SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

(Mark One)

For the transition period from            to

Commission File Number: 333-49821

MSX International, Inc.

(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 o

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

No substantial amounts of the registrant’s common stock are held by non-affiliates of the registrant.

Number of shares outstanding of each of the registrant’s classes of common stock at March 31, 2005:

TABLE OF CONTENTS

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GLOSSARY

Certain terms used in the text and financial statements are defined below.

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PART I

Item 1. Business.

     General

     We are a global provider of outsourced technical business services. Our broad range of technical services improves the business performance of our customers by enhancing operating effectiveness, improving quality, and reducing costs. Our customers value our in-depth knowledge of their business requirements and systems, our international delivery capability, and our proprietary processes and unique technical skills. We currently have over 5,700 employees providing technical services to more than 400 clients in 19 countries.

     Several benefits which drive outsourcing include reduced operating costs, lower capital investment, and management focus on core activities. Outsourcing also improves operating flexibility by increasing the variability of a company’s cost structure. While our services provide these benefits to our customers, we also focus on delivering higher value outsourcing services by providing our customers access to unique expertise and technologies. This expertise and these proprietary technologies enhance the value of outsourcing to our customers and provide greater profit margin opportunities for our company.

     Technical Service Offerings

     Our business is organized into three segments: business services, human capital services, and engineering services. The following table shows a summary of our net sales by segment, net of intercompany sales, for the three fiscal years ended January 2, 2005, after adjusting for discontinued operations. For additional information on discontinued operations see Note 4 of our consolidated financial statements included under Item 8. of this report. Additional information on our operating results by segment appears in Note 16 of our consolidated financial statements included under Item 8. of this report.

     Our scalable solutions and customized offerings are adapted to customer needs that have emerged in recent years due to the convergence of digital communication technologies and business process improvement initiatives. Our net sales are based principally on fees charged for resources provided to support development, manufacturing and distribution of customer products and services.

     The domestic and foreign markets for our services are highly competitive. In some cases, our competitors include a number of other well-established vendors, as well as customers with their own internal capabilities. Although a number of companies of varying size compete with us, no single competitor is substantially in competition with respect to all of our services. The following summarizes the services offered by each of our segments.

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     Business Services

     We deliver a range of technology-based business services to meet the outsourcing requirements of our customers. Our business services segment give our customers the actionable product, market and customer information they need to improve product quality, reduce costs and improve customer loyalty and satisfaction. We also offer communication solutions that facilitate our customer’s communication strategies by creating, maintaining and delivering information. Our service offerings include:

	•	Warranty support programs – warranty process improvement consulting, claims assessment and analysis, contract administration of extended warranty programs, and management and operation of parts return centers
	•	Product quality improvement programs – supplier quality assurance, technical call centers, and quality training and consulting programs
	•	Retail support programs – process improvement consulting, customer satisfaction program management, and training programs
	•	Technical and consumer publishing – assists our customers in reducing cost and cycle time by facilitating the reuse and repurposing of content in technical writing, translation, print and distribution
	•	Integrated marketing support and research services – supports the development and implementation of personalized marketing programs including copy and design, translation, printing and distribution
	•	Integrated document management – assists our customers in facilitating the internal development and distribution of knowledge across their organizations. Our services include document imaging and on-site document centers
	•	Outsourced purchasing services – management of the procurement process from initial requisition to supplier payment.

     In many cases, our principal competition for these business services is the customer’s in-house operations. Our competitors for these business services include, but are not limited to Accenture, EDS, IBM, ICG Commerce, Maritz, TeleTech/Percepta, Atisae, Valley Forge/SPX, Bowne, Xerox, and Budco.

     Human Capital Services

     We provide a broad range of services to help maximize the effectiveness, flow and utilization of human capital in technology-oriented environments. Staffing solutions include:

	•	Contingent staffing—traditional temporary and/or permanent staffing for information technology, engineering or other professional staff needs. Our staffing capabilities include design and production engineers, computer operators, database specialists, network administrators and specialists, PC support staff, software engineers, systems analysts and administrators, and technical support specialists
	•	Vendor management programs—management of the entire contract staffing procurement and deployment process on a regional, national or global basis utilizing web enabled supporting technologies and custom processes
	•	Specialized training—training programs and virtual training courseware

     Our competitors in human capital services include Adecco International, CDI, Keane, kforce, Manpower, Kelly Services Technical, Olsten, Randstad (in Europe only), TechAid, Volt, and numerous regional information technology-staffing firms. Other indirect competitors include Monster.com (a subsidiary of Monster Worldwide) and other internet-based staffing resource providers.

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     Engineering Services

     We provide a complete range of engineering services, including consultancy, product and process development and full program management. Our customer base is primarily concentrated in the automotive industry. Our services are delivered through all phases of the product development cycle. Service offerings include:

	•	Technical consultancy – consultancy that supports complete engineering and niche vehicle development and support programs and the application of processes and technology tools to achieve best in class product quality, timing and cost
	•	Technology applications – we apply technology and CAE tools to execute projects, including virtual engineering (digital design, predictive analysis, dimensional management, CAD engineering and manufacturing simulation). This reduces development process cycle time and minimizes requirements for physical prototypes and testing
	•	Engineering services – we provide general engineering services required to deliver successful products. These include studio services, product engineering (body structures, chassis and trim), system integration in powertrain and electronics, prototype vehicle and system development and build, process and manufacturing engineering, and low volume vehicle build.

     In North America, Magna, Porsche, Roush Industries, and Wagon Inc., among others, deliver similar engineering services. Substantially all of our Eurpoean engineering operations are presented as discontinued as of January 2, 2005.

     A significant portion of our $48.0 million in sales to Fiat during 2004 were made pursuant to purchase orders with Fiat’s principal manufacturing companies, including Fiat Auto and Iveco. These purchase orders were modified and extended when we acquired Satiz in December 1999. These agreements were extended to five-year terms and include exclusivity provisions for selected services, which are subject to agreed quality benchmarking procedures. Our services to Fiat are subject to annual price reductions based on the volume of sales.

     During fiscal 2004, our Fiat Auto contract was renewed for three years (2005-2007) for the exclusive supply of editorial services, preparation of documentation as well as other related services. Our Iveco contract was renewed for three years (2004-2006) with an option for the fourth year for the exclusive supply of editorial services, preparation of documentation as well as other related activities.

     We believe we have developed strong relationships with our customers. We have a reputation for quality, reliability and service that has been recognized through Ford’s Q1 award, among others. In addition, most of our operations comply with ISO quality standards. Certification to ISO standards requires a determination by an independent assessor that the operation is in compliance with a documented quality management system. Quality certificates are site specific and are based upon the individual needs of our customers.

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     Our services, especially to automotive customers, are frequently delivered pursuant to annual or multi-year purchase orders that establish commercial terms, but which may vary in actual demand. Except as otherwise noted above, no material portion of our business is dependent upon any one customer or is subject to contractual renegotiation of prices. In general, equipment and technologies required to support our service offerings are obtainable from various sources in the quantities desired.

     Global Capabilities

     Employees

     Our future success is substantially dependent upon our ability to attract, retain and develop personnel, particularly technical personnel, who possess the skills and experience necessary to meet the needs of our customers. Competition for individuals with proven technical or professional skills is intense. We compete with other technical service companies, as well as customers and other employers for qualified personnel.

