MSX International 10Q 2005 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


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

For the Quarterly Period Ended October 2, 2005


o		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)

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

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

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

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). Yeso Noþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12(b)-2 of the Securities and Exchange Act of 1934).Yeso Noþ

At November 10, 2005, 486,354 shares of Class A common stock of the Registrant were outstanding.

MSX INTERNATIONAL, INC.
INDEX


	Pages
PART I.FINANCIAL INFORMATION

*ITEM 1*.Financial Statements (unaudited):

Consolidated Balance Sheets as of October 2, 2005 and January 2, 2005		2

Consolidated Statements of Operations for the fiscal quarters and fiscal nine months ended October 2, 2005 and October 3, 2004		3

Consolidated Statements of Cash Flows for the fiscal nine months ended October 2, 2005 and October 3, 2004		4

Notes to Consolidated Financial Statements		5

*ITEM 2.*Management’s Discussion and Analysis of Financial Condition and Results of Operations		26

*ITEM 4.*Controls and Procedures		31

PART II.OTHER INFORMATION

*ITEM 1.*Legal Proceedings		32

*ITEM 4.*Submission of Matters to a Vote of Security Holders		32

*ITEM 6*. Exhibits		32

SIGNATURE		33
Certification of Chief Executive Officer to Rule 13a-15(e)/15d-15(e)
Certification of Chief Financial Officer to Rule 13a-15(e)/15d-15(e)
Certification pursuant to 18 U.S.C., Section 1350
Press release announcing 3rd quarter results

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MSX INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)
as of October 2, 2005 and January 2, 2005


	October 2,			January 2,
	2005			2005
	(in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	23,899		$	34,377
Accounts receivable, net (Note 4)		105,358			158,640
Inventory		7,302			12,160
Prepaid expenses and other assets		5,397			3,402
Assets held for sale (Note 2)		25,556			13,453
Deferred income taxes, net		5,628			5,341

Total current assets		173,140			227,373

Property and equipment, net		4,562			11,195
Goodwill, net (Note 5)		116,401			135,095
Assets held for sale (Note 2)		14,092			2,618
Other assets		7,434			9,463
Deferred income taxes, net		318			—

Total assets	$	315,947		$	385,744


LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Notes payable and current portion of long-term debt (Note 6)	$	2,642		$	10,995
Accounts payable and drafts		73,398			117,251
Accrued payroll and benefits		20,816			22,442
Other accrued liabilities		36,161			45,002
Liabilities held for sale (Note 2)		25,102			10,133

Total current liabilities		158,119			205,823

Long-term debt (Note 6)		251,067			249,869
Long-term deferred compensation liabilities and other		6,196			18,496
Liabilities held for sale (Note 2)		8,348			—
Deferred income taxes, net		—			1,016

Total liabilities		423,730			475,204

Commitments and contingencies		—			—
Redeemable Series A Preferred Stock (Note 7)		99,671			91,312

Shareholders’ deficit
Common Stock, $.01 par value, 5,000,000 aggregate shares of each of Class A and Class B Common Stock authorized; 486,354 shares of Class A Common Stock issued and outstanding		5			5
Additional paid-in capital		(24,881	)		(24,881	)
Common stock purchase warrants		750			750
Accumulated other comprehensive loss		(2,446	)		(894	)
Retained deficit		(180,882	)		(155,752	)

Total shareholders’ deficit		(207,454	)		(180,772	)

Total liabilities and shareholders’ deficit	$	315,947		$	385,744

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

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
for the fiscal quarters and fiscal nine months ended October 2, 2005 and October 3, 2004


	Fiscal Quarter Ended						Fiscal Nine Months Ended
	October 2,			October 3,			October 2,			October 3,
	2005			2004			2005			2004
	(in thousands)
Net sales	$	110,632		$	111,293		$	340,669		$	350,357
Cost of sales		95,068			94,743			290,058			299,321


Gross profit		15,564			16,550			50,611			51,036

Selling, general and administrative expenses		7,354			8,532			24,766			26,509
Restructuring and severance costs (Note 3)		663			9			1,166			147


Income from continuing operations before interest and income taxes		7,547			8,009			24,679			24,380

Interest expense, net		8,212			7,910			25,683			23,682


Income (loss) from continuing operations before income taxes		(665	)		99			(1,004	)		698

Income tax provision (benefit)		(1,288	)		423			372			1,412


Income (loss) from continuing operations		623			(324	)		(1,376	)		(714	)

Income (loss) from discontinued operations, net of taxes (Note 2)		1,889			(860	)		(15,392	)		(192	)


Net income (loss)		2,512			(1,184	)		(16,768	)		(906	)

Accretion for redemption of preferred stock		(2,895	)		(2,329	)		(8,359	)		(7,171	)


