95	%		4.67	%		10,255		10,519
Other		7.00	%		7.00	%		2,335		2,407

								260,199		260,261
Less current portion								10,255		10,519

Total long-term debt							$	249,944	$	249,742

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

6. Series A Preferred Stock:

Effective December 29, 2003 the company amended its Restated Certificate of Incorporation to modify the redemption provisions of our 12% Series A Cumulative Preferred Stock (the “Preferred Stock”). As a result of the amendment the Preferred Stock is now redeemable to the extent that funds are legally available, on or after December 31, 2008, at the option of the company or the shareholder.

As of April 4, 2004 and December 28, 2003 there are 359,448 shares of the Preferred Stock outstanding with a stated value of $100 per share or about $36 million in total. We are authorized to issue up to 1,500,000 shares of Preferred Stock, divided into two classes: 500,000 shares of Series A Preferred Stock, par value $0.01, and 1,000,000 shares of New Preferred Stock, par value $0.01. As of April 4, 2004, dividends accrued totaled $48.5 million, however we have not declared or paid any dividends. We may not declare or pay any dividends or other distribution with respect to any common stock or other class or series of stock ranking junior to the Preferred Stock without first complying with restrictions specified in the Amended and Restated Stockholders’ Agreement. Our ability to pay cash dividends, and to acquire or redeem the preferred stock, is subject to restrictions contained in our debt agreements.

7. Comprehensive Loss:

Our comprehensive loss was:


	Fiscal Quarter Ended
	April 4,			March 30,
	2004			2003
Net income (loss)	$	394		$	(3,560	)
Other comprehensive income (loss) - foreign currency translation adjustments		(1,314	)		1,398

Comprehensive loss	$	(920	)	$	(2,162	)

8. Income Taxes:

The company currently provides valuation allowances for a significant portion of its deferred tax assets. The effective tax rate for the quarter ended April 4, 2004 differs from the 35% federal statutory rate primarily because of these valuation allowances. The expense for the period relates primarily to earnings in foreign jurisdictions for which valuation allowances have not previously been recorded.

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

9. Segment Information:

MSXI is a global provider of technical business services to the automotive and other industries. Our business includes: human capital services, business services and engineering services. Human capital services include a full range of staffing solutions, including direct support of our engineering and business services. Our business services include solutions to quality, and communication related customer needs. Engineering services offers a full range of total product, custom, or single point engineering solutions. Certain operations within each of our segments have been aggregated following the provisions of SFAS No. 131 due to the similar characteristics of their operations, including the nature of their service offerings, processes supporting the delivery of the services, common customers, and marketing and sales processes.

The accounting policies of each of our segments are the same as those for MSXI except that the financial results for each segment are presented using a management approach. We evaluate performance based on earnings before interest, taxes, including the Michigan Single Business Tax and other similar taxes, amortization and non-cash charges, (EBITA). The results of each segment include certain allocations for general, administrative, and other shared costs. However, certain shared costs and termination and restructuring costs are not allocated to the segments.

The following is a summary of selected data for each of our segments:


	Human
	Capital		Business		Engineering
	Services		Services		Services			Other			Total
Quarter Ended April 4, 2004:
Net sales — external	$	58,878	$	67,891	$	40,545		$	—		$	167,314
Net intercompany sales		2		305		269			(576	)		—
Segment EBITA		3,777		6,769		2,882			—			13,428
Quarter Ended March 30, 2003:
Net sales — external		72,223		66,932		44,196			—			183,351
Net intercompany sales		292		1,528		139			(1,959	)		—
Segment EBITA		4,723		4,343		(2,476	)		—			6,590

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
	April 4,			March 30,
	2004			2003
Total segment EBITA	$	13,428		$	6,590
Net costs not allocated to segments		(3,348	)		(2,673	)
Interest expense, net		(7,805	)		(6,675	)
Michigan single business tax and other similar taxes		(786	)		(875	)

Consolidated income (loss) before income taxes, minority interests and equity in affiliates	$	1,489		$	(3,633	)

10. Stock-Based Compensation:

We account for stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (APB 25”), “Accounting for Stock Issued to Employees,” and related interpretations. In June, 2003 we repriced selected outstanding stock options. In accordance with APB 25 we now account for the options under variable plan accounting. We have not recognized any expense related to employee stock options as the estimated fair value of the stock is below the exercise price of the options as of April 4, 2004. The following table illustrates the effect on net income (loss) for the fiscal quarters ended April 4, 2004 and March 30, 2003 if we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation.


	Fiscal Quarter Ended
	April 4,		March 30,
	2004		2003
Net income (loss) as reported	$	394	$	(3,560	)
Deduct: Total employee stock-based compensation determined under the fair value method, net of taxes		—		(18	)

Pro forma net income (loss)	$	394	$	(3,578	)

11. New Accounting Pronouncements:

In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. SFAS No. 150 establishes standards for how companies classify and measure in their statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that a company classify certain financial instruments as liabilities because they embody an obligation of the company. As discussed in Note 6, the redemption provisions of our preferred stock were amended and the adoption of SFAS 150 during the first quarter of fiscal 2004 did not have any impact on the company’s consolidated results of operations or financial position.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46) which requires the consolidation of variable interest entities, as defined. FIN 46 is applicable to variable interest entities created after January 31, 2003. Variable interest entities created prior to February 1, 2003, must be consolidated effective December 31, 2003. The adoption of FIN 46 during the first quarter of fiscal 2004 did not have a material impact on the company’s consolidated results of operations or financial position.