     As of January 2, 2005, we had the following number of employees, broken out by geographic locations:

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     A small portion of our employees in the U.S. are members of unions. We believe that our current relations with our employees are good. There are no significant issues arising under a collective bargaining agreement, which would have a material adverse effect on our financial condition, results of operations or long term cash flows.

     Seasonality of our Business

     The number of billing days in a fixed period and the seasonality of our customers’ businesses affect our operating results. Demand for some of our services has historically been lower during automotive shutdown periods including both summer and year-end holidays.

     Environmental

     Due to the nature of our service offerings, compliance with foreign, federal, state, and local environmental protection laws and regulations is not expected to result in material capital expenditures or have a material adverse effect on our financial condition, results of operations, cash flows or competitive position.

     Patents and Trademarks

     We hold a number of U.S. and foreign patents, licenses, copyrights, tradenames and trademarks. Although we consider our intellectual property valuable, we do not believe that there is any reasonable likelihood of the loss of any rights that would have a material effect on our operating units, services or present business as a whole.

Item 2. Properties.

     We believe that substantially all of our property and equipment is in good condition and that we have sufficient capacity to meet our current and projected operating needs. The number of facilities in any region is dictated by the local demographics and requirements to support our customers’ needs. Our facilities are utilized to provide all or any combination of our service offerings across all of our segments. The following table sets forth the current number of facilities we operate by region:

     All of our facilities are leased with the exception of one facility in Europe. We believe that the termination of any one lease would not have a material adverse affect on our business.

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Item 3. Legal Proceedings.

     We are involved in various legal proceedings incidental to the ordinary conduct of our business. One such matter is an arbitration and related action in state court to enforce/vacate a March 2004 arbitration award totaling $3.8 million. The underlying dispute involves a claim for a contingent earnout payment under the terms of a purchase agreement for the acquisition of Management Resources, Inc. In October 2004, the state court granted MSXI’s motion to vacate the arbitration award and ordered that the matter be re-arbitrated before a new arbitrator. The opposing party has filed an appeal with the Michigan Court of Appeals. In addition, we and our subsidiaries are parties to various legal proceedings arising in the normal course of business. While litigation is subject to inherent uncertainties, management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s consolidated financial condition, results of operation or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders.

     There were no matters submitted to a vote of security holders during the fourth quarter of 2004.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters.

     MSXI is privately owned and there is no current public trading market for our equity securities. See “Item 12. Security Ownership of Certain Beneficial Owners and Management”. For further information related to ownership aspects of our common stock, see the discussion under “Amended and Restated Stockholders’ Agreement” contained under “Item 13. Certain Relationships and Related Transactions”. There were approximately 40 record holders of our common stock as of March 31, 2005.

     During 1999 and 2003, we completed offers to exchange senior subordinated notes and senior secured notes, respectively, that had been registered under the Securities Act of 1933 for similar notes that had not been registered.

     We may not declare or pay any dividends or other distributions with respect to any common stock or other class or series of stock ranking junior to our Series A Preferred Stock without first complying with restrictions specified in the Amended and Restated Stockholders’ Agreement. See Note 13 to our consolidated financial statements included under Item 8. of this report.

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Item 6. Selected Financial Data.

     The selected historical consolidated financial data (other than EBITDA from continuing operations, as defined) as of and for the five fiscal years ended January 2, 2005 have been derived from the audited historical financial statements of MSXI. The results of operations for the periods presented include the results of operations of acquired companies from the effective date of their acquisition. Results of operations classified as discontinued are shown separately. For additional information on discontinued operations see Note 4 of our consolidated financial statements included under Item 8. of this report. The selected financial and other data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.

(A)

EBITDA is not a measure of operating results or cash flows from operations, as determined in accordance with accounting principles generally accepted in the United States. We have included EBITDA because we believe it is an indicative measure of operating performance and is used by investors and analysts to evaluate companies with our capital structure. As presented by us, EBITDA may not be comparable to similarly titled measures reported by other companies. EBITDA should be considered in addition to, not as a substitute for, operating income, income (loss) from continuing operations, cash flows and other measures of financial performance and liquidity reported in accordance with accounting principles generally accepted in the United States.

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EBITDA for each period is presented as defined in our senior secured note indenture and is calculated as income (loss) before the cumulative effect of accounting changes, plus (i) income tax expense/(benefit), (ii) Michigan single business and similar taxes, (iii) minority interests and equity in affiliates, (iv) net interest expense, (v) loss on asset impairment and sale, (vi) depreciation and amortization and (vii) goodwill impairment charges. Losses on asset impairment and sale and goodwill impairment charges have been added back for EBITDA purposes as these represent charges that will not require cash settlement at any future date. Michigan single business and similar taxes are treated like other income based taxes for purposes of EBITDA calculations.

     The following table reconciles income (loss) from continuing operations before the cumulative effect of an accounting change to EBITDA from continuing operations, as defined:

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Executive Overview

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

	•	Increase margins through emphasis on higher return service offerings – We are committed to developing and delivering higher value-added business solutions to address the complex and evolving outsourcing needs of our customers. We believe this will both enhance profitability and solidify our position as a one-stop outsourced business service provider. Specific areas of growth and development include non-automotive technical staffing, product quality, warranty, and aftermarket-related business services.
	•	Capitalize on growing trend toward outsourcing – In many instances, our principal competition is our customers’ in-house operations. These internal resources often have other operational priorities, or they have become relatively costly or non-responsive to organizational requirements. We believe our customers are implementing outsourcing strategies in order to reduce costs, increase flexibility, and gain access to unique expertise or technologies.
	•	Increase market share – Based on our significant experience delivering complex technical services to the automotive industry, we possess the credibility and technical expertise to serve other industries with similar outsourcing requirements. Our goal is to expand and diversify our client base by cross-selling our capabilities to existing customers and providing our customers with an integrated portfolio of technical business services.

     Our business segments are affected by differing industry dynamics. As a result of recent trends, we have experienced an overall revenue decline during the past several years. Our revenue remains under pressure from continuing cost containment actions at our major customers. We believe that automotive OEM budgets will continue to be challenged due to declining market share and pressure to reduce costs.

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

     We are continually enhancing our overall business strategy by evaluating the rate of return on our portfolio of service offerings. During the fourth quarter of fiscal 2004, we determined we would seek to divest substantially all of our engineering and staffing businesses in Europe. Management will continue to explore and evaluate additional development alternatives to focus the company on business units with excellent growth prospects, particularly in the areas of warranty and dealership consulting.

     The following analysis of our results of operations and liquidity and capital resources should be read in conjunction with our consolidated financial statements and the related notes included under Item 8. of this report. The results of operations for the periods presented include the results of operations of acquired companies from the effective date of their acquisition. Where necessary, prior year information has been modified to conform to the current year presentation. Operations classified as discontinued at January 2, 2005 have been excluded from the discussion of continuing operations and are discussed separately under the heading “Discontinued Operations”.

