MSX International 10-Q 2001 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended April 1, 2001

OR

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

For the transition period from         to

Commission File Number: 333-49821

MSX International, Inc.
(Exact name of registrant as specified in its charter)

Delaware	38-3323099
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
275 Rex Boulevard, Auburn Hills, Michigan	48326
(Address of principal executive offices)	(Zip 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 No.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS AS OF APRIL 1, 2000 (UNAUDITED) AND DECEMBER 31, 2000
		CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) FOR THE FISCAL QUARTERS ENDED APRIL 1, 2001 AND APRIL 2, 2000
		CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE FISCAL QUARTERS ENDED APRIL 1, 2001 AND APRIL 2, 2000
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 6. EXHIBITS AND REPORTS OM FORM 8-K
SIGNATURE

MSX INTERNATIONAL, INC.
INDEX

PART I.   FINANCIAL INFORMATION

				Pages
	ITEM 1.		Financial Statements:
		Consolidated Balance Sheets as of April 1, 2001 (Unaudited) and December 31, 2000			2
		Consolidated Statements of Income (Unaudited) for the Fiscal Quarters Ended April 1, 2001 and April 2, 2000			3
		Consolidated Statements of Cash Flows (Unaudited) for the Fiscal Quarters Ended April 1, 2001 and April 2, 2000			4
		Notes to Consolidated Financial Statements (Unaudited)			5
	ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
PART II.   OTHER INFORMATION
	ITEM 2.		Changes in Securities and Use of Proceeds		15
	ITEM 6.		Exhibits and Reports on Form 8-K		15
SIGNATURE					16

1

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

MSX INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
as of April 1, 2001 and December 31, 2000

					April 1,
					2001			December 31,
					(Unaudited)			2000
					(dollars in thousands)
ASSETS
Current assets:
	Cash and cash equivalents				$	4,571		$	4,686
	Accounts receivable, net (Note 3)					307,083			321,733
	Inventory					3,441			3,189
	Prepaid expenses and other assets					12,071			8,578
	Deferred income taxes, net					3,086			3,209
			Total current assets			330,252			341,395
Property and equipment, net						41,935			40,959
Goodwill and other intangibles, net of accumulated amortization of $12,931 and $11,395, respectively						172,718			172,091
Other assets						23,338			18,774
Deferred income taxes, net						4,803			3,810
		Total assets			$	573,046		$	577,029
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
	Notes payable and current portion of long-term debt (Note 4)				$	11,656		$	13,170
	Accounts payable and drafts					163,802			176,569
	Accrued payroll and benefits					21,774			30,561
	Other accrued liabilities					68,171			71,017
				Total current liabilities		265,403			291,317
Long-term debt (Note 4)						272,553			253,676
Long-term deferred compensation and other liabilities						11,245			10,406
	Total liabilities					549,201			555,399
Minority interests						1,208			1,092
Redeemable Series A Preferred Stock (Note 5)						36,000			36,000
Shareholders’ deficit:
	Common Stock, $.01 par value, 200,000,000 aggregate shares of Class A and Class B Common Stock authorized; 20,080,800 and 20,400,600 shares of Class A Common Stock issued and outstanding, respectively					201			204
	Additional paid-in-capital					(21,769	)		(21,705	)
	Note receivable from officer					(3,000	)		(3,000	)
	Accumulated other comprehensive loss					(14,176	)		(15,641	)
	Retained earnings					25,381			24,680
				Total shareholders’ deficit		(13,363	)		(15,462	)
				Total liabilities and shareholders’ deficit	$	573,046		$	577,029

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

2

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
for the fiscal quarters ended April 1, 2001 and April 2, 2000

		Fiscal Quarter Ended
		April 1,			April 2,
		2001			2000
		(in thousands)
Net sales		$	256,637		$	247,965
Cost of sales			224,445			212,805
	Gross profit		32,192			35,160
Selling, general and administrative expenses			21,243			20,087
Amortization of goodwill and other intangibles			1,604			1,102
	Operating income		9,345			13,971
Interest expense, net			6,928			6,911
	Income before income taxes, minority interests and equity in net losses of affiliates		2,417			7,060
Income tax provision			1,015			2,928
Minority interests and equity in net losses of affiliates, net of taxes			(202	)		82
	Net income	$	1,200		$	4,214

