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 October 3, 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		38-3323099
(State or other jurisdiction
of incorporation or organization)		(I.R.S. Employer Identification No.)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [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.

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)
ASSETS
Current assets:
Cash and cash equivalents	$	32,054		$	36,650
Accounts receivable, net (Note 3)		171,180			219,219
Inventory		9,235			8,618
Prepaid expenses and other assets		8,111			6,218
Deferred income taxes, net		3,946			6,896

Total current assets		224,526			277,601

Property and equipment, net		13,543			18,480
Goodwill, net (Note 4)		133,646			129,624
Other assets		11,855			13,268
Deferred income taxes, net		934			—

Total assets	$	384,504		$	438,973

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Notes payable and current portion of long-term debt (Note 5)	$	8,425		$	10,519
Accounts payable and drafts		124,008			149,051
Accrued payroll and benefits		29,444			29,625
Other accrued liabilities		50,588			78,769

Total current liabilities		212,465			267,964

Long-term debt (Note 5)		252,879			249,742
Long-term deferred compensation and other liabilities		13,223			12,546
Deferred income taxes, net					1,618

Total liabilities		478,567			531,870

Commitments and contingencies		—			—
Series A Preferred Stock (Note 6)		88,983			81,812
Shareholders’ 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			5
Additional paid-in-capital		(24,881	)		(24,881	)
Common stock purchase warrants		750			750
Accumulated 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.

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 Ended
	October 3,			September 28,			October 3,			September 28,
	2004			2003			2004			2003
				(in thousands)
Net sales	$	147,326		$	167,860		$	468,541		$	536,946
Cost of sales		129,903			149,480			411,641			474,517

Gross profit		17,423			18,380			56,900			62,429

Selling, general and administrative expenses		10,692			15,232			32,812			47,429
Restructuring and severance costs		—			2,002			—			3,902
Loss on asset impairment and sale		—			1,797			—			1,893

Operating income (loss)		6,731			(651	)		24,088			9,205

Interest expense, net		8,068			9,406			24,223			22,713

Loss before income taxes, minority interests and equity in affiliates		(1,337	)		(10,057	)		(135	)		(13,508	)

Income tax provision (benefit)		(153	)		14,764			771			14,998
Less minority interests and equity in affiliates, net of taxes		—			(40	)		—			195

Net 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.

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 Ended
	October 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		—			1,893
Depreciation		6,695			13,653
Amortization of debt issuance costs and non-cash interest		3,268			5,260
Deferred 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	)		15,229
Other, net		302			(334	)

Net cash provided by operating activities		2,322			2,458

Cash flows from investing activities:
Capital expenditures		(1,907	)		(4,465	)
Proceeds from sale/disposal of property and equipment		304			2,150
Other, net		489			(342	)

Net cash used for investing activities		(1,114	)		(2,657	)


Cash flows from financing activities:
Proceeds from issuance of debt		—			99,854
Repayment 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	)		620

Cash and cash equivalents:
Decrease for the period		(4,596	)		(2,288	)
Balance, beginning of period		36,650			10,935

Balance, end of period	$	32,054		$	8,647

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 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:


							Other
	Termination			Facility			Contractual
	Benefits			Consolidation			Costs			Other			Total
Reserve at December 28, 2003	$	8,032		$	5,954		$	3,085		$	265		$	17,336
Payments 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.

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 Capital
	Services		Business Services		Engineering Services		Total
Balance at December 28, 2003	$	97,392	$	32,232	$	—	$	129,624
Goodwill recorded during the period		—		3,800		215		4,015
Translation changes		1		6		—		7

Balance 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 at
	October 3,			December 28,			October 3,		December 28,
	2004			2003			2004		2003
Senior credit facility		7.50	%		8.55	%	$	1,758	$	297
Senior secured notes, net of $.5 million unamortized discount		11.00	%		11.00	%		75,028		74,911
Mezzanine term notes, net of $.5 million unamortized discount		11.50	%		11.50	%		24,462		24,325
Fourth lien term notes		10.00	%		10.00	%		19,224		17,802
Senior subordinated notes		11.375	%		11.375	%		130,000		130,000
Satiz facilities		4.98	%		4.67	%		8,425		10,519
Other		7.00	%		7.00	%		2,407		2,407

								261,304		260,261
Less current portion								8,425		10,519

Total 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.