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Results of Operations

     Fiscal Year Ended January 2, 2005 Compared with the Fiscal Year Ended December 28, 2003

     Net Sales. Overall, the decline in sales reflects program reductions in our historical automotive and technical service businesses partially offset by new programs sold during fiscal 2004. Our sales by segment, net of intercompany sales, were as follows:

     Sales of business services were favorably impacted by exchange rate variances versus 2003. The net impact of year over year exchange rate changes was to increase sales of business services by approximately $13.9 million. After adjusting for exchange rate variances, sales of our business services during fiscal 2004 declined $25.9 million, or 9.2%, from fiscal 2003. The decline in business services is 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 as well as reduced demand services with specific customers in the U.S. We are currently focused on diversifying our customer base in the U.S. to offset these declines. We recently 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 decline in human capital services is primarily due to reduced volumes in our engineering staffing and IT and technical staffing services. Volume reductions reflect a 25.1% decline in automotive contract staffing volumes while other human capital services volumes decreased 7.9% versus fiscal 2003. The decline in automotive staffing volumes reflect continued pressures from auto clients to reduce costs in response to lower sales volumes.

     The decline in engineering services is primarily due to the shutdown of manufacturing engineering operations in North America. Demand for engineering services remained relatively stable during 2004.

     Operating Income. Our consolidated gross profit and operating income for the periods presented were as follows:

     Overall gross profits from continuing operations decreased from 2003 due to both reduced sales volumes and price changes. Volume reductions resulted in a decrease in gross profit of over $18.5 million. Price changes included customer mandated reductions, changes agreed with customers to secure longer-term contracts, and changes to our mix of services. Gross profit, as a percent of sales, improved from 2003 due to cost reductions implemented during 2003 and continued initiatives during 2004. We have realigned our variable cost structure to current levels of business by reducing indirect labor and operating costs, facility consolidations, and elimination of unprofitable operations that are not strategic to our long-term growth. Such initiatives generated savings of over $18.4 million during 2004. We will continue to rationalize our cost structure for selected programs while working to expand more profitable lines of business.

     Selling, general and administrative expenses decreased $14.1 million compared to fiscal 2003. Selling, general and administrative expenses, as a percentage of net sales, were 7.3% during fiscal 2004 compared to 8.9% during fiscal 2003. The decrease is primarily due to ongoing cost reductions. Cost reductions were implemented across our operations in response to sales declines. Reductions were achieved through staff reductions, operational streamlining and simplification of our support and backroom activities. We will continue to evaluate our selling, general and administrative expenses relative to current levels of business.

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     Operating results during 2004 reflect a $1.7 million charge substantially due to continued restructuring and cost reduction actions at our Italian subsidiary, Satiz. Fiscal year 2003 results include a loss on our investment in Prototipo Holdings BV, which amounted to $1.6 million. Operating results during 2003 include various restructuring charges totaling $20.3 million. For a detailed analysis and explanation of these costs refer to “Restructuring Initiatives” below.

     Interest Expense. Interest expense increased $2.3 million, from $28.8 million during fiscal 2003 to $31.1 million during fiscal 2004. Interest expense during fiscal 2003 included the write-off of deferred financing costs totaling $2.4 million, which resulted from the refinancing of our senior bank debt on August 1, 2003. The refinancing was treated as a debt extinguishment requiring recognition of these costs due to the extent of changes in terms and conditions of our outstanding debt. Interest expense during 2004, reflects a significant increase in interest rates on debt outstanding versus our prior arrangements due to the revised terms and conditions associated with our 2003 refinancing. Average debt outstanding also increased nominally versus 2003 due to the conversion from variable to fixed debt outstanding for much of our financing.

     Income taxes. Our provision for income taxes was $1.7 million during fiscal 2004 compared to $18.7 million during fiscal 2003. The income tax expense in 2004 is primarily due to earnings from selected operations where valuation allowances have not been recorded in previous years. During fiscal 2003 we recorded a non-cash tax charge of $34.8 million to establish valuation allowances against a substantial portion of our deferred tax assets. Valuation allowances were required due to cumulative operating losses generated by certain operations. In accordance with SFAS No. 109, when negative evidence such as cumulative losses exists management must place considerable weight on historical results and less weight on future projections when evaluating the realizability of deferred tax assets. As a result, management determined that the likelihood of realizing certain deferred tax assets was not sufficient to allow for continued recognition of assets.

     Discontinued Operations. In the fourth quarter of fiscal 2004, management determined that it would seek to divest substantially all engineering and staffing businesses in Europe. Due to changing competitive requirements and customer demands for automotive engineering and staffing in Europe, combined with management’s focus on businesses with higher growth and return prospects, the Company determined these businesses are no longer core to its strategies. A process for selling the businesses was initiated and prospective purchasers have been identified the sale is expected to occur during 2005. In accordance with SFAS No. 144, discontinued operations have been eliminated from the on-going operations of MSXI.

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     The following table represents the income statement of those entities, which are in the disposal process:

     Restructuring Initiatives

     During fiscal 2004, we continued to implement our overall business strategy following the execution of a comprehensive cost reduction plan in late 2003. Our 2004 actions included steps to reduce employment costs in selected business units through reductions in staffing levels. In particular, we are restructuring Satiz to meet current customer demand for its services. In the first quarter of 2005, we concluded an agreement with various trade union organizations that represent Satiz employees. The agreement establishes a program for permanent employment reductions affecting 124 personnel. We estimate that the program is likely to reduce Satiz’ employment costs by approximately $5.7 million annually. We believe that affected employees are most likely to take advantage of the program in the latter half of 2005, at an estimated cost of approximately $4.2 million.

     We completed significant restructuring programs in prior years that were implemented in response to lower demand for information technology staffing solutions, cost containment actions at major customers and deferrals of product development initiatives in the automotive industry. Such actions affecting our business have included extended seasonal shutdowns beyond normal seasonal variances, contract staffing reductions, and fee reductions that enabled us to secure long term contract renewals for our vendor management programs.

     Management implemented a comprehensive cost reduction plan in late 2003 to optimize the Company’s cost structure and align resources with the Company’s growth strategy. The incremental costs of these programs have been reported during these years as restructuring and related charges and all initiatives to date have been initiated at the end of fiscal 2004. The table below details the restructuring charges for the last three fiscal years:

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     Employee termination costs

     Fiscal year 2004 costs associated with employee terminations are substantially related to headcount reduction initiatives at our Italian subsidiary, Satiz. Employee terminations resulting from our 2003 cost reduction plan affected approximately 320 indirect employees, (including discontinued operations), throughout the U.S. and Europe. The costs associated with employee terminations consist of severance pay, placement services, and legal and related fees. In accordance with SFAS No. 146 these charges were recorded at the time it was communicated to the employees that they were being involuntarily terminated. Prior to 2003 the headcount reductions affected primarily indirect and administrative staff positions throughout the U.S. and Europe.

     Facility consolidation costs

     We continually analyze our operating facilities based on profitability, lease terms and geographic and program requirements. In response to the reductions in our business we have reduced the number of facilities we operate from 102 as of December 30, 2001 to 65 as of January 2, 2005. As a result of these facility consolidations, a $4.8 million charge was recorded in the fourth quarter of 2003 as a result of these consolidations. Facility consolidation costs include rental expense, property taxes, commissions, moving expenses and legal fees associated with the vacating of facilities.

     Other contractual costs

     As part of our 2003 cost savings initiatives, we also analyzed our operating leases and determined that selected leases no longer provided economic benefit to the company. In accordance with SFAS No. 146 we recorded a liability for these leases equal to their fair values based on the remaining lease obligations in 2003. These costs include the termination of operating leases for computer software and equipment and certain other leases.

