MSX International 10-Q 2001 Q3 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 September 30, 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	(I.R.S. Employer Identification No.)
of incorporation or organization)
275 Rex Boulevard, Auburn Hills, Michigan	48326
(Address of principal executive offices)	(Zip Code)

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

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

TABLE OF CONTENTS

Part I. Financial Information
	Item 1. Financial Statements
		Consolidated Balance Sheets as of September 30, 2001 (Unaudited) and December 31, 2000
		Consolidated Statements of Operations (Unaudited) for the fiscal quarters and fiscal nine-months ended September 30, 2001 and October 1, 2000
		Consolidated Statements of Cash Flows (Unaudited) for the fiscal nine-months ended September 30, 2001 and October 1, 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 6. Exhibits and Reports on Form 8-K
Signature
First Amendment to Amended/Restated Credit Agrmnt

MSX INTERNATIONAL, INC.

INDEX

			Pages
PART I.FINANCIAL INFORMATION
	ITEM 1.Financial Statements:
		Consolidated Balance Sheets as of September 30, 2001 (Unaudited) and December 31, 2000		2
		Consolidated Statements of Operations (Unaudited) for the Fiscal Quarters and Fiscal Nine-months Ended September 30, 2001 and October 1, 2000		3
		Consolidated Statements of Cash Flows (Unaudited) for the Fiscal Nine-months Ended September 30, 2001 and October 1, 2000		4
		Notes to Consolidated Financial Statements (Unaudited)		5
	ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
PART II.OTHER INFORMATION
	ITEM 6. Exhibits and Reports on Form 8-K			17
SIGNATURE				18

1

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

MSX INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS
as of September 30, 2001 and December 31, 2000

					September 30,
					2001			December 31,
					(Unaudited)			2000
					(dollars in thousands)
ASSETS
Current assets:
	Cash and cash equivalents				$	3,728		$	4,686
	Accounts receivable, net (Note 3)					287,244			317,458
	Inventory					7,173			7,464
	Prepaid expenses and other assets					10,627			8,578
	Deferred income taxes, net					3,576			3,209
			Total current assets			312,348			341,395
Property and equipment, net						42,235			40,959
Goodwill and other intangibles, net of accumulated amortization of $16,071 and $11,395, respectively						171,734			172,091
Other assets						24,963			18,774
Deferred income taxes, net						5,309			3,810
		Total assets			$	556,589		$	577,029
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
	Notes payable and current portion of long-term debt (Note 4)				$	19,370		$	13,170
	Accounts payable and book overdrafts					149,265			176,569
	Accrued payroll and benefits					20,575			30,561
	Other accrued liabilities					61,225			71,017
				Total current liabilities		250,435			291,317
Long-term debt (Note 4)						268,583			253,676
Long-term deferred compensation liabilities and other						11,656			10,406
	Total liabilities					530,674			555,399
Minority interests						1,411			1,092
Redeemable Series A Preferred Stock (Note 5)						36,000			36,000
Shareholders’ deficit:
	Common Stock, $.01 par value, 2,000,000 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 (Note 6)					(13,447	)		(15,641	)
	Retained earnings					26,519			24,680
				Total shareholders’ deficit		(11,496	)		(15,462	)
				Total liabilities and shareholders’ deficit	$	556,589		$	577,029

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

2

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
for the fiscal quarters and fiscal nine-months ended September 30, 2001 and October 1, 2000

		Fiscal Quarter Ended						Fiscal Nine-months Ended
		September 30,			October 1,			September 30,		October 1,
		2001				2000		2001		2000
						(in thousands)
Net sales (Note 7)		$	213,906			$	256,732	$	712,464	$	774,209
Cost of sales			187,945				220,294		621,814		664,012
	Gross profit		25,961				36,438		90,650		110,197
Selling, general and administrative expenses			18,571				20,208		58,499		61,937
Amortization of goodwill and other intangibles			1,548				1,563		4,660		4,063
	Operating income		5,842				14,667		27,491		44,197
Interest expense, net			6,856				7,706		21,340		22,276
	Income (loss) before income taxes, minority interests, and equity in net losses of affiliates		(1,014	)			6,961		6,151		21,921
Income tax provision (benefit)			(405	)			3,063		2,556		9,213
Less minority interests and equity in net losses of affiliates, net of taxes			507				206		1,257		672
	Net income (loss)	$	(1,116	)		$	3,692	$	2,338	$	12,036