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 Ended
	October 3,			Sept. 28,			October 3,			Sept. 28,
	2004			2003			2004			2003
Net loss	$	(1,184	)	$	(24,861	)	$	(906	)	$	(28,311	)
Other comprehensive income (loss) - foreign currency translation adjustments		1,216			188			(260	)		5,387

Comprehensive 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.

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 Capital
	Services			Business Services		Engineering Services			Other			Total
Quarter Ended October 3, 2004:
Net sales – external	$	52,722		$	60,862	$	33,742		$	—		$	147,326
Net intercompany sales		—			1,074		(974	)		(100	)		—
Segment EBITA		2,595			5,257		1,464			—			9,316

Quarter Ended September 28, 2003:
Net sales – external	$	62,785		$	67,135	$	37,940			—			167,860
Net intercompany sales		(53	)		1,920		86			(1,953	)		—
Segment EBITA		3,261			4,224		(2,381	)		—			5,104


	Human Capital
	Services		Business Services		Engineering Services			Other			Total
Nine Months Ended October 3, 2004:
Net sales – external	$	166,793	$	196,203	$	105,545		$	—		$	468,541
Net intercompany sales		9		1,977		—			(1,986	)		—
Segment EBITA		8,966		19,385		5,525			—			33,876

Nine Months Ended September 28, 2003:
Net sales – external	$	203,944	$	207,282	$	125,720			—		$	536,946
Net intercompany sales		262		5,859		377			(6,498	)		—
Segment EBITA		13,326		14,805		(7,177	)		—			20,954

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 Ended
	October 3,			September 28,			October 3,			September 28,
	2004			2003			2004			2003
Total segment EBITA	$	9,316		$	5,104		$	33,876		$	20,954
Net 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 Ended
	October 3,			September 28,			October 3,			September 28,
	2004			2003			2004			2003
Net 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.

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.

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			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	17,230		$	2,162	$	12,662	$	—		$	32,054
Accounts receivable, net		—			81,342		89,838		—			171,180
Inventory		—			6,333		2,902		—			9,235
Prepaid expenses and other assets		—			5,425		2,686		—			8,111
Deferred income taxes, net		—			2,622		3,986		(2,662	)		3,946

Total current assets		17,230			97,884		112,074		(2,662	)		224,526

Property and equipment, net		—			5,148		8,395		—			13,543
Goodwill, net		—			116,302		17,344		—			133,646
Investment in subsidiaries		102,188			17,916		—		(120,104	)		—
Other assets		6,268			4,902		685		—			11,855
Deferred income taxes, net		240			—		934		(240	)		934

Total assets	$	125,926		$	242,152	$	139,432	$	(123,006	)	$	384,504

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—	$	8,425	$	—		$	8,425
Accounts payable and drafts		—			78,087		45,921		—			124,008
Accrued liabilities		5,161			39,296		35,575		—			80,032
Deferred income taxes, net		2,662			—		—		(2,662	)		—

Total current liabilities		7,823			117,383		89,921		(2,662	)		212,465

Long-term debt		232,026			—		20,853		—			252,879
Intercompany accounts		(19,860	)		19,093		767		—			—
Long-term deferred compensation and other liabilities		—			3,248		9,975		—			13,223
Deferred income taxes, net		—			240		—		(240	)		—

Total liabilities		219,989			139,964		121,516		(2,902	)		478,567

Series A Preferred Stock		88,983			—		—		—			88,983
Shareholders’ 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

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			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			11,861		—		(99,284	)		—
Other assets		7,370			5,246		652		—			13,268
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			50,632		48,337		—			108,394
Deferred income taxes, net		3,093			—		—		(3,093	)		—

Total current liabilities		12,518			128,157		130,382		(3,093	)		267,964

Long-term debt		230,566			—		19,176		—			249,742
Intercompany accounts		(39,080	)		29,668		9,412		—			—
Long-term deferred compensation and other liabilities		—			3,199		9,347		—			12,546
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 October 3, 2004 and September 28, 2003