     Asset impairment charges

     During 2003 the company recorded non-cash asset impairment charges totaling $6.0 million. The charges were based on an assessment of the recoverability of our long-lived assets in light of the challenging environment in which we operate. Assets are considered impaired if the book value exceeds the undiscounted cash flows expected from the use of the asset. The 2003 charges also included leasehold improvements that were abandoned as a result of our facility consolidations.

     Fiscal Year Ended December 28, 2003 Compared with the Fiscal Year Ended December 29, 2002

     Net Sales. Overall, the decline in sales reflects lower demand for automotive engineering and human capital services. Our sales by segment, net of intercompany sales, were as follows:

     Sales of business services improved versus 2002 as a result of 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 approximately $30.0 million. Excluding the favorable impact of foreign exchange rate changes and a reduction in revenue of $2.1 million due to the sale of an unprofitable operation, sales of business services for fiscal 2003 decreased about $8.9 million, or 3.3% versus fiscal 2002. The decrease primarily reflects reduced demand for technical and consumer publishing services in Italy due to program delays by our automotive customers and lower volumes in North America.

     The decline in human capital services reflects reduced volumes in our engineering staffing and reduced volumes of information technology and technical staffing services in our regional U.S. markets. The decrease in human capital services revenue during fiscal 2003 includes $25.1 million of reductions as a result of the closure/sale of certain unprofitable operations as part of the cost reduction plan. In addition, our vendor management programs have been impacted by price reductions negotiated with customers to secure contract extensions.

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     Sales from our engineering operations reflect $3.6 million of reduced volume due to the closure of certain unprofitable operations. After adjusting for businesses closed, sales declined $3.1 million compared to fiscal 2002, reflecting reduced demand from automotive clients. Our engineering operations have been challenged by cost reduction programs and reduced product development activities at key automotive customers.

     Operating Income. Our consolidated gross profit and operating income for the periods presented were as follows:

     Overall, gross profit declined year over year as a result of reduced volumes and pricing pressures, primarily in our engineering services and human capital services. Volume reductions resulted in a decrease in gross margins of approximately $17.5 million versus 2002. The impact of reduced volumes and pricing pressures was partially offset by cost reductions implemented throughout the company. 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 overall indirect cost savings in excess of $8.0 million during fiscal 2003. Gross profit as a percentage of sales declined to 13.4% for 2003 compared to 13.6% for 2002. The decrease as a percent of sales reflects pricing pressures affecting our business, and unfavorable absorption of certain fixed costs, including underutilized facilities.

     Selling, general and administrative expenses decreased $12.7 million compared to fiscal 2002. Selling, general and administrative expenses, as a percentage of sales, were 8.9% during fiscal 2003 compared to 9.9% during fiscal 2002. The decrease reflects cost reduction programs implemented across the company throughout 2003 and 2002

     Operating results during 2003 and 2002 include various restructuring charges totaling $20.3 million and $6.1 million, respectively. Additional information on restructuring can be found under the heading “Restructuring Initiatives”. Results for 2002 also include a goodwill impairment charge totaling $4.3 million. In accordance with SFAS No. 142, the 2002 charge was calculated based on a fair value impairment analysis. An equivalent analysis was performed during 2003 resulting in no impairment charge. Fair value improvements during 2003 reflect the impact of restructuring actions taken and improvements in market assumptions and related forecasted results.

     Loss on asset impairment and sale. During the third quarter of 2003 we sold selected assets of our translation management business in Europe, receiving cash consideration of approximately $0.5 million. This transaction resulted in a loss on the sale of $1.1 million and a related charge against goodwill associated with these assets totaling $0.7 million. The sale was completed as part of our restructuring efforts in response to forecasted operating losses generated by this business.

     During the fourth quarter of 2002 we sold our human capital operations in Italy and recognized a loss on our investment in Prototipo Holding BV. The sale of Quandoccorre Interinale and QR Quandoccorre, our Italian staffing operations, was completed as part of our restructuring efforts in response to current and forecasted operating losses resulting from developments in the staffing markets these businesses competed in. The sale proceeds totaled approximately $1.0 million, resulting in a non-cash loss on the sale of $2.7 million during the fourth quarter of 2002. The operations, which were acquired in a series of transactions beginning in 1999, had reported operating losses of approximately $1.0 million through November of 2002. The loss on our investment in Prototipo Holding BV amounted to $1.6 million and reflected a reduction in the market value of the business due to their weakened economic performance.

     Interest Expense. Interest expense increased $4.5 million, from $24.3 million during fiscal 2002 to $28.8 million during fiscal 2003. Interest expense during 2003 includes the write-off of deferred financing costs totaling $2.4 million which resulted from the refinancing of our senior bank debt on August 1, 2003. The refinancing of debt outstanding on that date was treated as a debt extinguishment, requiring recognition of these costs, due to the extent of changes in terms and conditions of our outstanding debt. The remaining increase in interest expense compared to 2002 primarily resulted from increased interest rates on debt outstanding as a result of the refinancing.

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     Income taxes. Our provision for income taxes was $18.7 million during fiscal 2003. This compares to an income tax benefit of $2.6 million during fiscal 2002. During fiscal 2003 we recorded a non-cash tax charge of $34.8 million to establish valuation allowances against a substantial portion of our deferred tax assets. Valuation of allowances were required due to cumulative operating losses generated by certain operations. In accordance with SFAS No. 109, when negative evidence such as cumulative losses exists management must place considerable weight on historical results and less weight on future projections when evaluating the realizability of deferred tax assets. As a result, management determined that the likelihood of realizing certain deferred tax assets was not sufficient to allow for continued recognition of assets.

     Minority interests and equity in net losses of affiliates. Minority interests and equity losses resulted in income of $0.4 million during fiscal 2003, an improvement from expense of $2.9 million during the fiscal 2002. Minority interest and equity losses during 2002 include $2.6 million in losses related to MTE, a minority-certified tooling and business services company in which we owned an equity investment. During 2002, MTE experienced serious market challenges from key customers that ultimately impaired its financial performance, resulting in significant liquidity problems. As a result of their performance and the lack of liquidity that emerged in the fourth quarter of 2002, the remaining value of our investment was written-off during the fourth quarter of 2002.

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, 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. Capital expenditure requirements for current programs have decreased commensurate with reduced demand for selected services and by redeploying underutilized assets. We also emphasize disciplined management of working capital. 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.

     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.

     Net cash provided by operating activities totaled $14.5 million in fiscal 2003, a $12.1 million decrease from $26.6 million in fiscal 2002. Operating cash flows during 2003 reflect a $24.2 million reduction in earnings before non-cash charges and taxes due to factors described in our operating results. The remaining change in net cash from operating activities reflects improvements in our working capital due primarily to efforts to reduce investments in accounts receivable and the timing of vendor payments relative to the close of the fiscal period.

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     Investing Activities. Net cash used for investing activities increased $1.5 million from $3.3 million during fiscal 2003 to $4.8 million during fiscal 2004. The increase relates to a reduction in capital expenditure requirements offset by a $4.0 million payment related to the settlement of a contingent earnout obligation. Capital expenditure requirements decreased due to lower discretionary spending and increased emphasis on higher return services with lower capital investment requirements. We believe that this level of capital spending is sustainable for the next several years at current levels of business.