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.:

Senior secured notes that are issued by MSX International, Inc. are collateralized by security interests in substantially all of the assets of the company and its domestic subsidiaries, subject to permitted liens. Payment obligations under the senior secured notes as well as the senior subordinated notes issued by MSX International, Inc. are guaranteed jointly and severally by all domestic subsidiaries of MSX International, Inc.

The following presents condensed consolidating financial information for:

• MSXI-the parent company and issuer

• The guarantor subsidiaries

• The non-guarantor subsidiaries

• MSXI on a consolidated basis

Investments in subsidiaries are accounted for under the equity method. The principal elimination entries are to eliminate the investments in subsidiaries and intercompany balances and transactions. Separate financial statements for each of the guarantor and non-guarantor subsidiaries are not presented because management has determined such statements would not provide additional material information to the holders of the senior subordinated or senior secured notes.

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of April 4, 2004


						Non-
	MSXI			Guarantor		Guarantor					MSXI
	(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	26,250		$	2,367	$	12,504	$	—		$	41,121
Accounts receivable, net		—			88,936		119,459		—			208,395
Inventory		—			6,068		2,944		—			9,012
Prepaid expenses and other assets		—			4,762		3,003		—			7,765
Deferred income taxes, net		—			3,138		6,830		(3,467	)		6,501

Total current assets		26,250			105,271		144,740		(3,467	)		272,794

Property and equipment, net		—			7,115		9,261		—			16,376
Goodwill, net		—			116,302		17,056		—			133,358
Investment in subsidiaries		92,550			17,441		—		(108,233	)		1,758
Other assets		7,138			3,315		805		—			11,258
Deferred income taxes, net		—			1,668		—		(1,668	)		—

Total assets	$	125,938		$	251,112	$	171,862	$	(113,368	)	$	435,544

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—	$	10,255	$	—		$	10,255
Accounts payable and drafts		—			86,206		66,466		—			152,672
Accrued liabilities		5,151			53,282		44,236		—			102,669
Deferred income taxes, net		3,467			—		—		(3,467	)		—

Total current liabilities		8,618			139,488		120,957		(3,467	)		265,596

Long-term debt		231,066			—		18,878		—			249,944
Intercompany accounts		(21,269	)		16,406		4,863		—			—
Long-term deferred compensation and other liabilities		—			2,668		9,271		—			11,939
Deferred income taxes, net		1,340			—		2,210		(1,668	)		1,882

Total liabilities		219,755			158,562		156,179		(5,135	)		529,361

Series A Preferred Stock		84,477			—		—		—			84,477
Shareholders’ equity (deficit)		(178,294	)		92,550		15,683		(108,233	)		(178,294	)

Total liabilities and shareholders’ equity (deficit)	$	125,938		$	251,112	$	171,862	$	(113,368	)	$	435,544

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of December 28, 2003


						Non-
	MSXI			Guarantor		Guarantor					MSXI
	(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	18,600		$	390	$	17,660	$	—		$	36,650
Accounts receivable, net		—			95,154		124,065		—			219,219
Inventory		—			5,635		2,983		—			8,618
Prepaid expenses and other assets		—			4,151		2,067		—			6,218
Deferred income taxes, net		—			3,093		6,896		(3,093	)		6,896

Total current assets		18,600			108,423		153,671		(3,093	)		277,601

Property and equipment, net		—			8,129		10,351		—			18,480
Goodwill, net		—			112,502		17,122		—			129,624
Investment in subsidiaries		87,423			13,659		—		(99,284	)		1,798
Other assets		7,370			3,448		652		—			11,470
Deferred income taxes, net		—			2,286		—		(2,286	)		—

Total assets	$	113,393		$	248,447	$	181,796	$	(104,663	)	$	438,973

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—	$	10,519	$	—		$	10,519
Accounts payable and drafts		—			77,525		71,526		—			149,051
Accrued liabilities		9,425			51,147		48,337		—			108,909
Deferred income taxes, net		3,093			—		—		(3,093	)		—

Total current liabilities		12,518			128,672		130,382		(3,093	)		268,479

Long-term debt		230,566			—		19,176		—			249,742
Intercompany accounts		(39,080	)		29,668		9,412		—			—
Long-term deferred compensation and other liabilities		—			2,684		9,347		—			12,031
Deferred income taxes, net		2,286			—		1,618		(2,286	)		1,618

Total liabilities		206,290			161,024		169,935		(5,379	)		531,870

Series A Preferred Stock		81,812			—		—		—			81,812
Shareholders’ 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

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc.- continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended April 4, 2004 and March 30, 2003