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

3

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
for the fiscal quarters ended April 1, 2001 and April 2, 2000

			Fiscal Quarter Ended
			April 1,			April 2,
			2001			2000
			(in thousands)
Cash flows from operating activities:
	Net income		$	1,200		$	4,214
	Adjustments to reconcile net income to net cash provided by (used for) operating activities:
		Minority interests and equity in net losses of affiliates		202			(82	)
		Depreciation		3,920			3,864
		Amortization		1,882			1,365
		Deferred taxes		(870	)		993
		Loss on sale/disposal of property and equipment		—			19
		(Increase) decrease in receivables, net		14,650			(4,238	)
		(Increase) decrease in inventory		(252	)		(295	)
		(Increase) decrease in prepaid expenses and other assets		(3,491	)		(2,472	)
		Increase (decrease) in current liabilities		(25,347	)		4,739
		Other, net		237			(144	)
Net cash provided by (used for) operating activities				(7,869	)		7,963
Cash flows from investing activities:
	Capital expenditures			(4,999	)		(4,465	)
	Acquisition of businesses, net of cash acquired			(11,348	)		(32,613	)
	Proceeds from sale/disposal of equipment			4			55
	Other, net			(14	)		(662	)
Net cash used for investing activities				(16,357	)		(37,685	)
Cash flows from financing activities:
	Proceeds from issuance of debt			—			25,000
	Repayment of debt			(1,313	)		(980	)
	Debt issuance costs			(7	)		(160	)
	Changes in revolving debt, net			18,677			6,485
	Changes in book overdrafts, net			5,657			1,056
	Repurchase of common stock			(4,178	)		—
	Sale of common stock			3,612			—
Net cash provided by financing activities				22,448			31,401
Effect of foreign exchange rate changes on cash and cash equivalents				1,663			(1,258	)
Cash and cash equivalents:
	Increase (decrease) for the period			(115	)		421
	Balance, beginning of period			4,686			6,879
	Balance, end of period		$	4,571		$	7,300

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

4

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

1. Organization and Basis of Presentation:

      The accompanying financial statements represent the consolidated assets and liabilities and results of operations of MSX International, Inc. and its majority owned subsidiaries (“MSXI”). We are principally engaged in the business of providing engineering services, information technology (“IT”) and professional staffing services, and business and technology services primarily to automobile manufacturers and suppliers in the United States and Europe. We utilize a 52-53 week fiscal year, which ends on the Sunday nearest December 31.

      All intercompany transactions and balances between subsidiaries of MSXI have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of only normal recurring items, which are necessary for a fair presentation. The operating results for the fiscal quarters ended April 1, 2001 and April 2, 2000 are not necessarily indicative of the results of operations for the entire year. Reference should be made to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2000. Certain prior year amounts have been reclassified to conform to the presentation adopted during the current period.

2. Acquisitions of Businesses:

      CSR Acquisition. On February 23, 2000 we acquired the professional staffing operations of Corporate Staffing Resources, Inc. (the “CSR Acquisition”). Specifically, we acquired 100% of the outstanding common stock of Intranational Computer Consultants, Inc. and Programming Management and Systems, Inc. and selected assets and liabilities of CMS Management Services and Ascend. The total purchase price, upon settlement of certain contractual matters, of about $31.8 million was funded with borrowings under our credit facility. These companies provide information technology and technical professional staffing services throughout the United States with combined historical annual sales in excess of $57 million. The CSR Acquisition was accounted for under the purchase method of accounting, resulting in goodwill of $26.9 million.

      The terms of certain of our acquisition agreements from prior years provide for additional contingent consideration to be paid over a period of up to two years if the acquired entity’s future operating results exceed targeted levels. Contingent consideration is earned when the acquired entity’s financial performance grows in excess of the targeted levels established at the time of acquisition. Such additional consideration is recorded, when earned, as additional purchase price. In this regard, we recorded additional consideration during fiscal 2000 and 2001, related to prior year acquisitions, which resulted in additional goodwill capitalization. Additional goodwill is amortized over the remaining amortization period.