     Debt Arrangements

     Senior Secured Notes and Mezzanine Term Notes. On August 1, 2003 we completed private offerings of senior secured notes totaling $100.5 million that mature on October 15, 2007. Effective December 19, 2003 the notes were exchanged for notes that were registered under the Securities Act of 1933. The transactions included the issuance of $75.5 million aggregate principal amount of 11% senior secured notes, priced to yield 11.25%, and $25.0 million aggregate principal amount of 11.5% mezzanine term notes. The notes were issued by both MSXI and MSXI Limited, a wholly-owned subsidiary in the U.K. The $25.0 million of mezzanine term notes were issued to Citicorp Mezzanine III, L.P. Proceeds from the combined offering totaled $95.5 million, net of related expenses and discounts and were used to repay all debt outstanding under our existing credit facility. These transactions refinanced our debt obligations over a longer term and removed certain restrictive covenants in place under prior arrangements.

     Senior Subordinated Notes. At January 2, 2005, we have $130 million of 11-3/8% unsecured senior subordinated notes outstanding, which are registered under the Securities Act of 1933. The notes mature on January 15, 2008 with interest payable semi-annually.

     Credit Facility and Fourth Lien Term Notes. Upon consummation of the private offering of senior secured notes, our second secured term note was amended and restated into a $14.7 million note issued by MSXI and a $2.4 million note issued by MSXI Limited. The amendments to the note also included extending the maturity from June 7, 2007 to January 15, 2008, and resetting the covenants in the notes so that they are equivalent to the senior notes sold on August 1, 2003. The amended and restated notes are referred to as the “fourth lien term notes”.

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     Concurrent with the offerings during 2003, we entered into an amended and restated credit facility with JPMorgan Chase. Terms of the amendment allow for revolving advances up to $40.0 million on a secured basis through July 2006 plus an additional $5.0 million available exclusively for the issuance of letters of credit. Available borrowings are subject to accounts receivable collateral requirements and certain customary covenants.

     Satiz Facility. Satiz, a subsidiary based in Italy, has local financing arrangements that provide for borrowings against selected eligible accounts receivable. As of January 2, 2005, borrowings under the arrangements bear interest at the average rate of 4.46%, and are collateralized by the underlying accounts receivable. The agreements are generally renewed annually unless terminated by either party.

     The company was notified that Fidis S.p.a., one of its principal local financing sources, intended to terminate its financing arrangement with Satiz in 2004. At January 2, 2005, $1.0 million was drawn on the Fidis facility, collateralized by a corresponding amount of accounts receivable from our largest Italian customer. Satiz concluded an arrangement with GE Capital to replace most but not all of the existing Fidis facility and at January 2, 2005, $4.9 million was outstanding pursuant to the GE Capital arrangement. We have also negotiated improved payment terms with the customer and we continue to seek additional financing to meet local requirements.

     Additional information regarding these obligations is set forth in Note 10 to our consolidated financial statements included under Item 8. of this report.

     Liquidity and Available Financing

     Our total indebtedness as of January 2, 2005 consists of senior secured notes, mezzanine term notes, senior subordinated notes, our fourth lien term notes, borrowings under our credit facilities and borrowings under various short-term arrangements. In addition to our total indebtedness, we also have contractual and other commitments under various arrangements as discussed below.

     Available borrowings under our credit facility as of January 2, 2005 are subject to adequate accounts receivable collateral requirements. As of January 2, 2005 we have $36.4 million available for immediate borrowing based on eligible accounts receivable as determined in accordance with our amended credit agreement.

     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 I, Item 3. Legal Proceedings”) through the term of our senior credit facility, although there can be no assurance that will be the case. We expect to obtain a suitable extension to our amended and restated credit facility on or before its expiration. Our ability to access additional capital in the long term depends on availability of capital markets and pricing on commercially reasonable terms as well as our credit profile at the time we are seeking funds. From time to time, we review 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 based on 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.

     Contractual Obligations and Off-Balance Sheet Arrangements

     Our material obligations under firm contractual and other arrangements, including commitments for future payments under long-term debt arrangements, operating lease arrangements and other long-term obligations as of January 2, 2005 are summarized below.

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     The settlement is related to a contingent earnout obligation pursuant to a prior acquisition. The monetary terms of the settlement are consistent in present value with amounts previously reserved by the company, with the balance paid in equal quarterly installments over three year. In addition to our total indebtedness, we also have contingent commitments under letters of credit totaling about $5.0 million, without duplication. Except for our letters of credit, we have no other existing off-balance sheet financing arrangements.

     In addition to the above contractual obligations, at January 2, 2005, we have accruals totaling $3.8 million related to contingent earnout obligations related to the acquisition of Management Resources, Inc. For a discussion of this and other pending cases refer to “Legal Proceedings”. It is impossible to determine the final outcome of all outstanding litigation or the impact on the company. If final liabilities related to litigation are significantly more than our current accrual, funding of such obligations could have a material adverse impact on our liquidity and capital resources.

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Critical Accounting Policies

     Our critical accounting policies are more fully described in Note 2 to our consolidated financial statements. Certain accounting policies applied require management’s judgment in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to a degree of uncertainty. Management judgments are based on historical experience, information from our customers, market and regional trends, and other information. Significant accounting policies include:

	•	Valuation of accounts receivable — Periodically, we review accounts receivable to reassess our estimates of collectibility. We provide valuation reserves for bad debts based on specific identification of likely and probable losses. In addition, we provide valuation reserves for estimates of aged receivables that may be written off, based upon historical experience. These valuation reserves are periodically re-evaluated and adjusted as more information about the ultimate collectibility of accounts receivable becomes available. Circumstances that could cause our valuation reserves to increase include changes in our customer’s liquidity and credit quality, other factors negatively impacting our customer’s ability to pay their obligations as they come due and the quality of our collection efforts.
	•	Valuation of goodwill and long-lived assets — During the fourth quarter of each fiscal year we review the carrying value of our goodwill and long-lived assets for impairment based on projections of anticipated discounted cash flows. Determining market values based on discounted cash flows requires management to make significant estimates and assumptions including, but not limited to, long-term projections of cash flows, investment requirements, market conditions, and appropriate discount rates. Management judgments are based on historical experience, information from our customers, market and regional trends, and other information including, in the case of discount rates, cost of capital data compiled by third parties. During the first quarter of 2002, we recorded a cumulative charge upon adoption of SFAS No. 142 as described in our results of operations. During the fourth quarter of 2002 an additional charge of $4.2 million was recorded based on updated analysis. While we believe that the estimates and assumptions underlying our valuation models are valid, different assumptions could result in a larger or smaller charge to earnings. In completing our analysis in 2004 we used a discount rate of 10.51%, which represents the median WACC for the staffing industry per Ibbotson Associates, in our cash flow calculations. A 1% change in the discount rate results in a $13.0 million change in the calculated fair value assuming all other assumptions are unchanged.
	•	Deferred income taxes — At January 2, 2005 our consolidated balance sheet includes net deferred tax assets of $4.3 million. As of January 2, 2005, valuation allowances totaling $45.1 million have been established against a substantial portion of our deferred tax assets. Valuation allowances were required due to cumulative operating losses generated by certain operations. In accordance with SFAS No. 109, when negative evidence such as cumulative losses exists management must place considerable weight on historical results and less weight on future projections when evaluating the realizability of deferred tax assets. As a result, management determined that the likelihood of realizing certain deferred tax assets was not sufficient to allow for continued recognition of assets.
	•	Valuation of common stock purchase warrants -. In connection with the issuance of mezzanine term notes during 2003, we granted to Citicorp Mezzanine III, L.P. the right to purchase 16,666 shares of our Class A common stock. The purchase warrants are exercisable at a price of $0.01 per share, subject to certain anti-dilution adjustments, through July 31, 2013. To determine the fair value of the warrants we completed a discounted cash flow analysis, which requires management to make significant estimates and assumptions including, but not limited to, long-term projections of cash flows, market conditions, and appropriate discount rates. During the third quarter of 2003, we recorded common stock purchase warrants at a fair value of $750,000. While we believe that the estimates and assumptions underlying our valuation models are valid, different assumptions could result in a different fair market value assigned to the warrants.