							Non-
	MSXI			Guarantor			Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Fiscal Quarter Ended April 4, 2004:
Net sales	$	—		$	97,399		$	70,491		$	(576	)	$	167,314
Cost of sales		—			87,569			59,720			(576	)		146,713

Gross profit		—			9,830			10,771			—			20,601
Selling, general and administrative expenses		—			6,990			4,317			—			11,307

Operating income (loss)		—			2,840			6,454			—			9,294
Interest expense, net		6,667			1,099			39			—			7,805

Income (loss) before income taxes, minority interests, and equity in affiliates		(6,667	)		1,741			6,415			—			1,489
Income tax provision (benefit)		(622	)		436			1,281			—			1,095
Minority interests and equity in affiliates		6,439			5,134			—			(11,573	)		—

Net income (loss)	$	394		$	6,439		$	5,134		$	(11,573	)	$	394

Fiscal Quarter Ended March 30, 2003:
Net sales	$	—		$	109,031		$	76,279		$	(1,959	)	$	183,351
Cost of sales		—			96,710			68,423			(1,959	)		163,174

Gross profit		—			12,321			7,856			—			20,177
Selling, general and administrative expenses		—			9,329			6,375			—			15,704
Restructuring and severance costs		—			957			395			—			1,352
Loss on asset impairment and sale		—			55			24			—			79

Operating income (loss)		—			1,980			1,062			—			3,042
Interest expense, net		4,346			2,021			308			—			6,675

Income (loss) before income taxes, minority interests, and equity in affiliates		(4,346	)		(41	)		754			—			(3,633	)
Income tax provision (benefit)		(1,295	)		399			997			—			101
Minority interests and equity in affiliates		(509	)		(69	)		59			693			174

Net income (loss)	$	(3,560	)	$	(509	)	$	(184	)	$	693		$	(3,560	)

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal quarter ended April 4, 2004


							Non-
	MSXI			Guarantor			Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	394		$	6,439		$	5,134		$	(11,573	)	$	394
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates		(6,439	)		(5,134	)		—			11,573			—
Loss on asset impairment and sale		—			—			—			—			—
Depreciation		—			1,212			1,169			—			2,381
Amortization of debt issuance costs and non-cash interest		1,028			—			79			—			1,107
Deferred taxes		(572	)		573			658			—			659
(Gain) loss on sale/disposal of property and equipment		—			3			(58	)		—			(55	)
(Increase) decrease in receivables, net		—			6,218			4,606			—			10,824
(Increase) decrease in inventory		—			(434	)		39			—			(395	)
(Increase) decrease in prepaid expenses and other assets		—			(610	)		(936	)		—			(1,546	)
Increase (decrease) in current liabilities		(4,276	)		10,712			(9,161	)		—			(2,725	)
Other, net		—			(143	)		(139	)		—			(282	)

Net cash provided by (used for) operating activities		(9,865	)		18,836			1,391			—			10,362

Cash flows from investing activities:
Capital expenditures		—			(200	)		(142	)		—			(342	)
Proceeds from sale/disposal of property and equipment		—			2			76			—			78
Other, net		—			294			—			—			294

Net cash provided by (used for) investing activities		—			96			(66	)		—			30

Cash flows from financing activities:
Transactions with subsidiaries		17,811			(13,261	)		(4,550	)		—			—
Debt issuance costs		(296	)		—			(17	)		—			(313	)
Changes in revolving debt, net		—			—			(634	)		—			(634	)
Changes in book overdrafts, net		—			(3,696	)		—			—			(3,696	)

Net cash provided by (used for) financing activities		17,515			(16,957	)		(5,201	)		—			(4,643	)

Effect of foreign exchange rate changes on cash and cash equivalents		—			—			(1,278	)		—			(1,278	)

Cash and cash equivalents:
Increase (decrease) for the period		7,650			1,975			(5,154	)		—			4,471
Balance, beginning of period		18,600			391			17,659			—			36,650

Balance, end of period	$	26,250		$	2,366		$	12,505		$	—		$	41,121

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

12. Guarantor and Non-Guarantor Subsidiaries of MSX International, Inc. — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal quarter ended March 30, 2003


							Non-
	MSXI			Guarantor			Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(3,560	)	$	(509	)	$	(184	)	$	693		$	(3,560	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates		509			70			(60	)		(693	)		(174	)
Depreciation		—			2,375			2,384			—			4,759
Amortization of debt issuance costs		513			—			—			—			513
Deferred taxes		—			—			(665	)		—			(665	)
Loss on sale/disposal of property and equipment		—			60			301			—			361
(Increase) decrease in receivables, net		(6	)		(5,988	)		(1,636	)		—			(7,630	)
(Increase) decrease in inventory		—			240			397			—			637
(Increase) decrease in prepaid expenses and other assets		9			(1,620	)		167			—			(1,444	)
Increase (decrease) in current liabilities		(4,279	)		9,068			(3,295	)		—			1,494
Other, net		—			(1,098	)		(83	)		—			(1,181	)

Net cash provided by (used for) operating activities		(6,814	)		2,598			(2,674	)		—			(6,890	)