      The operating results of acquired companies have been included in our consolidated operating results from the date of acquisition. The proforma effects of the CSR acquisition would not be materially different from reported results for the periods presented.

3. Accounts Receivable:

      Accounts receivable include the portion of our billings for purchasing support services attributable to services provided by our vendors which are passed on to our customers. These amounts totaled $67.7 million as of April 1, 2001 and $68.5 million as of April 2, 2000. A corresponding liability to our vendors for these amounts is recorded in accounts payable at the time the receivable is recognized.

5

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

Debt:

      Debt is comprised of the following:

		Interest Rates at						Outstanding at
		April 1,			December 31,			April 1,		December 31,
		2001			2000			2001		2000
Senior Subordinated Notes			11.375	%		11.375	%	$	130,000	$	130,000
Credit Facility, as amended and restated:
	Revolving line of credit notes		6.56-7.22	%		7.47-9.75	%		26,181		19,964
	Swingline notes		7.00-8.25	%		7.53-9.00	%		22,060		7,712
	Term notes		6.91-9.46	%		8.21-9.69	%		99,937		101,250
Satiz Facility			5.64	%		5.73	%		5,397		6,392
Other			7.75	%		7.50-8.00	%		634		1,528
									284,209		266,846
Less current portion									11,656		13,170
Total long-term debt								$	272,553	$	253,676

      As of April 1, 2001, $48.2 million was outstanding under the revolving credit portions of our credit facility and has been classified as long-term debt as we have both the ability and intent to refinance such amounts under the credit facility.

5. Redeemable Series A Preferred Stock:

      We are authorized to issue up to 1,500,000 shares of Preferred Stock, divided into two classes: 500,000 shares of Redeemable Series A Preferred Stock, par value $0.01, and 1,000,000 shares of New Preferred Stock, par value $0.01. As of April 1, 2001 and December 31, 2000, 360,000 shares of our Redeemable Series A Preferred Stock are issued and outstanding. Dividends on preferred stock are payable in cash at a rate per annum equal to 12 percent of the stated value plus an amount equal to any accrued and unpaid dividends. As of April 1, 2001, we have not declared or paid any dividends. Dividends accumulated but not declared totaled about $23.0 million as of April 1, 2001.

6. Comprehensive Income:

      Our comprehensive income was:

	Fiscal Quarter Ended
	April 1,		April 2,
	2001		2000
Net income	$	1,200	$	4,214
Other comprehensive loss - foreign currency translation adjustments		1,465		(1,702	)
Comprehensive income	$	2,665	$	2,512

6

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

7. Segment Information:

      MSXI is a global provider of technology driven business services to the automotive and other industries. We group our services into three service line categories: engineering services, information technology (“IT”) and professional staffing services, and business and technology services. Due to the similar characteristics of our service lines, including the nature of our service offerings, processes supporting the delivery of our services, our customers, and our marketing and sales processes, our operations have been aggregated following the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 131 for segment reporting purposes.

      The following is a summary of our net sales by service line:

		Fiscal Quarter Ended
		April 1,		April 2,
		2001		2000
Engineering Services		$	142,818	$	143,805
IT and Professional Staffing Services			46,010		35,136
Business & Technology Services			67,809		69,024
	Total net sales	$	256,637	$	247,965

      We evaluate performance based on earnings before interest and taxes (EBIT), including the Michigan Single Business Tax, as defined. A reconciliation of consolidated EBIT to consolidated income before income taxes, minority interests and equity in net losses of affiliates is as follows:

	Fiscal Quarter Ended
	April 1,			April 2,
	2001			2000
Total EBIT before minority interests and equity in net losses of affiliates	$	10,384		$	15,413
Interest expense		(6,928	)		(6,911	)
Michigan Single Business Tax and other similar taxes		(1,039	)		(1,442	)
Consolidated income before taxes, minority interests and equity in net losses of affiliates	$	2,417		$	7,060

8. Guarantor and Non-Guarantor Subsidiaries:

      In connection with our $130 million of senior subordinated notes outstanding, each of our significant domestic restricted subsidiaries, as defined in the related bond indenture (the “Guarantor Subsidiaries”), irrevocably and unconditionally guarantee MSXI’s performance as primary obligor. The following condensed consolidating financial data provides information regarding the financial position, results of operations and cash flows of the Guarantor Subsidiaries as set forth below. Separate financial statements of the Guarantor Subsidiaries are not presented because management has determined those would not be material to the holders of the senior subordinated notes.