Inflation

     Although we cannot anticipate future inflation, we do not believe that inflation has had, or is likely in the foreseeable future to have, a material impact on our results of operations. Our contracts typically do not include automatic adjustments for inflation.

Seasonality

     The number of billing days in the period and the seasonality of our customers’ businesses primarily affect our quarterly operating results. Historically, demand for our services has been lower during automotive shutdown periods, including the year-end holidays.

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Recently Issued Accounting Pronouncements

     SFAS No. 123-R,: Accounting for Stock-Based Compensation- Revised: Issued by the FASB in December 2004, this standard establishes the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The new Statement is now effective for public companies for interim and annual periods beginning after June 15, 2005. Public companies with calendar year-ends will be required to adopt SFAS No. 123-R in the third quarter of 2005. MSXI is in the process of studying this statement, and has yet to determine the effects, if any, on its consolidated financial statements.

     SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity: Issued by the FASB in May 2003, this standard established 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 13, the redemption provisions of our preferred stock were amended and the adoption of SFAS No. 150 during the first quarter of fiscal 2004 did not have any impact on the company’s consolidated results of operations or financial position.

     FASB Interpretation No. 46, Consolidation of Variable Interest Entities: Issued by the FASB in January 2003, the interpretation expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. The consolidation requirements of the interpretation apply immediately 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 this interpretation during the first fiscal quarter of 2004 did not have a material impact on the company’s consolidated results of operations or financial position.

Change in Independent Registered Public Accounting Firm

     On November 17, 2004, PricewaterhouseCoopers LLP (“PwC”) was dismissed as the independent registered public accounting firm of MSX International, Inc. The decision to change public accounting firms and the appointment of the new public registered public accounting firm was made by the Audit Committee of MSX International’s Board of Directors. The reports of PwC on MSX International’s financial statements as of and for the years ended December 28, 2003 and December 29, 2002 did not contain an adverse opinion or a disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope or accounting principle.

     MSX International has engaged Grant Thornton LLP as its independent registered public accounting firm, effective November 17, 2004.

Forward Looking Statements

     Certain of the statements made in this report on Form 10-K, including those concerning restructuring activities and other operational improvements, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements may be identified by the use of forward looking terminology such as “believes,” “expects,” “estimates,” “will,” “should,” “plans,” “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Such forward-looking statements are based on current management projections and expectations. They involve significant risks and uncertainties. As such, they are not guarantees of future performance. MSXI disclaims any intent or obligation to update such statements.

     Actual results may vary materially from those in the forward-looking statements as a result of any number of factors, many of which are beyond the control of management. These important factors include: our leverage and related exposure to changes in interest rates; our reliance on major customers in the automotive industry and the timing of their product development and other initiatives; the market demand for our business services in general; our ability to recruit and place qualified personnel; delays or unexpected costs associated with cost reduction efforts; risks associated with operating internationally, including economic, political and currency risks; and risks associated with our acquisition strategy. Additional information concerning these and other factors are discussed in MSXI’s Registration Statement on Form S-4 (dated November 19, 2003) and in other filings with the SEC.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

     We are exposed to certain market risks, including interest rate and currency exchange rate risks. Risk exposures relating to these market risks are summarized below. This information should be read in connection with the consolidated financial statements and the related notes thereto included elsewhere in this Form 10-K.

     Currency Rate Management

     For fiscal 2004, 38% of our net sales, excluding discontinued operations, were from markets outside of the U.S. To date, the majority of our exposure to foreign exchange fluctuations has been naturally hedged since our foreign operation’s revenues and operating costs are typically denominated in the same currency. We may periodically hedge specific transactions or obligations in non-functional currencies in order to mitigate any additional risk. However, we do not enter into financial instruments for trading or speculative purposes. For the fiscal years ended January 2, 2005 and December 28, 2003, adjustments from the translation of the financial results of our foreign operations increased equity by about $1.9 million and $6.6 million, respectively.

     Interest Rate Management

     We manage interest cost using a combination of fixed and variable rate debt. We have $75.5 million of senior secured notes outstanding at a fixed interest rate of 11% and $25.0 million of mezzanine term notes at a fixed interest rate of 11.5%. Both notes mature on October 15, 2007. In addition, under our new senior credit facility, we have a $40 million revolver with variable interest rates. As of January 2, 2005, we had $130 million of senior subordinated notes outstanding at a fixed interest rate of 11-3/8% with a remaining duration of five years. As of January 2, 2005, the fair value of the senior subordinated notes was $102.2 million, compared to its carrying value of $130 million.

     Sales to Major Markets/Customers

     Our current business is heavily reliant on the domestic and foreign automotive industries. Ford, DaimlerChrysler, Fiat, and GM, including their automotive subsidiaries, accounted for approximately 35.9%, 13.3%, 8.7%, and 7.3% respectively, of our consolidated net sales for fiscal 2004, excluding discontinued operations. Significant future price or volume reductions from these customers could adversely affect our earnings and financial condition. We believe we can expand our services to other less cyclical industries and have had some success in doing so. However, there can be no assurance that our diversification efforts will fully offset the impact of any further declines in our current automotive markets.

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Item 8. Financial Statements and Supplementary Data.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and
Shareholders of MSX International, Inc.

We have audited the accompanying consolidated balance sheet of MSX International, Inc. (a Delaware corporation) and subsidiaries as of January 2, 2005, and the related consolidated statements of operations, shareholders’ deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MSX International, Inc. and subsidiaries as of January 2, 2005, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the fiscal 2005 basic consolidated financial statements taken as a whole. Schedule II has been subjected to the auditing procedures applied in the audit of the fiscal 2005 basic consolidated financial statements and, in our opinion, is fairly stated, when considered in relation to the fiscal 2005 basic consolidated financial statements taken as a whole.

/s/ Grant Thornton LLP

Southfield, Michigan
March 18, 2005

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders
of MSX International, Inc.

In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, cash flows and shareholders’ deficit present fairly, in all material respects, the financial position of MSX International, Inc. and its subsidiaries at December 28, 2003, and the results of their operations and their cash flows for each of the two fiscal years in the period ended December 28, 2003, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the fiscal 2003 and 2002 information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards established by the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 8 to the consolidated financial statements, the Company changed its method of accounting for goodwill effective December 31, 2001.