Cash flows from investing activities:
Capital expenditures		—			(1,189	)		(1,057	)		—			(2,246	)
Proceeds from sale/disposal of property and equipment		—			236			—			—			236
Other, net		—			(299	)		—			—			(299	)

Net cash used for investing activities		—			(1,252	)		(1,057	)		—			(2,309	)

Cash flows from financing activities:
Transactions with subsidiaries		(9,418	)		14,110			(4,692	)		—			—
Repayment of debt		(1,385	)		(9	)		—			—			(1,394	)
Debt issuance costs		(975	)		—			—			—			(975	)
Changes in revolving debt, net		18,592			—			127			—			18,719
Changes in book overdrafts, net		—			(15,470	)		1,624			—			(13,846	)

Net cash provided by (used for) financing activities		6,814			(1,369	)		(2,941	)		—			2,504

Effect of foreign exchange rate changes on cash and cash equivalents		—			—			(354	)		—			(354	)

Cash and cash equivalents:
Increase (decrease) for the period		—			(23	)		(7,026	)		—			(7,049	)
Balance, beginning of period		—			154			10,781			—			10,935

Balance, end of period	$	—		$	131		$	3,755		$	—		$	3,886

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

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

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

• MSXI — the parent company

• MSXI Limited — the issuer

• The guarantor subsidiaries

• The non-guarantor subsidiaries

• MSXI on a consolidated basis

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited- continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of April 4, 2004


				MSXI					Non-
	MSXI			Limited			Guarantor		Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries		Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	26,250		$	99		$	2,367	$	12,405		$	—		$	41,121
Accounts receivable, net		—			19,860			88,936		99,599			—			208,395
Inventory		—			3			6,068		2,941			—			9,012
Prepaid expenses and other assets		—			785			4,762		2,218			—			7,765
Deferred income taxes, net		—			423			3,138		6,407			(3,467	)		6,501

Total current assets		26,250			21,170			105,271		123,570			(3,467	)		272,794

Property and equipment, net		—			2,330			7,115		6,931			—			16,376
Goodwill, net		—			104			116,302		16,952			—			133,358
Investment in subsidiaries		92,550			11			17,441		(2,312	)		(105,932	)		1,758
Other assets		7,138			601			3,315		204			—			11,258
Deferred income taxes, net		—			—			1,668		—			(1,668	)		—

Total assets	$	125,938		$	24,216		$	251,112	$	145,345		$	(111,067	)	$	435,544

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—		$	—	$	10,255		$	—		$	10,255
Accounts payable and drafts		—			9,545			86,206		56,921			—			152,672
Accrued liabilities		5,151			10,309			53,282		33,927			—			102,669
Deferred income taxes, net		3,467			—			—		—			(3,467	)		—

Total current liabilities		8,618			19,854			139,488		101,103			(3,467	)		265,596

Long-term debt		231,066			16,542			—		2,336			—			249,944
Intercompany accounts		(21,269	)		(10,672	)		16,406		15,535			—			—
Long-term deferred compensation and other liabilities		—			254			2,668		9,017			—			11,939
Deferred income taxes, net		1,340			539			—		1,671			(1,668	)		1,882

Total liabilities		219,755			26,517			158,562		129,662			(5,135	)		529,361

Series A Preferred Stock		84,477			—			—		—			—			84,477
Shareholders’ equity (deficit)		(178,294	)		(2,301	)		92,550		15,683			(105,932	)		(178,294	)

Total liabilities and shareholders’ equity (deficit)	$	125,938		$	24,216		$	251,112	$	145,345		$	(111,067	)	$	435,544


				MSXI					Non-
	MSXI			Limited			Guarantor		Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries		Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	18,600		$	5,639		$	390	$	12,021		$	—		$	36,650
Accounts receivable, net		—			23,876			95,154		100,189			—			219,219
Inventory		—			—			5,635		2,983			—			8,618
Prepaid expenses and other assets		—			715			4,151		1,352			—			6,218
Deferred income taxes, net		—			391			3,093		6,506			(3,094	)		6,896

Total current assets		18,600			30,621			108,423		123,051			(3,094	)		277,601

Property and equipment, net		—			2,614			8,129		7,737			—			18,480
Goodwill, net		—			99			112,502		17,023			—			129,624
Investment in subsidiaries		87,423			10			13,659		(2,638	)		(96,656	)		1,798
Other assets		7,370			594			3,448		58			—			11,470
Deferred income taxes, net		—			—			2,286		—			(2,286	)		—

Total assets	$	113,393		$	33,938		$	248,447	$	145,231		$	(102,036	)	$	438,973

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—		$	—	$	10,519		$	—		$	10,519
Accounts payable and drafts		—			15,028			77,525		56,498			—			149,051
Accrued liabilities		9,425			13,215			51,147		35,122			—			108,909
Deferred income taxes, net		3,093			—			—		—			(3,093	)		—

Total current liabilities		12,518			28,243			128,672		102,139			(3,093	)		268,479