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 nine-months ended September 30, 2001 and October 1, 2000

			Fiscal Nine-months Ended
			September 30,			October 1,
			2001			2000
			(in thousands)
Cash flows from operating activities:
	Net income		$	2,338		$	12,036
	Adjustments to reconcile net income to net cash provided by operating activities:
		Minority interests and equity in net losses of affiliates		1,257			672
		Depreciation		12,352			12,881
		Amortization		5,497			4,865
		Deferred taxes		(1,866	)		4,954
		(Gain) loss on sale/disposal of property and equipment		46			(204	)
		Decrease in receivables, net		30,284			10,273
		Decrease in inventory		291			254
		Increase in prepaid expenses and other assets		(2,050	)		(2,497	)
		Increase (decrease) in current liabilities		(40,586	)		1,985
		Other, net		(918	)		(130	)
Net cash provided by operating activities				6,645			45,089
Cash flows from investing activities:
	Capital expenditures			(13,905	)		(12,686	)
	Acquisition of businesses, net of cash acquired			(16,132	)		(60,648	)
	Proceeds from sale/disposal of equipment			147			2,299
	Other, net			44			610
Net cash used for investing activities				(29,846	)		(70,425	)
Cash flows from financing activities:
	Proceeds from issuance of debt			—			25,000
	Repayment of debt			(3,938	)		(2,856	)
	Debt issuance costs			(28	)		(243	)
	Changes in revolving debt, net			25,046			3,799
	Changes in book overdraft, net			(778	)		3,055
	Repurchase of common stock			(4,178	)		—
	Sale of common stock			3,612			—
Net cash provided by financing activities				19,736			28,755
Effect of foreign exchange rate changes on cash and cash equivalents				2,507			(6,463	)
Cash and cash equivalents:
	Decrease for the period			(958	)		(3,044	)
	Balance, beginning of period			4,686			6,879
	Balance, end of period		$	3,728		$	3,835

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 present the consolidated assets and liabilities and results of operations of MSX International, Inc. and its majority owned subsidiaries (“MSXI”). MSXI combines innovative people, standardized processes and today’s technologies to deliver a collaborative, competitive advantage on a global basis. We utilize a 52-53 week fiscal year, which ends on the Sunday nearest December 31.

     All intercompany transactions and balances between majority owned 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 and fiscal nine-months ended September 30, 2001 and October 1, 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 in fiscal 2001.

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 revenues in excess of $57 million. The CSR Acquisition was accounted for under the purchase method resulting in goodwill of $26.9 million.

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

     The terms of certain of our acquisition agreements 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 generally recorded, when earned, as additional purchase price. In this regard, we recorded additional consideration during the first nine-months of fiscal 2001, related to prior year acquisitions, which resulted in additional goodwill capitalization of about $2.1 million. Additional goodwill is amortized over the remaining amortization period.

3. Accounts Receivable:

     Accounts receivable include the portion of our billings for purchasing support services attributable to services provided by our vendors that are passed on to our customers. These amounts totaled $72.9 million as of September 30, 2001 and $82.5 million as of December 31, 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)

4. Debt:

     Debt is comprised of the following:

		Interest Rates at						Outstanding at
		September 30,			December 31,			September 30,		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		4.67-6.75	%		7.47-9.75	%		19,438		19,964
	Swingline notes		5.44-7.50	%		7.53-9.00	%		28,208		7,712
	Term notes		5.10-5.87	%		8.21-9.69	%		97,312		101,250
Satiz facility			4.60	%		5.73	%		11,581		6,392
Other debt			5.04-7.75	%		7.50-8.00	%		1,414		1,528
									287,953		266,846
Less current portion									19,370		13,170
Total long-term debt								$	268,583	$	253,676