      The Guarantor Subsidiaries account for their investments in the non-guarantor subsidiaries, if any, on the equity method. The principal elimination entries are to eliminate the investments in subsidiaries and intercompany balances and transactions.

7

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

8. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of April 1, 2001

			MSXI			Guarantor		Non-Guarantor					MSXI
			(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	315	$	4,256	$	—		$	4,571
	Accounts receivable, net			19			190,653		116,411		—			307,083
	Inventory			—			2,342		1,099		—			3,441
	Prepaid expenses and other assets			230			5,997		5,844		—			12,071
	Deferred income taxes, net			—			2,770		316		—			3,086
		Total current assets		249			202,077		127,926		—			330,252
Property and equipment, net				—			20,113		21,822		—			41,935
Goodwill and other intangibles, net				—			131,797		40,921		—			172,718
Investment in subsidiaries				170,717			89,105		5,326		(252,843	)		12,305
Other assets				6,297			4,387		349		—			11,033
Deferred income taxes, net				—			1,635		3,168		—			4,803
		Total assets	$	177,263		$	449,114	$	199,512	$	(252,843	)	$	573,046
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Notes payable and current portion of long-term debt		$	5,625		$	—	$	6,031	$	—		$	11,656
	Accounts payable and drafts			—			114,625		49,177		—			163,802
	Accrued liabilities			175			59,365		30,405		—			89,945
		Total current liabilities		5,800			173,990		85,613		—			265,403
Long-term debt				251,366			10,196		10,991		—			272,553
Intercompany accounts				(102,540	)		89,713		12,827		—			—
Long-term deferred compensation and other liabilities				—			4,498		6,747		—			11,245
		Total liabilities		154,626			278,397		116,178		—			549,201
Minority interests				—			—		1,208		—			1,208
Redeemable Series A Preferred Stock				36,000			—		—		—			36,000
Shareholders’ equity (deficit)				(13,363	)		170,717		82,126		(252,843	)		(13,363	)
		Total liabilities and shareholders’ equity (deficit)	$	177,263		$	449,114	$	199,512	$	(252,843	)	$	573,046

8

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

8. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of December 31, 2000

			MSXI			Guarantor		Non-Guarantor					MSXI
			(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	569	$	4,117	$	—		$	4,686
	Accounts receivable, net			171			198,403		123,159		—			321,733
	Inventory			—			1,867		1,322		—			3,189
	Prepaid expenses and other assets			262			4,837		3,479		—			8,578
	Deferred income taxes, net			—			2,770		439		—			3,209
		Total current assets		433			208,446		132,516		—			341,395
Property and equipment, net				—			19,770		21,189		—			40,959
Goodwill and other intangibles, net				—			132,914		39,177		—			172,091
Investment in subsidiaries				163,697			80,666		5,523		(242,417	)		7,469
Other assets				6,569			4,252		484		—			11,305
Deferred income taxes, net				—			1,635		2,175		—			3,810
		Total assets	$	170,699		$	447,683	$	201,064	$	(242,417	)	$	577,029
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Notes payable and current portion of long-term debt		$	5,250		$	—	$	7,920	$	—		$	13,170
	Accounts payable and drafts			—			126,198		50,371		—			176,569
	Accrued liabilities			6,431			65,340		29,807		—			101,578
		Total current liabilities		11,681			191,538		88,098		—			291,317
Long-term debt				230,554			10,196		12,926		—			253,676
Intercompany accounts				(92,074	)		78,312		13,762		—			—
Long-term deferred compensation and other liabilities				—			3,940		6,466		—			10,406
		Total liabilities		150,161			283,986		121,252		—			555,399
Minority interests				—			—		1,092		—			1,092
Redeemable Series A Preferred Stock				36,000			—		—		—			36,000
Shareholders’ equity (deficit)				(15,462	)		163,697		78,720		(242,417	)		(15,462	)
		Total liabilities and shareholders’ equity (deficit)	$	170,699		$	447,683	$	201,064	$	(242,417	)	$	577,029