Long-term debt		230,566			16,471			—		2,705			—			249,742
Intercompany accounts		(39,080	)		(8,779	)		29,668		18,191			—			—
Long-term deferred compensation and other liabilities		—			240			2,684		9,107			—			12,031
Deferred income taxes, net		2,286			391			—		1,228			(2,287	)		1,618

Total liabilities		206,290			36,566			161,024		133,370			(5,380	)		531,870

Series A Preferred Stock		81,812			—			—		—			—			81,812
Shareholders’ 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

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended April 4, 2004 and March 30, 2003


				MSXI						Non-
	MSXI			Limited			Guarantor			Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Fiscal Quarter Ended April 4, 2004
Net sales	$	—		$	19,000		$	97,399		$	51,491		$	(576	)	$	167,314
Cost of sales		—			16,554			87,569			43,166			(576	)		146,713

Gross profit		—			2,446			9,830			8,325			—			20,601
Selling, general and administrative expenses		—			1,233			6,990			3,084			—			11,307

Operating income		—			1,213			2,840			5,241			—			9,294
Interest expense (income), net		6,667			(178	)		1,099			217			—			7,805

Income (loss) before income taxes, minority interests and equity in affiliates		(6,667	)		1,391			1,741			5,024			—			1,489
Income tax provision (benefit)		(622	)		423			436			858			—			1,095
Minority interests and equity in affiliates		6,439			—			5,134			968			(12,541	)		—

Net income (loss)	$	394		$	968		$	6,439		$	5,134		$	(12,541	)	$	394

Fiscal Quarter Ended March 30, 2003
Net sales	$	—		$	22,933		$	109,031		$	53,346		$	(1,959	)	$	183,351
Cost of sales		—			20,378			96,710			48,045			(1,959	)		163,174

Gross profit		—			2,555			12,321			5,301			—			20,177
Selling, general and administrative expenses		—			3,086			9,329			3,289			—			15,704
Restructuring and severance costs		—			370			957			25			—			1,352
(Gain)/loss on asset impairment and sale		—			241			55			(217	)		—			79

Operating income (loss)		—			(1,142	)		1,980			2,204			—			3,042
Interest expense, net		4,346			262			2,021			46			—			6,675

Income (loss) before income taxes, minority interests and equity in affiliates		(4,346	)		(1,404	)		(41	)		2,158			—			(3,633	)
Income tax provision (benefit)		(1,295	)		(523	)		399			1,520			—			101
Minority interests and equity in affiliates		(509	)		—			(69	)		(823	)		1,575			174

Net income (loss)	$	(3,560	)	$	(881	)	$	(509	)	$	(185	)	$	1,575		$	(3,560	)

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal quarter ended April 4, 2004


				MSXI						Non-
	MSXI			Limited			Guarantor			Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	394		$	968		$	6,439		$	5,134		$	(12,541	)	$	394
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates		(6,439	)		—			(5,134	)		(968	)		12,541			—
Depreciation		—			401			1,212			768			—			2,381
Amortization of debt issuance costs and non-cash interest		1,028			79			—			—			—			1,107
Deferred taxes		(572	)		116			573			542			—			659
(Gain) loss on sale/disposal of property and equipment		—			(70	)		3			12			—			(55	)
(Increase) decrease in receivables, net		—			4,016			6,218			590			—			10,824
(Increase) decrease in inventory		—			(3	)		(434	)		42			—			(395	)
(Increase) decrease in prepaid expenses and other assets		—			(70	)		(610	)		(866	)		—			(1,546	)
Increase (decrease) in current liabilities		(4,276	)		(8,389	)		10,712			(772	)		—			(2,725	)
Other, net		—			49			(143	)		(188	)		—			(282	)

Net cash provided by (used for) operating activities		(9,865	)		(2,903	)		18,836			4,294			—			10,362

Cash flows from investing activities:
Capital expenditures		—			(51	)		(200	)		(91	)		—			(342	)
Proceeds from sale/disposal of property and equipment		—			66			2			10			—			78
Other, net		—			—			294			—			—			294

Net cash provided by (used for) investing activities		—			15			96			(81	)		—			30

Cash flows from financing activities:
Transactions with subsidiaries		17,811			(1,894	)		(13,261	)		(2,656	)		—			—
Debt issuance costs		(296	)		(17	)		—			—			—			(313	)
Changes in revolving debt, net		—			—			—			(634	)		—			(634	)
Changes in book overdrafts, net		—			—			(3,696	)		—			—			(3,696	)

Net cash provided by (used for) financing activities		17,515			(1,911	)		(16,957	)		(3,290	)		—			(4,643	)

Effect of foreign exchange rate changes on cash and cash equivalents		—			(741	)		—			(537	)		—			(1,278	)

Cash and cash equivalents:
Increase (decrease) for the period		7,650			(5,540	)		1,975			386			—			4,471
Balance, beginning of period		18,600			5,639			391			12,020			—			36,650

Balance, end of period	$	26,250		$	99		$	2,366		$	12,406		$	—		$	41,121

MSX International, Inc.
Notes to Consolidated Financial Statements (Unaudited) — continued
(dollars in thousands unless otherwise stated)