     Effective September 30, 2001, our lending group approved the first amendment to our credit facility. The result of the amendment was to relax certain financial covenants through the end of fiscal 2002, and to clarify certain definitions and calculations included in the credit facility. Specifically, the required ratios of total debt to EBITDA, fixed charge coverage, and interest coverage were relaxed from their previous levels. Beginning in the first quarter of fiscal 2003, these ratio requirements will return to their previous levels. As part of the amendment the applicable spread over benchmark interest rates, applicable when the ratio of debt to EBITDA is above certain levels, was increased.

     As of September 30, 2001, $47.6 million was outstanding under the revolving and swingline 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. The revolving credit portion of our credit facility expires on December 7, 2004.

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 September 30, 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 September 30, 2001, we have not declared or paid any dividends. Dividends accumulated but not declared totaled about $26.7 million as of September 30, 2001.

6

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

6. Comprehensive Income:

     Our comprehensive income was:

	Fiscal Quarter Ended						Fiscal Nine-months Ended
	September 30,			October 1,			September 30,		October 1,
	2001			2000			2001		2000
Net income (loss)	$	(1,116	)	$	3,692		$	2,338	$	12,036
Other comprehensive income (loss) - Foreign currency translation adjustments		3,959			(4,572	)		2,194		(8,558	)
Comprehensive income (loss)	$	2,843		$	(880	)	$	4,532	$	3,478

7. Segment Information:

     MSXI is a leading, 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				Fiscal Nine-months Ended
	September 30,		October 1,		September 30,		October 1,
	2001		2000		2001		2000
Engineering Services	$	118,511	$	139,955	$	391,456	$	424,405
IT and Professional Staffing Services		34,246		49,597		122,346		137,974
Business and Technology Services		61,149		67,180		198,662		211,830
Total net sales	$	213,906	$	256,732	$	712,464	$	774,209

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

	Fiscal Quarter Ended						Fiscal Nine-months Ended
	September 30,			October 1,			September 30,			October 1,
	2001			2000			2001			2000
Total EBIT before minority interests and equity in net losses of affiliates	$	7,159		$	16,114		$	31,144		$	48,422
Interest expense		(6,856	)		(7,706	)		(21,340	)		(22,276	)
Michigan Single Business Tax and other similar taxes		(1,317	)		(1,447	)		(3,653	)		(4,225	)
Consolidated income (loss) before taxes, minority interests, and equity in net losses of affiliates	$	(1,014	)	$	6,961		$	6,151		$	21,921

7

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

8. Recent Accounting Pronouncements:

     In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the statements. Other intangible assets will continue to be amortized over their useful lives. We are currently reviewing the impact of SFAS Nos. 141 and 142 and will be performing a fair-value analysis at a later date in connection with the adoption of SFAS No. 142 during the first quarter of fiscal 2002.

9. 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 provide material information 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.

8

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

     9.     Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of September 30, 2001