	MSXI			Guarantor			Non-Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Fiscal Quarter Ended October 3, 2004:
Net sales	$	—		$	82,449		$	64,976		$	(99	)	$	147,326
Cost of sales		—			71,028			58,974			(99	)		129,903

Gross profit		—			11,421			6,002			—			17,423
Selling, general and administrative expenses		—			6,548			4,144			—			10,692

Operating income		—			4,873			1,858			—			6,731
Interest expense, net		6,272			1,025			771			—			8,068

Income (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	)	$	167,860
Cost of sales		—			86,077			65,356			(1,953	)		149,480

Gross profit		—			12,594			5,786			—			18,380
Selling, general and administrative expenses		—			9,081			6,151			—			15,232
Restructuring and severance costs		—			1,450			552			—			2,002
(Gain) loss on asset impairment and sale		—			—			1,797			—			1,797

Operating income (loss)		—			2,063			(2,714	)		—			(651	)
Interest expense, net		7,697			1,581			128			—			9,406

Income (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			—			14,764
Minority 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	)

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			Consolidated
Fiscal Nine Months Ended October 3, 2004:
Net sales	$	—		$	266,864		$	203,689		$	(2,012	)	$	468,541
Cost of sales		—			234,435			179,218			(2,012	)		411,641

Gross profit		—			32,429			24,471			—			56,900
Selling, general and administrative expenses		—			20,100			12,712			—			32,812

Operating income		—			12,329			11,759			—			24,088
Interest expense, net		18,994			3,287			1,942			—			24,223

Income (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			—			771
Minority 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	)	$	536,946
Cost of sales		—			274,760			205,944			(6,187	)		474,517

Gross profit		—			41,796			20,944			(311	)		62,429
Selling, general and administrative expenses		—			27,190			20,239			—			47,429
Restructuring and severance costs		—			2,407			1,495			—			3,902
Loss on asset impairment and sale		—			—			1,893			—			1,893

Operating income (loss)		—			12,199			(2,683	)		(311	)		9,205
Interest expense, net		16,391			5,708			614			—			22,713

Income (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			—			14,998
Minority interests and equity in affiliates		(1,018	)		(5,082	)		155			6,140			195

Net income (loss)	$	(28,000	)	$	(1,019	)	$	(5,121	)	$	5,829		$	(28,311	)

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			Consolidated
Cash 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			—			6,695
Amortization of debt issuance costs and non-cash interest		3,024			—			244			—			3,268
Deferred 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			—			302

Net cash provided by (used for) operating activities		(20,128	)		13,869			8,581			—			2,322

Cash flows from investing activities:
Capital expenditures		—			(395	)		(1,512	)		—			(1,907	)
Proceeds from sale/disposal of property and equipment		—			22			282			—			304
Other, net		—			489			—			—			489

Net 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			—			36,650

Balance, end of period	$	17,230		$	2,162		$	12,662		$	—		$	32,054

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			Consolidated
Cash 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			—			1,893
Depreciation		—			6,974			6,679			—			13,653
Amortization of debt issuance costs		5,217			—			43			—			5,260
Deferred taxes		10,223			2,631			(666	)		—			12,188
Loss 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			—			15,229
Other, net		(55	)		(829	)		550			—			(334	)

Net cash provided by (used for) operating activities		(14,255	)		17,456			(432	)		(311	)		2,458

Cash flows from investing activities:
Capital expenditures		—			(2,438	)		(2,027	)		—			(4,465	)
Proceeds from sale/disposal of property and equipment		—			545			1,605			—			2,150
Other, 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			—			99,854
Repayment 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	)		620

Cash and cash equivalents:
Increase (decrease) for the period		2,400			604			(5,292	)		—			(2,288	)
Balance, beginning of period		—			154			10,781			—			10,935

Balance, end of period	$	2,400		$	758		$	5,489		$	—		$	8,647

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

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


				MSXI
	MSXI			Limited			Guarantor		Non-Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries		Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	17,230		$	132		$	2,162	$	12,530		$	—		$	32,054
Accounts receivable, net		—			17,942			81,342		71,896			—			171,180
Inventory		—			4			6,333		2,898			—			9,235
Prepaid expenses and other assets		—			1,036			5,425		1,650			—			8,111
Deferred income taxes, net		—			496			2,622		3,490			(2,662	)		3,946