13. Guarantor and Non-Guarantor Subsidiaries of MSXI Limited — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal quarter ended March 30, 2003


				MSXI						Non-
	MSXI			Limited			Guarantor			Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
Net income (loss)	$	(3,560	)	$	(882	)	$	(509	)	$	(184	)	$	1,575		$	(3,560	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates		509			—			70			822			(1,575	)		(174	)
Depreciation		—			755			2,375			1,629			—			4,759
Amortization of debt issuance costs		513			—			—			—			—			513
Deferred taxes		—			49			—			(714	)		—			(665	)
Loss on sale/disposal of property and equipment		—			18			60			283			—			361
(Increase) decrease in receivables, net		(6	)		4,274			(5,988	)		(5,910	)		—			(7,630	)
(Increase) decrease in inventory		—			—			240			397			—			637
(Increase) decrease in prepaid expenses and other assets		9			138			(1,620	)		29			—			(1,444	)
Increase (decrease) in current liabilities		(4,279	)		752			9,068			(4,047	)		—			1,494
Other, net		—			(12	)		(1,098	)		(71	)		—			(1,181	)

Net cash provided by (used for) operating activities		(6,814	)		5,092			2,598			(7,766	)		—			(6,890	)

Cash flows from investing activities:
Capital expenditures		—			(409	)		(1,189	)		(648	)		—			(2,246	)
Loss on sale/disposal of property and equipment		—			—			236			—			—			236
Other, net		—			—			(299	)		—			—			(299	)

Net cash used for investing activities		—			(409	)		(1,252	)		(648	)		—			(2,309	)

Cash flows from financing activities:
Transactions with subsidiaries		(9,418	)		(4,391	)		14,110			(301	)		—			—
Repayment of debt		(1,385	)		—			(9	)		—			—			(1,394	)
Debt issuance costs		(975	)		—			—			—			—			(975	)
Changes in revolving debt, net		18,592			77			—			50			—			18,719
Changes in book overdrafts, net		—			—			(15,470	)		1,624			—			(13,846	)

Net cash provided by (used for) financing activities		6,814			(4,314	)		(1,369	)		1,373			—			2,504

Effect of foreign exchange rate changes on cash and cash equivalents		—			(347	)		—			(7	)		—			(354	)

Cash and cash equivalents:
Increase (decrease) for the period		—			22			(23	)		(7,048	)		—			(7,049	)
Balance, beginning of period		—			116			154			10,665			—			10,935

Balance, end of period	$	—		$	138		$	131		$	3,617		$	—		$	3,886

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

Results of Operations

Outlook

We are a significant supplier of technical business services and have developed, through internal growth and acquisitions, extensive international service delivery capability. We are executing the following business strategy to leverage our commercial strengths:

• Capitalize on growing trend toward outsourcing

• Grow our non-automotive and non-traditional client base

• Increase market share by delivering integrated services and cross-selling

• Increase margins through emphasis on higher return service offerings in service segments with higher growth prospects

Our business segments are affected by differing industry dynamics. As a result of recent industry and economic trends, our overall revenue declined during the past three years. Our revenue remains under pressure from continuing cost containment actions at our major customers. In response to difficult industry conditions we completed a significant restructuring plan in 2003 that reduced our headcount, consolidated underutilized facilities and eliminated unfavorable leases. We believe that automotive OEM budgets will generally remain stable in the next 12 to 24 months as our customers pursue cost reductions on their existing platforms and launch new concepts and products. Economic growth in North America and Europe is also expected to support the continuing development of our business. Operating trends in the first quarter of 2004 appear to support the key assumptions in the Company’s 2004 operating plan.

We remain focused on building our customized services into standardized and scalable product offerings. We believe that this positioning of our services as integrated solutions will improve our value proposition to existing and prospective customers. Our strategy is to sell high value solutions by leveraging our global organization and existing customer base. As we continue to expand our services with current customers in the automotive industry, an important strategy is to expand our customer relationships to new automotive customers and to other industries. Our targeted markets include transportation, medical products, and financial services, among others. Although we cannot provide assurance about the future, our strategies are expected to enhance profitability on existing business and increase operating efficiencies while we work to expand our customer base.

Net Sales

For the first quarter of fiscal 2004, consolidated net sales decreased $16.0 million, or 8.7%, from $183.4 million in the first quarter of fiscal 2003 to $167.3 million during fiscal 2004. Overall, the decline in sales reflects lower demand for automotive engineering and human capital services and reductions from the closure/sale of certain unprofitable operations. Our sales by segment, net of intercompany sales, were as follows:


	Fiscal Quarter Ended				Change
	April 4,		March 30,
	2004		2003		$			%
	(dollars in thousands)
Human Capital Services	$	58,878	$	72,223	$	(13,345	)		(18.5	%)
Business Services		67,891		66,932		959			1.4	%
Engineering Services		40,545		44,196		(3,651	)		(8.3	%)

Total net sales	$	167,314	$	183,351	$	(16,037	)		(8.7	%)

The decline in human capital services primarily reflects reduced volumes in our engineering staffing and IT and technical staffing services in North America. Volume reductions reflect year over year declines in development programs and related contract staffing at automotive OEMs and selected non-automotive clients. In addition, our vendor management programs have been impacted by price reductions negotiated with customers to secure contract extensions.