								Non-
			MSXI			Guarantor		Guarantor					MSXI
			(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	342	$	3,386	$	—		$	3,728
	Accounts receivable, net			120			169,575		117,549		—			287,244
	Inventory			—			6,338		835		—			7,173
	Prepaid expenses and other assets			166			5,606		4,855		—			10,627
	Deferred income taxes, net			—			3,153		423		—			3,576
		Total current assets		286			185,014		127,048		—			312,348
Property and equipment, net				—			21,842		20,393		—			42,235
Goodwill and other intangibles, net				—			129,928		41,806		—			171,734
Investment in subsidiaries				151,048			87,460		6,521		(232,078	)		12,951
Other assets				5,760			5,958		294		—			12,012
Deferred income taxes, net				552			891		3,866		—			5,309
		Total assets	$	157,646		$	431,093	$	199,928	$	(232,078	)	$	556,589
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Notes payable and current portion of long-term debt		$	6,375		$	—	$	12,995	$	—		$	19,370
	Accounts payable and book overdrafts			—			107,365		41,900		—			149,265
	Accrued liabilities			8,000			45,494		28,306		—			81,800
		Total current liabilities		14,375			152,859		83,201		—			250,435
Long-term debt				260,137			—		8,446		—			268,583
Intercompany accounts				(141,370	)		122,528		18,842		—			—
Long-term deferred compensation											—
	liabilities and other			—			4,658		6,998		—			11,656
		Total liabilities		133,142			280,045		117,487		—			530,674
Minority interests				—			—		1,411		—			1,411
Redeemable Series A Preferred Stock				36,000			—		—		—			36,000
Shareholders’ equity (deficit)				(11,496	)		151,048		81,030		(232,078	)		(11,496	)
		Total liabilities and shareholders’ equity (deficit)	$	157,646		$	431,093	$	199,928	$	(232,078	)	$	556,589

9

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

9. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of December 31, 2000

								Non-
			MSXI			Guarantor		Guarantor					MSXI
			(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	569	$	4,117	$	—		$	4,686
	Accounts receivable, net			171			194,128		123,159		—			317,458
	Inventory			—			6,142		1,322		—			7,464
	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				145,970			79,309		5,523		(223,333	)		7,469
Other assets				6,569			4,252		484		—			11,305
Deferred income taxes, net				—			1,635		2,175		—			3,810
		Total assets	$	152,972		$	446,326	$	201,064	$	(223,333	)	$	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 book overdrafts			—			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				(109,801	)		94,682		15,119		—			—
Long-term deferred compensation liabilities and other				—			3,940		6,466		—			10,406
		Total liabilities		132,434			300,356		122,609		—			555,399
Minority interests				—			—		1,092		—			1,092
Redeemable Series A Preferred Stock				36,000			—		—		—			36,000
Shareholders’ equity (deficit)				(15,462	)		145,970		77,363		(223,333	)		(15,462	)
		Total liabilities and shareholders’ equity (deficit)	$	152,972		$	446,326	$	201,064	$	(223,333	)	$	577,029

10

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

9. Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended September 30, 2001 and October 1, 2000

					Non-
		MSXI			Guarantor			Guarantor						MSXI
		(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Fiscal Quarter Ended September 30, 2001:
Net sales		$	—		$	130,051		$	87,829		$	(3,974	)	$	213,906
Cost of sales			—			109,683			82,236			(3,974	)		187,945
	Gross profit		—			20,368			5,593			—			25,961
Selling, general and administrative expenses			—			12,592			5,979			—			18,571
Amortization of goodwill and other intangibles			—			1,168			380			—			1,548
	Operating income		—			6,608			(766	)		—			5,842
Interest income (expense), net			13,147			(17,893	)		(2,110	)		—			(6,856	)
	Income (loss) before income taxes, minority interests, and equity in net losses of affiliates		13,147			(11,285	)		(2,876	)		—			(1,014	)
Income tax provision (benefit)			4,888			(4,106	)		(1,187	)		—			(405	)
Minority interests and equity in net losses of affiliates, net of taxes			(9,375	)		(2,196	)		(267	)		11,331			(507	)
	Net loss	$	(1,116	)	$	(9,375	)	$	(1,956	)	$	11,331		$	(1,116	)
Fiscal Quarter Ended October 1, 2000:
Net sales		$	—		$	160,986		$	100,049		$	(4,303	)	$	256,732
Cost of sales			—			136,624			87,973			(4,303	)		220,294
	Gross profit		—			24,362			12,076			—			36,438
Selling, general and administrative expenses			—			14,404			5,804			—			20,208
Amortization of goodwill and other intangibles			—			1,114			449			—			1,563
	Operating income		—			8,844			5,823			—			14,667
Interest income (expense), net			13,120			(18,315	)		(2,511	)		—			(7,706	)
	Income (loss) before income taxes, minority interests, and equity in net losses of affiliates		13,120			(9,471	)		3,312			—			6,961
Income tax provision (benefit)			4,728			(2,645	)		980			—			3,063
Minority interests and equity in net losses of affiliates, net of taxes			4,700			2,126			(206	)		2,574			(206	)
	Net income (loss)	$	3,692		$	(4,700	)	$	2,126		$	2,574		$	3,692