9

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

8. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
For the fiscal quarters ended April 1, 2001 and April 2, 2000

		MSXI			Guarantor		Non-Guarantor						MSXI
		(Issuer)			Subsidiaries		Subsidiaries			Eliminations			Consolidated
Fiscal Quarter Ended April 1, 2001:
Net sales		$	—		$	160,250	$	100,957		$	(4,570	)	$	256,637
Cost of sales			—			137,998		91,017			(4,570	)		224,445
	Gross profit		—			22,252		9,940			—			32,192
Selling, general and administrative expenses			—			15,422		5,821			—			21,243
Amortization of goodwill and other intangibles			—			1,170		434			—			1,604
	Operating income		—			5,660		3,685			—			9,345
Interest income (expense), net			(6,898	)		73		(103	)		—			(6,928	)
	Income (loss) before income taxes, minority interests and equity in net losses of affiliates		(6,898	)		5,733		3,582			—			2,417
Income tax provision (benefit)			(2,538	)		2,121		1,432			—			1,015
Minority interests and equity in net losses of affiliates, net of taxes			5,560			1,948		(202	)		(7,508	)		(202	)
	Net income	$	1,200		$	5,560	$	1,948		$	(7,508	)	$	1,200
Fiscal Quarter Ended April 2, 2000:
Net sales		$	—		$	157,125	$	94,486		$	(3,646	)	$	247,965
Cost of sales			—			132,297		84,154			(3,646	)		212,805
	Gross profit		—			24,828		10,332			—			35,160
Selling, general and administrative expenses			—			14,108		5,979			—			20,087
Amortization of goodwill and other intangibles			—			865		237			—			1,102
	Operating income		—			9,855		4,116			—			13,971
Interest income (expense), net			(6,508	)		409		(812	)		—			(6,911	)
	Income (loss) before income taxes, minority interests and equity in net losses of affiliates		(6,508	)		10,264		3,304			—			7,060
Income tax provision (benefit)			(2,372	)		3,826		1,474			—			2,928
Minority interests and equity in net losses of affiliates, net of taxes			8,350			1,912		82			(10,262	)		82
	Net income	$	4,214		$	8,350	$	1,912		$	(10,262	)	$	4,214

10

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

8. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal quarter ended April 1, 2001

			MSXI			Guarantor			Non-Guarantor						MSXI
			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
	Net income		$	1,200		$	5,560		$	1,948		$	(7,508	)	$	1,200
	Adjustments to reconcile net income to net cash provided by (used for) operating activities:
		Equity in earnings of subsidiaries		(5,560	)		(1,948	)		202			7,508			202
		Depreciation		—			2,002			1,918			—			3,920
		Amortization		278			1,170			434			—			1,882
		Deferred taxes		—			—			(870	)		—			(870	)
		Loss on sale/disposal of property and equipment		—			—			—			—			—
		(Increase) decrease in receivables, net		153			7,750			6,747			—			14,650
		(Increase) decrease in inventory		—			(475	)		223			—			(252	)
		(Increase) decrease in prepaid expenses and other assets		32			(1,159	)		(2,364	)		—			(3,491	)
		Increase (decrease) in current liabilities		(6,256	)		(17,418	)		(1,673	)		—			(25,347	)
		Other, net		—			347			(110	)		—			237
Net cash provided by (used for) operating activities				(10,153	)		(4,171	)		6,455			—			(7,869	)
Cash flows from investing activities:
	Capital expenditures			—			(2,249	)		(2,750	)		—			(4,999	)
	Acquisition of businesses, net of cash acquired			—			(10,902	)		(446	)		—			(11,348	)
	Proceeds from sale/disposal of equipment			—			4			—			—			4
	Other, net			—			(14	)		—			—			(14	)
Net cash used for investing activities				—			(13,161	)		(3,196	)		—			(16,357	)
Cash flows from financing activities:
	Intercompany			(10,466	)		11,400			(934	)		—			—
	Transactions with subsidiaries			(1,460	)		(1,616	)		148			2,928			—
	Proceeds from issuance of debt			—			—			—			—			—
	Repayment of debt			(1,313	)		—			—			—			(1,313	)
	Debt issuance costs			(7	)		—			—			—			(7	)
	Changes in revolving debt, net			22,501			—			(3,824	)		—			18,677
	Changes in book overdrafts, net			—			5,830			(173	)		—			5,657
	Repurchase of common stock			(566	)		(3,612	)		—			—			(4,178	)
	Sale of common stock			—			3,612			—			—			3,612
Net cash provided by (used for) financing activities				8,689			15,614			(4,783	)		2,928			22,448
Effect of foreign exchange rate changes on cash and cash equivalents				1,464			1,464			1,663			(2,928	)		1,663
Cash and cash equivalents:
	Increase (decrease) for the period			—			(254	)		139			—			(115	)
	Balance, beginning of period			—			569			4,117			—			4,686
	Balance, end of period		$	—		$	315		$	4,256		$	—		$	4,571