Total current assets		17,230			19,610			97,884		92,464			(2,662	)		224,526

Property and equipment, net		—			1,703			5,148		6,692			—			13,543
Goodwill, net		—			101			116,302		17,243			—			133,646
Investment in subsidiaries		102,188			11			17,916		(2,338	)		(117,777	)		—
Other assets		6,268			505			4,902		180			—			11,855
Deferred income taxes, net		240			—			—		1,430			(736	)		934

Total assets	$	125,926		$	21,930		$	242,152	$	115,671		$	(121,175	)	$	384,504

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—		$	—	$	8,425		$	—		$	8,425
Accounts payable and drafts		—			6,892			78,087		39,029			—			124,008
Accrued liabilities		5,161			8,018			39,296		27,557			—			80,032
Deferred income taxes, net		2,662			—			—		—			(2,662	)		—

Total current liabilities		7,823			14,910			117,383		75,011			(2,662	)		212,465

Long-term debt		232,026			18,414			—		2,439			—			252,879
Intercompany accounts		(19,860	)		(9,872	)		19,093		10,639			—			—
Long-term deferred compensation and other liabilities		—			309			3,248		9,666			—			13,223
Deferred income taxes, net		—			496			240		—			(736	)		—

Total liabilities		219,989			24,257			139,964		97,755			(3,398	)		478,567

Series A Preferred Stock		88,983			—			—		—			—			88,983
Shareholders’ 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

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of December 28, 2003


				MSXI
	MSXI			Limited			Guarantor		Non-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			11,861		(2,638	)		(96,656	)		—
Other assets		7,370			594			5,246		58			—			13,268
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			12,700			51,147		35,122			—			108,394
Deferred income taxes, net		3,093			—			—		—			(3,093	)		—

Total current liabilities		12,518			27,728			128,672		102,139			(3,093	)		267,964

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		—			755			2,684		9,107			—			12,546
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 October 3, 2004 and September 28, 2003


				MSXI
	MSXI			Limited			Guarantor			Non-Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Fiscal Quarter Ended October 3, 2004
Net sales	$	—		$	16,871		$	82,449		$	48,105		$	(1,337	)	$	147,326
Cost of sales		—			15,205			71,028			43,769			(1,337	)		129,903

Gross profit		—			1,666			11,421			4,336			—			17,423
Selling, general and administrative expenses		—			1,194			6,548			2,950			—			10,692

Operating income		—			472			4,873			1,386			—			6,731
Interest expense (income), net		(6,272	)		670			1,025			101			—			8,068


Income (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, 2003
Net sales	$	—		$	19,777		$	98,671		$	51,365		$	(1,953	)	$	167,860
Cost of sales		—			18,285			86,077			47,071			(1,953	)		149,480

Gross profit		—			1,492			12,594			4,294			—			18,380
Selling, general and administrative expenses		—			1,604			9,081			4,547			—			15,232
Restructuring and severance costs		—			58			1,450			494			—			2,002
(Gain)/loss on asset impairment and sale		—			787						1,010			—			1,797

Operating income (loss)		—			(957	)		2,063			(1,757	)		—			(651	)
Interest expense (income), net		7,697			53			1,581			75			—			9,406


Income (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			—			14,764
Minority 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	)

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			Consolidated
Fiscal Nine Months Ended October 3, 2004
Net sales	$	—		$	53,011		$	266,864		$	150,678		$	(2,012	)	$	468,541
Cost of sales		—			47,161			234,435			132,057			(2,012	)		411,641

Gross profit		—			5,850			32,429			18,621			—			56,900
Selling, general and administrative expenses		—			3,779			20,100			8,933			—			32,812

Operating income		—			2,071			12,329			9,688			—			24,088
Interest expense (income), net		18,994			1,403			3,287			539			—			24,223

Income (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			—			771
Minority 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, 2003
Net sales	$	—		$	64,209		$	316,556		$	162,679		$	(6,498	)	$	536,946
Cost of sales		—			61,579			274,760			144,365			(6,187	)		474,517