11

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

     9.     Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal nine-months ended September 30, 2001 and October 1, 2000

								Non-
		MSXI			Guarantor			Guarantor						MSXI
		(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Fiscal Nine-months Ended September 30, 2001:
Net sales		$	—		$	438,182		$	287,312		$	(13,030	)	$	712,464
Cost of sales			—			372,760			262,084			(13,030	)		621,814
	Gross profit		—			65,422			25,228			—			90,650
Selling, general and administrative expenses			—			41,084			17,415			—			58,499
Amortization of goodwill and other intangibles			—			3,505			1,155			—			4,660
	Operating income		—			20,833			6,658			—			27,491
Interest income (expense), net			(811	)		(17,772	)		(2,757	)		—			(21,340	)
	Income (loss) before income taxes, minority interests, and equity in net losses of affiliates		(811	)		3,061			3,901			—			6,151
Income tax provision (benefit)			(255	)		1,202			1,609						2,556
Minority interests and equity in net losses of affiliates, net of taxes			2,894			1,035			(770	)		(4,416	)		(1,257	)
	Net income	$	2,338		$	2,894		$	1,522		$	(4,416	)	$	2,338
Fiscal Nine-months Ended October 1, 2000:
Net sales		$	—		$	492,515		$	293,787		$	(12,093	)	$	774,209
Cost of sales			—			417,558			258,547			(12,093	)		664,012
	Gross profit		—			74,957			35,240			—			110,197
Selling, general and administrative expenses			—			43,310			18,627			—			61,937
Amortization of goodwill and other intangibles			—			3,094			969			—			4,063
	Operating income		—			28,553			15,644			—			44,197
Interest income (expense), net			(642	)		(17,481	)		(4,153	)		—			(22,276	)
	Income (loss) before income taxes, minority interests, and equity in net losses of affiliates		(642	)		11,072			11,491			—			21,921
Income tax provision (benefit)			(199	)		5,148			4,264			—			9,213
Minority interests and equity in net losses of affiliates, net of taxes			12,479			6,555			(672	)		(19,034	)		(672	)
	Net income	$	12,036		$	12,479		$	6,555		$	(19,034	)	$	12,036

12

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

9.     Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal nine-months ended September 30, 2001

										Non-
				MSXI			Guarantor			Guarantor						MSXI
				(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
	Net income			$	2,338		$	2,894		$	1,522		$	(4,416	)	$	2,338
	Adjustments to reconcile net income to net cash provided by operating activities:
			Equity in earnings of subsidiaries		(2,894	)		(1,035	)		770			4,416			1,257
			Depreciation		—			6,050			6,302			—			12,352
			Amortization		837			3,505			1,155			—			5,497
			Deferred taxes		(552	)		361			(1,675	)		—			(1,866	)
		(Gain) loss on sale/disposal of property and equipment			—			45			1			—			46
			(Increase) decrease in receivables, net		51			24,623			5,610			—			30,284
			(Increase) decrease in inventory		—			(196	)		487			—			291
			(Increase) decrease in prepaid expenses and other assets		95			(770	)		(1,375	)		—			(2,050	)
			Increase (decrease) in current liabilities		1,570			(32,001	)		(10,155	)		—			(40,586	)
			Other, net		—			(1,221	)		303			—			(918	)
Net cash provided by operating activities					1,445			2,255			2,945			—			6,645
Cash flows from investing activities:
	Capital expenditures				—			(7,984	)		(5,921	)		—			(13,905	)
	Acquisition of businesses, net of cash acquired				—			(11,533	)		(4,599	)		—			(16,132	)
	Proceeds from sale/disposal of property and equipment				—			47			100			—			147
	Other, net				—			44			—			—			44
Net cash used for investing activities					—			(19,426	)		(10,420	)		—			(29,846	)
Cash flows from financing activities:
	Intercompany				(31,564	)		27,846			3,718			—			—
	Transactions with subsidiaries				(2,184	)		(2,220	)		70			4,334			—
	Repayment of debt				(3,938	)		—			—			—			(3,938	)
	Debt issuance costs				(28	)		—			—			—			(28	)
	Changes in revolving debt, net				34,646			(10,196	)		596			—			25,046
	Changes in book overdraft, net				—			(675	)		(103	)		—			(778	)
	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					(3,634	)		14,755			4,281			4,334			19,736
Effect of foreign exchange rate changes on cash and cash equivalents					2,189			2,189			2,463			(4,334	)		2,507
Cash and cash equivalents:
	Decrease for the period				—			(227	)		(731	)		—			(958	)
	Balance, beginning of period				—			569			4,117			—			4,686
	Balance, end of period			$	—		$	342		$	3,386		$	—		$	3,728