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

The small improvement in sales of business services versus 2003 reflects favorable exchange rate changes affecting our European operations. The net impact of year over year exchange rate changes was to increase sales of business services by about $5.8 million for the first quarter of 2004. Excluding the impact of foreign exchange rate changes, sales of business services for the first quarter of 2004 decreased about $4.8 million, or 7.2% versus 2003. The decrease primarily reflects reduced demand for custom communication services in our Italian operations.

Sales of engineering services reflect declining volumes in our European operations partially offset by a favorable exchange impact of $1.6 million on sales. After adjusting for the impact of exchange rate variances, our European engineering operations reflect a net decrease of $5.9 million compared to fiscal 2003. Sales from our North and South American engineering operations increased $0.8 million compared to fiscal 2003, reflecting relatively stable demand versus the first quarter of fiscal 2003.

Operating Profit

Our consolidated gross profit, selling, general and administrative expenses and operating income for the periods presented were:


	Fiscal Quarter Ended						Change
	April 4,			March 30,
	2004			2003			$			%
	(dollars in thousands)
Gross profit	$	20,601		$	20,563		$	38			0.2	%
% of net sales		12.3	%		11.2	%		n/a			n/a
Selling, general and administrative expenses	$	11,307		$	16,090		$	(4,783	)		(29.7	%)
% of net sales		6.8	%		8.8	%		n/a			n/a
Operating income	$	9,294		$	3,042		$	6,252			205.5	%
% of net sales		5.6	%		1.7	%		n/a			n/a

Overall, gross profit for the first quarter of fiscal 2004 approximately equaled gross profit of the comparable period of fiscal 2003. This was a result of the cost reductions implemented throughout the company during fiscal 2003 offset by volume reductions. Our cost reduction programs have focused primarily on indirect labor and related fringe benefit costs, elimination of unprofitable operations, consolidation of facilities and reductions of other indirect operating costs. These initiatives resulted in savings to our cost of sales of approximately $4.2 million for the first quarter of 2004 and we anticipate total annualized savings of $19.0 million during 2004. The impact of the cost reductions was offset by reduced volumes and pricing pressures, primarily in our human capital and engineering services. Volume reductions resulted in a decrease in gross margins by approximately $4.1 million versus 2003. Gross profit as a percentage of sales improved to 12.4% for the first quarter of 2004 compared to 11.2% for the first quarter of 2003. Our cost reduction program is also expected to result in annualized selling, general and administrative savings of approximately $15.4 million during 2004.

Interest expense

Interest expense increased from $6.7 million during the first quarter of 2003 to $7.8 million during the first quarter of 2004, a $1.1 million increase. The increase in interest expense compared to 2003 primarily resulted from increased interest rates on debt outstanding as a result of the senior secured debt refinancing completed August 1, 2003.

Income taxes

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

Liquidity and Capital Resources

Cash Flows

General. Historically, our principal capital requirements are for working capital, product development initiatives, and capital expenditures for customer programs. These requirements have been met through a combination of senior secured debt, issuance of senior subordinated notes and cash from operations. In response to lower sales volumes and a de-emphasis on capital intensive businesses we have reduced our capital expenditures for existing programs and selected new product development initiatives. We also emphasize disciplined management of working capital. Capital expenditure requirements for current programs have decreased commensurate with reduced demand for selected services and by redeploying underutilized assets. Days sales outstanding, accounts receivable agings, and other working capital metrics are monitored closely to minimize investments in working capital. We believe that such metrics are important to identify opportunities and potential problems, particularly those associated with the automated payment processes of our large automotive customers. Cash balances in excess of amounts required to fund daily operations are used to pay down any amounts outstanding under our credit facility. Thereafter, surplus funds are invested in short term, money market investments.

We typically pay our employees on a weekly basis and receive payment from our customers within invoicing terms, which is generally a 30 to 60 day period after the invoice date. However, in connection with certain of our vendor management services, we collect related receivables at approximately the same time we make payment to suppliers.

Operating Activities. Net cash provided by operating activities was $10.4 million for the first quarter of fiscal 2004 compared to net cash used for operating activities of $6.9 million during fiscal 2003. The increase reflects a $2.3 million increase in earnings before depreciation, amortization and other non-cash charges. The remaining change in net cash is related to changes in our working capital due primarily to the collection of accounts receivable relative to the close of the fiscal period.

Investing Activities. Net cash provided by investing activities was $30 thousand for the first quarter of 2004 compared to net cash used for investing activities of $2.3 million for the first quarter of 2003. Capital expenditure requirements for current programs decreased commensurate with the current business volumes. Investments in other initiatives declined due to changes in strategic priorities.