/s/ PRICEWATERHOUSECOOPERS LLP

Detroit, Michigan
March 12, 2004, except for discontinued operations discussed in Note 4 for
which the date is March 30, 2005

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MSX INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
as of January 2, 2005 and December 28, 2003

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

26

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
for the three fiscal years ended January 2, 2005

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

27

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three fiscal years ended January 2, 2005

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

28

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
for the three fiscal years ended January 2, 2005

The accompanying Notes to the Consolidated Financial Statements are an integral part of these statements.

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MSX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(dollars in thousands unless otherwise stated)

1. Organization and Basis of Presentation:

     The accompanying financial statements present the assets, liabilities and results of operations of MSX International, Inc. and its consolidated subsidiaries. MSXI is a holding company owned by Citicorp and affiliates and certain members of management. Since our formation we have completed numerous acquisitions, the most recent of which are disclosed in Note 3. The results of operations for the periods presented include the results of operations of acquired companies from the effective date of their acquisition. Where necessary, prior year information has been modified to conform to the current year presentation. Operations classified as discontinued at January 2, 2005 have been excluded from the discussion of continuing operations and are discussed separately in Note 4.

     We are principally engaged in providing technical business services to automobile manufacturers and suppliers and other industries primarily in North America and Europe.

2. Significant Accounting Policies:

     a. Principles of Consolidation. The accompanying financial statements include the accounts of MSX International, Inc. and all majority owned subsidiaries. Significant intercompany transactions have been eliminated. Companies that are 20 to 50 percent owned by MSXI or its wholly owned subsidiaries are accounted for by the equity method of accounting. We use a 52-53 week fiscal year that ends on the Sunday nearest December 31.

     b. Cash and Cash Equivalents. All highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.

     c. Receivables. Receivables are presented net of aggregate allowances for doubtful accounts of $1.5 million and $3.0 million at January 2, 2005 and December 28, 2003, respectively.

     d. Inventory. Inventory is comprised primarily of raw materials, parts and supplies, which are stated at the lower of cost, or net realizable value, with cost determined using the first-in, first-out method.

     e. Property and Equipment. Property and equipment, including significant betterments to leased facilities, are recorded at cost. Upon retirement or disposal of property and equipment, the cost and accumulated depreciation are removed from the accounts, and any gain or loss is included in income. Maintenance and repair costs are charged to expense as incurred.

     Under the provisions of Statement of Position 98-1, costs associated with software developed or obtained for internal use are capitalized when both the preliminary project stage is complete and management has authorized funding of the development program. Such costs are included in computers, peripherals and software. Capitalized costs include both external costs of software and consulting as well as payroll and payroll related costs of MSXI personnel working directly on the development project. Internal costs capitalized are not material to the consolidated balance sheet at January 2, 2005 and December 28, 2003.

     f. Goodwill and Other Intangibles. Management evaluates the carrying value of goodwill when events or circumstances warrant such a review, and in any case, annually during the fourth quarter of each year. The goodwill balances are reported in Note 8.

     g. Fair Value of Financial Instruments. The estimated fair value of cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate their carrying amounts. The estimated fair value and carrying amounts of long-term debt borrowings are reported in Note 10.

     h. Stock Based Compensation. We account for stock options in accordance with APB Opinion No. 25. In June 2003 we repriced selected outstanding stock options and in accordance with APB Opinion No. 25. We are now required to account for the stock options under variable plan accounting. Under APB Opinion No. 25, we recognize no compensation expense related to non-repriced stock options issued as no options have been granted at a price below the estimated market price on the day of grant. The following table illustrates the effect on net income (loss) if we had applied the fair value recognition provisions of SFAS No. 123, to stock-based employee compensation.

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MSX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(dollars in thousands unless otherwise stated)

     i. Foreign Currency Translation and Transactions. Net assets of operations outside of the U.S. are translated into U.S. dollars using current exchange rates with the effects of translation adjustments included in shareholders’ deficit as a separate component of comprehensive income. Revenues and expenses of operations outside of the U.S. are translated at the average rates of exchange during the period. Gains and losses arising from transactions denominated in currencies other than the functional currency of a particular entity are included in income. Net transaction gains and losses was an expense of $0.7 million, income of $0.4 million, and expense of $0.3 million for the fiscal years ended 2004, 2003, and 2002, respectively.

     j. Revenue Recognition. Our revenue is primarily comprised of revenue from time and material contracts and fixed price contracts. Revenues from time and material contracts are recognized in the period in which services are provided based on contractual billing rates. Revenues from certain master vendor and supply chain management programs are recorded, net of billings from sub-suppliers, at the completion of each individual service. Revenues from fixed price engineering service contracts are recognized using the percentage of completion method, measured by comparing the percentage of labor costs incurred to date to the estimated total labor costs for each contract.

     Contract costs include all direct material and labor costs and indirect costs such as indirect labor, supplies, tools and repairs. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in fixed price contracts may result in revisions to estimates of costs and revenues and are recognized in the period in which the revisions are determined.

     k. Depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of assets as follows:

     Leasehold improvements are amortized on a straight-line basis over their estimated useful lives or the term of the lease, whichever is shorter.

     l. Income Taxes. Deferred income taxes are recorded to reflect the differences between the tax basis and financial reporting basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

     m. Foreign Currency Contracts. MSXI has significant operations outside of the U.S. that are subject to foreign currency exchange risk. We may periodically hedge transactions or obligations in non-functional currencies in order to mitigate this risk. No such contracts were entered into during the last three fiscal years.

     n. Reclassifications. Certain prior year amounts have been reclassified to conform to the presentation adopted during fiscal 2004.

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MSX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(dollars in thousands unless otherwise stated)

     o. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions also affect the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from such estimates and assumptions.

     p. Recently Issued Accounting Pronouncement. SFAS No. 123-R,: Accounting for Stock-Based Compensation- Revised: Issued by the FASB in December 2004, this standard establishes fair value accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. The new Statement is effective for public companies for interim and annual periods beginning after June 15, 2005. Public companies with calendar year-ends will be required to adopt SFAS No. 123-R in the third quarter of 2005. MSXI is in the process of studying this statement, and has yet to determine the effects, if any, on its consolidated financial statements.

     SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity: Issued by the FASB in May 2003, this standard established 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 13, the redemption provisions of our preferred stock were amended and the adoption of SFAS No. 150 during the first quarter of fiscal 2004 did not have a material impact on the company’s consolidated results of operations or financial position.

     FASB Interpretation No. 46-R, Consolidation of Variable Interest Entities: Issued by the FASB in January 2003, the interpretation expands upon and strengthens existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. The consolidation requirements of the interpretation apply immediately 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 this interpretation during the first fiscal quarter of 2004 did not have a material impact on the company’s consolidated results of operations or financial position.

3. Acquisitions and Disposition of Businesses and Investments:

     Acquisition of Businesses and Investments

     Effective January 1, 2002, we completed the acquisition of selected assets and liabilities of Draupner in Gottenberg, Sweden for a total purchase price at closing of about $2.4 million, before acquisition related costs, with an additional amount payable contingent on the achievement of an annual earnings target. Draupner’s principal business is digital documentation and translation services for the automotive and related industries. Upon completion, the Draupner business was integrated with our technical and consumer publishing service offerings. Refer to “asset impairments and sale” for additional information on the disposition of this investment.