13

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

9.     Guarantor and Non-Guarantor Subsidiaries: — continued

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal nine-months ended October 1, 2000

									Non-
			MSXI			Guarantor			Guarantor						MSXI
			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:
	Net income		$	12,036		$	12,479		$	6,555		$	(19,034	)	$	12,036
	Adjustments to reconcile net income to net cash provided by operating activities:
		Equity in earnings of subsidiaries		(12,479	)		(6,555	)		672			19,034			672
		Depreciation		—			7,297			5,584			—			12,881
		Amortization		802			3,094			969			—			4,865
		Deferred taxes		—			3,990			964			—			4,954
		Loss on sale/disposal of property and equipment		—			(213	)		9			—			(204	)
		(Increase) decrease in receivables, net		(121	)		(17,148	)		27,542			—			10,273
		(Increase) decrease in inventory		—			11			243			—			254
		(Increase) decrease in prepaid expenses and other assets		95			(1,610	)		(982	)		—			(2,497	)
		Increase (decrease) in current liabilities		7,087			9,102			(14,237	)		33			1,985
		Other, net		—			755			(885	)		—			(130	)
Net cash provided by operating activities				7,420			11,202			26,434			33			45,089
Cash flows from investing activities:
	Capital expenditures			—			(5,036	)		(7,650	)		—			(12,686	)
	Acquisition of businesses, net of cash acquired			—			(41,589	)		(19,059	)		—			(60,648	)
	Proceeds from sale/disposal of property and equipment			—			2,191			108			—			2,299
	Other, net			—			610			—			—			610
Net cash used for investing activities				—			(43,824	)		(26,601	)		—			(70,425	)
Cash flows from financing activities:
	Intercompany			(19,239	)		15,601			3,638			—			—
	Transactions with subsidiaries			(4,372	)		8,583			11,695			(15,906	)		—
	Proceeds from issuance of debt			25,000			—			—			—			25,000
	Repayment of debt, net			(2,812	)		(44	)		—			—			(2,856	)
	Debt issuance costs, net			(243	)		—			—			—			(243	)
	Changes in revolving debt			2,804			10,196			(9,201	)		—			3,799
	Changes in book overdraft			—			6,211			(3,156	)		—			3,055
Net cash provided by financing activities				1,138			40,547			2,976			(15,906	)		28,755
Effect of foreign exchange rate changes on cash and cash equivalents				(8,558	)		(8,558	)		(5,220	)		15,873			(6,463	)
Cash and cash equivalents:
	Decrease for the period			—			(633	)		(2,411	)		—			(3,044	)
	Balance, beginning of period			—			873			6,006			—			6,879
	Balance, end of period		$	—		$	240		$	3,595		$	—		$	3,835