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

8. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal quarter ended April 2, 2000

			MSXI			Guarantor			Non-Guarantor						MSXI
			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
	Net income		$	4,214		$	8,350		$	1,912		$	(10,262	)	$	4,214
	Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
		Equity in earnings of subsidiaries		(8,350	)		(1,912	)		(82	)		10,262			(82	)
		Depreciation		—			2,450			1,414			—			3,864
		Amortization		263			865			237			—			1,365
		Deferred taxes		—			664			329			—			993
		Loss on sale/disposal of property and equipment		—			1			18			—			19
		(Increase) decrease in receivables, net		(20	)		(9,074	)		4,856			—			(4,238	)
		(Increase) decrease in inventory		—			(438	)		143			—			(295	)
		(Increase) decrease in prepaid expenses and other assets		32			(2,260	)		(244	)		—			(2,472	)
		Increase (decrease) in current liabilities		10,976			(12,726	)		6,456			33			4,739
		Other, net		—			(153	)		9			—			(144	)
Net cash provided by (used for) operating activities				7,115			(14,233	)		15,048			33			7,963
Cash flows from investing activities:
	Capital expenditures			—			(1,506	)		(2,959	)		—			(4,465	)
	Acquisition of businesses, net of cash acquired			—			(21,227	)		(11,386	)		—			(32,613	)
	Proceeds from sale/disposal of equipment			—			45			10			—			55
	Other, net			—			(662	)		—			—			(662	)
Net cash used for investing activities				—			(23,350	)		(14,335	)		—			(37,685	)
Cash flows from financing activities:
	Intercompany			(46,886	)		43,223			3,663			—			—
	Transactions with subsidiaries			2,220			(9,156	)		10,439			(3,503	)		—
	Proceeds from issuance of debt			25,000			—			—			—			25,000
	Repayment of debt			(937	)		(43	)		—			—			(980	)
	Debt issuance costs			(160	)		—			—			—			(160	)
	Changes in revolving debt, net			15,350			674			(9,539	)		—			6,485
	Changes in book overdrafts, net			—			3,989			(2,933	)		—			1,056
Net cash provided by (used for) financing activities				(5,413	)		38,687			1,630			(3,503	)		31,401
Effect of foreign exchange rate changes on cash and cash equivalents				(1,702	)		(1,702	)		(1,324	)		3,470			(1,258	)
Cash and cash equivalents:
	Increase (decrease) for the period			—			(598	)		1,019			—			421
	Balance, beginning of period			—			873			6,006			—			6,879
	Balance, end of period		$	—		$	275		$	7,025		$	—		$	7,300

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

Results of Operations

      Net Sales.