     Also effective January 1, 2002, we acquired the remaining 51% of the outstanding common stock of Cadform-MSX Engineering GmbH through a series of transactions that were contemplated at the time of our previous investment in Cadform. Specifically, we exercised our option to acquire an additional 16% of the common stock of Cadform for about $0.3 million. The remaining 35% of their common stock was acquired in exchange for a 7.8% interest in our existing German engineering business. Prior to these transactions, we owned 49% of the outstanding common stock of Cadform. The transactions were accounted for under the purchase method of accounting resulting in goodwill of $8.3 million. During the fourth quarter of fiscal 2004 we purchased the remaining minority interests in our Germany engineering business, representing 7.8% of the shares outstanding for a total purchase price of approximately $0.4 million.

     Effective in December 2002 we acquired the remaining 25% of the outstanding common stock of Satiz from Fiat. The transaction had been contemplated as part of the original acquisition of 75% of the outstanding common stock of Satiz in December of 1999. The total purchase price was about $3.5 million based on formulas established at the time of the original 75% acquisition. The transaction was accounted for under the purchase method of accounting resulting in additional goodwill of $2.4 million. Satiz specializes in commercial and technical publishing in Europe and derives a significant portion of its sales from Fiat and related subsidiaries.

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MSX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(dollars in thousands unless otherwise stated)

     All of the above transactions were funded through a combination of cash from operations and borrowings under our credit facility. The operating results of acquired companies have been included in our consolidated operating results from the effective date of the acquisition. The proforma effects of the above transactions would not be materially different from reported results for the periods presented.

     Asset impairments and sale

     Effective September 1, 2003, we completed the sale of selected assets of Draupner in Europe for approximately $0.5 million. This transaction resulted in a loss on the sale of $1.1 million and was consummated as part of our restructuring efforts in response to forecasted operating losses generated by this business. As a result of the sale we also recorded a charge against goodwill associated with these assets totaling $0.7 million. The proforma effects of the above transactions would not be materially different from reported results for the periods presented.

     During the fourth quarter of 2002, we completed the sale of our human capital businesses in Italy and recognized losses on the valuation of certain long-term investments. Quandoccorre Interinale and QR Quandoccorre were sold for net proceeds of about $1.0 million, resulting in a loss on sale of $2.7 million. The sale was completed as part of our restructuring efforts in response to current and forecasted operating losses generated by these businesses. These companies had been acquired through a series of transactions during fiscal 1999 and 2000.

     Also during the fourth quarter of 2002, we recognized losses on our investments in Prototipo Holding BV and MTE Groups LLC totaling $1.6 million and $2.4 million, respectively, reflecting reductions in the market value of our investments. The investment in Prototipo Holding BV, representing a 2% interest, was acquired in November of 2000 and was accounted for under the cost method. The investment in MTE, representing a 49% interest, was acquired in 2001 and had been accounted for under the equity method. The write-down of MTE comprised the balance of our investment and $0.7 million of receivables for certain services provided to MTE. The charges were determined based upon an evaluation of the financial stability of these businesses and the best available market information.

4. Discontinued Operations:

     In accordance with SFAS No. 144, discontinued operations include components of entities or entire entities that, through disposal transactions, will be eliminated from the ongoing operations of MSXI. In the fourth quarter of fiscal 2004, management determined that it would seek to divest selected engineering and staffing businesses in Europe. Due to changing competitive requirements and customer demands for automotive engineering and staffing in Europe, combined with management’s focus on businesses with higher growth and return prospects, the Company determined these businesses are no longer core to its strategies. A process for selling the businesses was initiated and prospective purchasers have been identified. The sale of such businesses is expected to close during fiscal 2005.

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MSX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(dollars in thousands unless otherwise stated)

     The following summary results of operations information is derived from the businesses that are in the disposal process:

     The summary balance sheet information is derived from the businesses that are in the disposal process, which management believes is representative of the net assets of the businesses held for disposal. The net proceeds received from the prospective disposal may be subject to limitations in the Company’s senior credit facility. When such net proceeds amount become known and available, management anticipates applying them to reduce outstanding indebtedness.

5. Restructuring and Severance:

     During fiscal 2004, we continued to implement our overall business strategy following the execution of a comprehensive cost reduction plan in late 2003. Our 2004 actions included steps to reduce employment costs in selected business units through reductions in staffing levels. In particular, we are restructuring Satiz to meet current customer demand for its services.

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MSX INTERNATIONAL, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)
(dollars in thousands unless otherwise stated)

In the first quarter of 2005, we concluded an agreement with various trade union organizations that represent Satiz employees. The agreement establishes a program for permanent employment reductions affecting 124 personnel. We estimate that the program is likely to reduce Satiz’ employment costs by approximately $5.7 million annually. We believe that affected employees are most likely to take advantage of the program in the latter half of 2005, at an estimated cost of approximately $4.2 million.

     We experienced declining revenue over the last several years due to the unstable economic environment, volatile demand for engineering and staffing services, and challenges posed by key customers. In response to declines in revenue and reduced margins due to pricing pressure, we implemented programs in recent years to maintain liquidity and reduce costs. Such actions included the following:

	•	On August 1, 2003 we completed a private offering of senior secured notes totaling $100.5 million that mature October 15, 2007. Net proceeds of $95.5 million were used to payoff our existing senior credit facility, including $62.7 million of term debt. The transaction served to extend into future years debt repayment obligations under the existing facility, which was scheduled to expire December 7, 2004. Concurrently with the notes offering, we amended our senior credit facility to include a $40 million revolving facility and an additional $5 million exclusively for the issuance of letters of credit.
	•	Management implemented a comprehensive cost reduction plan in late 2003 to optimize the Company’s cost structure and align resources with the Company’s growth strategy. The incremental costs of this and a prior year program were reported during each year as restructuring charges. All initiatives were fully implemented at the end of fiscal 2003. Restructuring charges incurred in 2003 were accounted for in accordance with SFAS No. 146. Restructuring charges incurred prior to 2003 were accounted for in accordance with EITF Issue No. 94-3. The table below details the restructuring charges for the last three fiscal years net of discontinued operations:

     Employee termination costs

     Fiscal year 2004 costs associated with employee terminations are substantially related to headcount reduction initiatives at our Italian subsidiary, Satiz. Employee terminations resulting from our 2003 cost reduction plan affected approximately 320 indirect employees, (including discontinued operations), throughout the U.S. and Europe. The costs associated with employee terminations consist of severance pay, placement services, and legal and related fees. In accordance with SFAS No. 146, these charges were recorded at the time it was communicated to the employees that they were being involuntarily terminated. Prior to 2003 the headcount reductions targeted primarily indirect and administrative staff positions throughout the U.S. and Europe.

     Facility consolidation costs

     We continually analyze our operating facilities based on profitability, lease terms and geographic and program requirements. In response to the reductions in our business we have reduced the number of facilities we operate from 102 as of December 30, 2001 to 65 as of January 2, 2005. As a result of these facility consolidations, a $4.8 million charge was recorded in the fourth quarter of 2003. This charge was recorded at the time we discontinued the use of selected facilities.