14

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

Results of Operations

     Net Sales

     Consolidated net sales were $213.9 million for the third quarter of fiscal 2001 compared to $256.7 million during fiscal 2000, a decrease of $42.8 million, or 16.7%. For the first nine-months of fiscal 2001, consolidated net sales totaled $712.5 million compared to $774.2 million in fiscal 2000, a decrease of $61.7 million, or 8.0%. Comparable fiscal 2001 sales continue to be negatively impacted by depressed foreign currency exchange rates in certain countries in which we operate. The net impact of year over year exchange rate changes was to reduce consolidated net sales by about $1.5 million and $14.9 million for the third quarter and first nine-months of fiscal 2001. Excluding the impact of foreign exchange rates, consolidated net sales decreased $41.3 million for the third quarter and $46.8 million for the first nine-months of fiscal 2001. Sales to non-automotive customers increased to 21.7% of total sales for the first nine-months of fiscal 2001 compared to 21.2% for the first nine-months of fiscal 2000 reflecting the economic slowdown in our automotive business.

     After adjusting for the impact of foreign exchange rates, the $41.3 million decrease in sales during the third quarter of fiscal 2001 is comprised of a $19.9 million decrease in sales of engineering services, a $15.3 million decrease in sales of IT and professional staffing services, and a $6.1 million decrease in sales of business and technology services. After adjusting for the impact of foreign exchange rates, the $46.8 million decrease in sales during the first nine-months of fiscal 2001 is comprised of a $23.8 million decrease in sales of engineering services, a $15.6 million decrease in sales of IT and professional staffing services, and a $7.4 million decrease in sales of business and technology services. The decrease in engineering sales reflects reduced volumes of engineering services in North America and Europe as our automotive customers have delayed the start of new development projects. Sales of IT and professional staffing services decreased during the third quarter due to reduced demand in North American markets for IT development and permanent placement services. Reductions in IT staffing volumes, on a year to date basis, were partially offset by the impact of businesses acquired during the first quarter of fiscal 2000. Sales of our business and technology services decreased as a result of lower volumes due to declines in our automotive business and the divestiture of a non-core business during fiscal 2000.

     Operating Income

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

								Change
		September 30,			October 1,
		2001			2000			$			%
					(dollars in thousands)
Fiscal Quarter:
	Operating income	$	5,842		$	14,667		$	(8,825	)		(60.2	%)
	% of net sales		2.7	%		5.7	%		n/a			n/a
Fiscal Nine-months:
	Operating income	$	27,491		$	44,197		$	(16,706	)		(37.8	%)
	% of net sales		3.9	%		5.7	%		n/a			n/a

     Gross profit, as a percentage of sales, decreased to 12.1% for the third quarter of fiscal 2001 compared to 14.2% during fiscal 2000. For the first nine-months of fiscal 2001, gross profit as a percentage of sales was 12.7% compared to 14.2% during fiscal 2001. The decreases in gross margin reflect the pricing pressures and unfavorable volumes in our engineering and IT staffing operations resulting in less favorable absorption of fixed and indirect costs.

     Overall, operating income decreased during the third quarter and first nine-months of fiscal 2001 due to reduced sales volumes, pricing pressures and costs incurred to position the company for future growth and expansion. The overall decline in our operating results is attributable to the general economic downturn, which has impacted demand for technical services in the automotive and telecommunications sectors. We cannot predict with certainty when economic conditions will improve and have taken steps to reduce our cost structure commensurate with the current levels of business. Our current cost reduction efforts will primarily impact fiscal 2002 results. In addition, we are also taking steps to further diversify our business to other markets and customers.

15

     Selling, general and administrative expenses, as a percentage of net sales, were 8.7% during the third quarter of fiscal 2001 compared to 7.9% during the comparable period of fiscal 2000. For the first nine-months of fiscal 2001, selling, general and administrative expenses were 8.2% of net sales compared to 8.0% during the first nine-months of fiscal 2000. The increases as a percentage of sales reflect the impact of lower volumes during fiscal 2001, particularly in the third quarter. Overall, selling, general and administrative expenses decreased in comparison to last year reflecting reductions in incentive compensation totaling $0.8 million and $5.1 million for the quarter and nine-months, respectively. After adjusting for reductions in incentive compensation, selling, general and administrative expenses increased on a year to date basis. The increased costs were incurred to develop our service offerings and sales efforts within our developing vertical markets.