Gross profit		—			2,630			41,796			18,314			(311	)		62,429
Selling, general and administrative expenses		—			5,452			27,190			14,787			—			47,429
Restructuring and severance costs		—			792			2,407			703			—			3,902
(Gain)/loss on asset impairment and sale		—			787			—			1,106			—			1,893

Operating income (loss)		—			(4,401	)		12,199			1,718			(311	)		9,205
Interest expense (income), net		16,391			598			5,708			16			—			22,713

Income (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			—			14,998
Minority interests and equity in affiliates		(1,018	)		—			(5,081	)		(3,974	)		10,268			195

Net income (loss)	$	(28,000	)	$	(4,128	)	$	(1,018	)	$	(5,122	)	$	9,957		$	(28,311	)

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


				MSXI
	MSXI			Limited			Guarantor			Non-Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash 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			—			6,695
Amortization of debt issuance costs		3,024			244			—			—			—			3,268
Deferred 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			—			302

Net cash provided by (used for) operating activities		(20,128	)		(5,718	)		13,869			14,299			—			2,322


Cash flows from investing activities:
Capital expenditures		—			(260	)		(395	)		(1,252	)		—			(1,907	)
Proceeds from sale/disposal of property and equipment		—			99			22			183			—			304
Other, net		—			—			489			—			—			489

Net 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			—			36,650

Balance, end of period	$	17,230		$	132		$	2,162		$	12,530		$	—		$	32,054

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


				MSXI
	MSXI			Limited			Guarantor			Non-Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash 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			—			1,893
Depreciation		—			2,599			6,974			4,080			—			13,653
Amortization of debt issuance costs		5,217			43			—			—			—			5,260
Deferred 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			—			15,229
Other, net		(55	)		(74	)		(829	)		624			—			(334	)

Net cash provided by (used for) operating activities		(14,255	)		4,745			17,456			(5,177	)		(311	)		2,458

Cash 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			—			2,150
Other, 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			—			—			—			99,854
Repayment 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	)		620

Cash and cash equivalents:
Increase (decrease) for the period		2,400			43			604			(5,335	)		—			(2,288	)
Balance, beginning of period		—			116			154			10,665			—			10,935

Balance, end of period	$	2,400		$	159		$	758		$	5,330		$	—		$	8,647

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:


					Change
	2004		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	%)

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:


							Change
	2004			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/a
Selling, general and administrative expenses	$	10,692		$	15,232		$	(4,540	)		(29.8	%)
% of net sales		7.3	%		9.1	%		n/a			n/a
Operating income	$	6,731		$	(651	)	$	7,382			—
% of net sales		4.6	%		(0.4	%)		n/a			n/a
Fiscal Nine Months:
Gross profit	$	56,900		$	62,429		$	(5,529	)		(8.8	%)
% of net sales		12.1	%		11.6	%		n/a			n/a
Selling, general and administrative expenses	$	32,812		$	47,429		$	(14,617	)		(30.8	%)
% of net sales		7.0	%		8.8	%		n/a			n/a
Operating income	$	24,088		$	9,205		$	14,883			161.7	%
% of net sales		5.1	%		1.7	%		n/a			n/a

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

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.

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.

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.

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

New Accounting Pronouncements

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.

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.

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


	Pages
PART I. FINANCIAL INFORMATION
*ITEM 1*. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of October 3, 2004 and December 28, 2003		2
Condensed Consolidated Statements of Operations for the fiscal quarters and fiscal nine months ended October 3, 2004 and September 28, 2003		3
Condensed Consolidated Statements of Cash Flows for the fiscal nine months ended October 3, 2004 and September 28, 2003		4
Condensed Notes to Consolidated Financial Statements		5
*ITEM 2.* Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
*ITEM 4.* Controls and Procedures		29
PART II. OTHER INFORMATION
*ITEM 1.* Legal Proceedings		30
*ITEM 5.* Other Information		30
*ITEM 6*. Exhibits		30
SIGNATURE		31
Certification of Chief Financial Officer Pursuant to Section 302
Certification of Chief Executive Officer Pursuant to Section 302
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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[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


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

	•		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 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

	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


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


EXHIBIT NO.	DESCRIPTION