      Consolidated net sales increased $8.6 million, or 3.5%, from $248.0 million during the first quarter of fiscal 2000 to $256.6 million during the first quarter of fiscal 2001. Fiscal 2001 sales were negatively impacted by declines in foreign currency exchange rates in many of the countries in which we operate. The net impact of declining exchange rates during the first quarter of fiscal 2001 was to reduce net sales by about $7.3 million compared to the first quarter of fiscal 2000. Before the impact of foreign currency exchange rate fluctuations, consolidated net sales for the first quarter of fiscal 2001 increased about $15.9 million, or 6%, over fiscal 2000. The increase in net sales, before the impact of foreign currency exchange rate fluctuations, includes favorable sales of $11.9 million from companies acquired early in fiscal 2000 and sales growth from existing businesses totaling about $4.0 million.

      Sales of our engineering services decreased $1.0 million, or less than 1%, compared to fiscal 2000. The decrease reflects a drop in value added sales volumes and price reductions from certain customers partially offset by an increase in subcontract and material volumes. Sales of our IT and professional staffing services increased $10.9 million, or 31.0%, including $11.9 million of incremental sales from companies acquired in early fiscal 2000. Excluding the impact of acquisitions, sales decreased about $1.0 million. Sales of our business and technology services decreased $1.2 million, or 1.8%, compared to fiscal 2000. The decrease reflects volume reductions due to the divestiture of certain non-core operations during fiscal 2000 and the impact of price reductions from certain customers. Sales to non-automotive customers increased to 20.0% of total sales for the first quarter of fiscal 2001 compared to 15.2% for the first quarter of fiscal 2000. The increase reflects our continued efforts to diversify our customer base beyond the automotive markets.

      Operating Income

      Our consolidated operating income and changes in operating income for the periods presented were:

	Fiscal Quarter Ended
							Change
	April 1,			April 2,
	2001			2000			$			%
	(dollars in thousands)
Operating income	$	9,345		$	13,971		$	(4,626	)		(33.1	%)
% of net sales		3.6	%		5.6	%		n/a			n/a

      Overall, operating income decreased during the first quarter of fiscal 2001 due to reduced gross profits and increased spending required to position the company for future growth. Gross profit, as a percentage of sales, decreased to 12.5% for the first quarter of fiscal 2001 compared to 14.2% for the first quarter of fiscal 2000. The decrease is primarily due to unfavorable sales mix and price reductions. Specifically, engineering labor sales decreased during the quarter while subcontractor and material sales increased, resulting in a lower margin mix. In addition, decreased IT staffing permanent placement fees, which generate strong margins, and pricing pressures from the automotive sector further reduced gross profits.

      Selling, general and administrative expenses, as a percentage of net sales, were 8.3% during the first quarter of fiscal 2001 compared to 8.1% in the comparable period of fiscal 2000. The increase includes additional costs incurred during the first quarter of fiscal 2001 to develop our service offerings and sales efforts within our developing vertical markets. Through these efforts we are positioning ourselves to grow our service offerings and customer reach within the areas of collaborative engineering, quality relationship management, human capital management and supply chain management. These increased costs were partially offset by decreased incentive compensation expense and Michigan single business tax during the first quarter of 2001.

13

Net Income

      Net income for the first quarter of fiscal 2001 decreased by $3.0 million, from $4.2 million in fiscal 2000 to $1.2 million in fiscal 2001. The decrease in net income reflects our lower operating income as well as an increase in minority interest expense and equity in net losses of our affiliates. Interest expense remained constant despite incremental average borrowings due to a decrease in interest rates year over year. Minority interests and equity in net losses of affiliates primarily represents the portion of Satiz S.r.l. (an Italian subsidiary) earnings attributable to the minority owner and equity in net losses of CADFORM-MSX Engineering GmbH.

Liquidity and Capital Resources

      Cash Flows

      General. Our principal capital requirements are for the acquisition of businesses, capital expenditures, and working capital to support growth. These requirements have been met through a combination of bank debt, issuance of subordinated notes and cash from operations. Cash balances in excess of amounts required to fund daily operations are used to pay down amounts outstanding under the revolving credit portion of 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 60-day period after the invoice date. However, in connection with our purchasing support services, we collect related receivables at approximately the same time we make payment to suppliers.