     Interest Expense

     Interest expense decreased $0.8 million, from $7.7 million during the third quarter of fiscal 2000 to $6.9 million for the third quarter of 2001. For the first nine-months of fiscal 2001, interest expense was $21.3 million compared to $22.3 million in 2000, a decrease of $1.0 million. The improvement resulted from decreases in interest rates on our variable rate debt outstanding. Improvements in interest rates were partially offset by increases in average borrowings outstanding required to fund acquisitions and investments.

     Net Income

     The net loss for the third quarter of fiscal 2001 was $1.1 million, compared to net income of $3.7 million in fiscal 2000. Net income for the first nine-months of fiscal 2001 decreased $9.7 million, or 80.8%, from $12.0 million in fiscal 2000 to $2.3 million in fiscal 2001. The decreases reflect lower operating earnings and increased equity losses during the periods. Our effective income tax rate, for the first nine-months of fiscal 2001, was 41.6% versus 42.0% for the first nine-months of fiscal 2000. Minority interests and equity losses increased on a year to date basis as a result of losses reported by our equity investees during the periods. Our equity investees are experiencing the same pricing pressures and volume reductions that are impacting our business.

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 provided by operating activities decreased $38.5 million to $6.6 million for the fiscal nine-months ended September 30, 2001, compared to cash provided by operating activities of $45.1 million for the fiscal nine-months ended October 1, 2000. Cash provided by operations during fiscal 2000 included significant improvements in accounts receivable collections resulting from the transition of Satiz S.r.l., which was acquired in December 1999, into our cash management system. This reduction in Satiz accounts receivable resulted in a one time improvement in cash from operations of about $12 million during the first nine-months of fiscal 2000. Excluding the one-improvements during fiscal 2000, cash provided by operations decreased about 26.4 million year over year. The decrease reflects lower year over cash earnings and decreased working capital during the period.

     Investing Activities.Net cash used for investing activities decreased $40.6 million, from $70.4 million for the first nine-months of fiscal 2000, to $29.8 million for the first nine-months of fiscal 2001. The decrease includes a reduction in cash used for business acquisitions of $44.6 million and an increase of $1.2 million in capital expenditures. Cash used to acquire businesses during 2000 primarily related to the acquisition of four companies from Corporate Staffing Resources, Inc. during February as detailed in Note 2 of our consolidated financial statements. The increase in capital expenditures represents cash required to maintain current programs and additional costs required for future programs and services.

16

     Financing Activities. Net cash provided by financing activities decreased $9.1 million from $28.8 million for the first nine-months of fiscal 2000, to $19.7 million for the first nine-months of fiscal 2001. Financing requirements during the first nine-months of fiscal 2001 decreased consistent with the reductions in funds required to acquire companies. During the first quarter of fiscal 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 entire proceeds of $3.6 million were used to pay the purchase price of the shares acquired from Citicorp.

     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 our credit facility. As of September 30, 2001, $50.0 million was available for potential future borrowings under the revolving credit portion of our amended and restated credit facility. See note 4 of our consolidated financial statements for a description of recent changes made to our credit facility.

Forward-Looking Statements

     This quarterly 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, MSXI’s leverage, its reliance on major customers in the automotive industry, the degree and nature of competition, MSXI’s ability to recruit and place qualified personnel, risks associated with its acquisition strategy, and employment liability risk.

PART II. OTHER INFORMATION

ITEM 6.	Exhibits and Reports on Form 8-K
	(a)	Exhibits:
		10.17     First Amendment to Amended and Restated Credit Agreement
	(b)	Reports on Form 8-K:
		None.

17

SIGNATURE

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

Date: November 13, 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)

18

Exhibit Index

Exhibit	Description
10.17	First Amendment to Amended and Restated Credit Agreement