Financing Activities. Net cash used in financing activities was $4.6 million for the first quarter of 2004 compared to net cash provided by financing activities of $2.5 million for the first quarter of 2003. Financing requirements during the first quarter of 2003 increased to fund investments and provide for changes in working capital. Financing activities during 2004 also includes a decrease in book overdrafts, of $10.2 million, compared to 2003 due to the timing of vendor payments.

Liquidity and Available Financings

Our total indebtedness as of April 4, 2004 consists of senior secured notes, mezzanine term notes, fourth lien term notes, senior subordinated notes and borrowings under various short-term arrangements. In addition to our total indebtedness, we also have contingent commitments related to letters of credit totaling about $4.6 million at April 4, 2004.

Available borrowings under our credit facility as of April 4, 2004 are subject to accounts receivable balance requirements. As of April 4, 2004 we have $38.9 million available for immediate borrowing based on eligible accounts receivable as determined in accordance with our credit agreement, as amended.

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

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.

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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various legal proceedings incidental to the ordinary conduct of our business. One such matter is a proceeding in both federal court and in an arbitration proceeding. It involves claims and counter claims asserted by both parties in connection with a contingent earnout obligation related to the acquisition of Lexstra International, Inc. and Lexus Temporaries, Inc. and various other claims by and against two former employees. Another such matter is an arbitration and related action in state court to enforce/vacate a March 2004 arbitration award totaling $3.8 million. The underlying dispute involves a claim for a contingent earnout payment under the terms of a purchase agreement for the acquisition of Management Resources, Inc. Litigation is subject to significant uncertainty and any final result could be greater or less than what management anticipates. However, we believe that none of the legal proceedings will have a material adverse effect on our financial condition, results of operation or long-term cash flows.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the first quarter of fiscal 2004 the following matters were ratified and approved by the consent of a majority of our stockholders:

• An amendment to the Restated Certificate of Incorporation of MSXI to modify the redemption provisions of the company’s 12% Series A Cumulative Preferred Stock.

• The following persons were elected to the MSX International, Inc. Board of Directors:

Robert Netolicka
Thomas T. Stallkamp
Erwin H. Billig
David E. Cole
Charles E. Corpening
Michael A. Delaney
Richard J. Puricelli

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

3.1(a) Certificate of Amendment to Amended and Restated Certificate of Incorporation

31.1 Certification of Chief Financial Officer pursuant to rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.

31.2 Certification of Chief Executive Officer pursuant to rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.

32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes - Oxley Act of 2002

(b) Reports on Form 8-K:

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

• March 22, 2004 reporting under “Item 12. Results of Operations and Financial Condition” we furnished the press release announcing our financial results for the fiscal year ended December 28, 2003.


PART I. FINANCIAL INFORMATION

*ITEM 1*. Financial Statements:	Pages

Consolidated Balance Sheets (unaudited) as of April 4, 2004 and December 28, 2003		2

Consolidated Statements of Operations (unaudited) for the fiscal quarters ended April 4, 2004 and March 30, 2003		3

Consolidated Statements of Cash Flows (unaudited) for the fiscal quarters ended April 4, 2004 and March 30, 2003		4

Notes to Consolidated Financial Statements (unaudited)		5

*ITEM 2.* Management’s Discussion and Analysis of Financial Condition and Results of Operations		22

*ITEM 4.* Controls and Procedures		26

PART II. OTHER INFORMATION

*ITEM 1.* Legal Proceedings		27

*ITEM 4.* Submission of Matters to a Vote of Security Holders		27

*ITEM 6*. Exhibits and Reports on Form 8-K		27

SIGNATURE		28

Certificate of Amendment
Certification of Chief Financial Officer
Certificate of Chief Executive Officer
Certification Pursuant to 18 U.S.C. Section 1350


By:		/s/ Frederick K. Minturn

		Frederick K. Minturn
		Executive Vice President and
		Chief Financial Officer

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	•		MSXI-the parent company and issuer

	•		The guarantor subsidiaries

	•		The non-guarantor subsidiaries

	•		MSXI on a consolidated basis

	•		MSXI — the parent company

	•		MSXI Limited — the issuer

	•		The guarantor subsidiaries

	•		The non-guarantor subsidiaries

	•		MSXI on a consolidated basis

	•		Capitalize on growing trend toward outsourcing
	•		Grow our non-automotive and non-traditional client base
	•		Increase market share by delivering integrated services and cross-selling
	•		Increase margins through emphasis on higher return service offerings in service segments with higher growth prospects

	•		An amendment to the Restated Certificate of Incorporation of MSXI to modify the redemption provisions of the company’s 12% Series A Cumulative Preferred Stock.

	•		The following persons were elected to the MSX International, Inc. Board of Directors:

	3.1(a)		Certificate of Amendment to Amended and Restated Certificate of Incorporation

	31.1		Certification of Chief Financial Officer pursuant to rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.

	31.2		Certification of Chief Executive Officer pursuant to rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.

	32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes - Oxley Act of 2002

	(b)		Reports on Form 8-K:

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


Exhibit No.		Description
3.1(a)		Certificate of Amendment to Amended and Restated Certificate of Incorporation

31.2		Certification of Chief Financial Officer pursuant to rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.

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