      Operating Activities. Net cash used for operating activities was $(7.9) million for the first quarter of fiscal 2001 compared to net cash provided by operations of $8.0 million during fiscal 2000, a decrease of $15.8 million. Cash used during the first quarter of fiscal 2001 primarily reflects the impact of certain pass through payments related to our purchasing support services amounting to about $20 million which were paid prior to quarter end. Excluding the impact of the pass through payments, cash provided by operations improved year over year due to improvements in managed working capital.

      Investing Activities. Net cash used for investing activities decreased $21.3 million from $37.7 million for the fiscal three months ended April 2, 2000 to $16.4 million for the fiscal three months ended April 1, 2001. Cash used to acquire businesses of $32.6 million during fiscal 2000 primarily relates to the acquisition of four companies from Corporate Staffing Resources, Inc. during February 2000 as detailed in Note 2 of our consolidated financial statements. Cash used to acquire businesses of $11.3 million during fiscal 2001 includes the acquisition of a minority investment in MTE Groups L.L.C. and the payment of contingent consideration related to certain prior year acquisitions. MTE is a certified minority enterprise offering tooling manufacturing, prototype design and build services, and placement services to automotive manufacturers and suppliers.

      Financing Activities. Net cash provided by financing activities decreased $9.0 million from $31.4 million for the fiscal three months ended April 2, 2000 to $22.4 million for the fiscal three month period ended April 1, 2001. Financing requirements during the fiscal three months ended April 1, 2001 decreased consistent with the reduction in funds required to acquire companies, after giving effect to the impact of certain pass through payments made prior to quarter end. Financing activities during the first quarter of fiscal 2000 included the issuance of an additional $25 million in term notes as discussed below.

      Available Financing Sources

      During the first quarter of 2000, the seven-year institutional term note, with principal outstanding of $50 million as of January 2, 2000, was increased to $75 million pursuant the terms of our amended and restated credit facility. Upon completion of the syndication of the credit facility, our total borrowing capacity increased to $205 million. Proceeds from the additional term debt were used to repay amounts outstanding under the revolving credit portion of the credit facility. Cash paid to repurchase stock, net of proceeds from the sale of stock, represents the retirement of shares owned by a former employee of the company. As of April 1, 2001, $49.3 million was available for potential future borrowing under the revolving credit portion of our amended and restated credit facility.

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Forward — Looking Statements

      This report on Form 10-Q contains statements that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “estimates,” “will,” “should,” “plans” or “anticipates” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Such forward-looking statements are not guarantees of future performance and involve significant risks and uncertainties. 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 factors include, but are not limited to, the Company’s leverage, its reliance on major customers in the automotive industry, the degree and nature of competition, the Company’s ability to recruit and place qualified personnel, risks associated with its acquisition strategy, and employment liability risk.

PART II. OTHER INFORMATION

ITEM 2. Changes in Securities and Use of Proceeds

      On March 30, 2001 a subsidiary of MSX International, Inc. completed a sale of unregistered securities to certain directors and members of management. The securities were sold in units with each unit comprised of MSX International Inc.’s Series A Preferred Stock, par value $0.01 per share, and Class A Common Stock, par value $0.01 per share. In total, 9,936 shares of Series A Preferred Stock and 482,400 shares of Class A Common Stock were sold. The shares of Series A Preferred Stock and Class A Common Stock, which comprised the units sold, were acquired from Citicorp, our majority stockholder, at a price equal to the price at which the units were offered to management. The proceeds of $3.6 million were wholly used to pay the purchase price of the shares acquired from Citicorp. These securities were not registered with the Securities and Exchange Commission or the securities commission of any state or jurisdiction. They were offered pursuant to an exemption from registration under Regulation D of the Securities Act of 1933, as amended.

ITEM 6. Exhibits and Reports on Form 8-K

      (a) Exhibits:

      None

      (b) Reports on Form 8-K:

      None

15

SIGNATURE

      Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 16, 2001

MSX INTERNATIONAL, INC.
(Registrant)

By:	/s/ Frederick K. Minturn
	Frederick K. Minturn
	Executive Vice President and
	Chief Financial Officer

(Chief accounting officer
and authorized signatory)

16