Net loss available to common shareholders	$	(383	)	$	(3,513	)	$	(25,127	)	$	(8,077	)

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

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
for the fiscal nine months ended October 2, 2005 and October 3, 2004


	Fiscal Nine Months Ended
	October 2,			October 3,
	2005			2004
	(in thousands)
Cash flows from operating activities:
Net loss	$	(16,768	)	$	(906	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Net loss on sale of businesses		4,031			—
Depreciation		3,859			6,695
Goodwill impairment charges		7,131			—
Amortization of debt issuance costs		3,452			3,268
Deferred income taxes (benefits)		(1,621	)		398
Gain on sale/disposal of property and equipment		(101	)		(79	)
(Increase) decrease in receivables, net		33,664			48,039
(Increase) decrease in inventory		2,083			(618	)
(Increase) decrease in prepaid expenses and other assets		(2,023	)		(1,893	)
Increase (decrease) in current liabilities		(41,567	)		(52,884	)
Other, net		(1,782	)		302

Net cash provided by (used for) operating activities		(9,642	)		2,322


Cash flows from investing activities:
Capital expenditures		(2,095	)		(1,907	)
Payments for contingent consideration		(1,813	)		—
Proceeds from sale of businesses, net of related expenses		5,088			—
Proceeds from sale/disposal of property and equipment		303			304
Other, net		—			489

Net cash provided by (used for) investing activities		1,483			(1,114	)


Cash flows from financing activities:
Debt issuance costs		(25	)		(398	)
Changes in revolving debt, net		(8,003	)		(636	)
Changes in book overdrafts, net		6,564			(4,322	)

Net cash used for financing activities		(1,464	)		(5,356	)


Effect of foreign exchange rate changes on cash and cash equivalents		(145	)		(448	)


Cash and cash equivalents:
Decrease for the period		(9,768	)		(4,596	)
Balance, beginning of period		34,377			36,650

Balance, end of period (including $710 of cash held for sale as of October 2, 2005)	$	24,609		$	32,054

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

MSX International, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(dollars in thousands unless otherwise stated)

Organization and Basis of Presentation:

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

All intercompany transactions and balances have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items, which are necessary for a fair presentation. The operating results for the fiscal quarters and fiscal nine months ended October 2, 2005 and October 3, 2004 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 January 2, 2005. Certain prior period amounts have been reclassified to conform to the presentation adopted during the current period.

Results of operations classified as discontinued at October 2, 2005 have been excluded from the discussion of continuing operations for all periods presented and are discussed separately in Note 2. Net assets held for sale are classified as such in the period that management determines it is probable that a sale of significant identifiable business will be completed within one year. At October 2, 2005, net assets held for sale include all remaining engineering operations in Germany as well as our technical and commercial publishing business based primarily in Italy. Net assets held for sale at January 2, 2005 reflect those associated with our European engineering and staffing operations, a substantial portion of which were sold during the second quarter of 2005.

Discontinued Operations

In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” discontinued operations include components of entities or entire entities that, through disposal transactions, will be eliminated from the on-going operations of MSXI. Operations classified as discontinued during the periods presented are described further in Note 1. Management has determined these businesses are no longer core to the Company’s strategy due to changing competitive requirements, customer demands and a required focus on business with higher growth and return prospects. For all businesses reflected as discontinued, a process for selling such operations has been initiated.

On July 1, 2005, we completed the disposition of substantially all the engineering and staffing net assets of MSX International Limited, a U.K. subsidiary. The operations were sold to a newly organized subsidiary of ARRK Product Development Group Ltd. for a total purchase price of about $7.4 million, before related expenses. $6.5 million in proceeds have been received as of October 2, 2005, and $0.9 million of the proceeds remain in escrow pending the outcome of certain contingencies. All proceeds from the U.K. sale are subject to a blocked account control agreement with our banking institution pending resolution pursuant to the terms of our senior credit facility. MSX International Limited continues to deliver technical business services and vendor management programs to customers.

In June 2005, we completed the disposition of Cadform MSX Engineering GmbH (“Cadform”), an engineering subsidiary based in Germany. Prior to concluding the sale, MSX International Engineering GmbH (Cadform’s parent company) contributed 1 million € of additional equity to Cadform and purchased certain real property from Cadform for 1.3 million €. The sale was completed for nominal proceeds to MSXI resulting in a net loss of $4.6 million. The sale of Cadform eliminated on-going exposure to MSXI for restructuring and related closure costs associated with the operations.

The net loss resulting from both sales was derived as follows:


Gross sale price	$	7,398
Less:
Net assets sold		7,856
Reserves and expenses		3,573

Loss on sale, net	$	4,031

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

A summary of the assets and liabilities sold during the second quarter of 2005 are as follows:


Assets:
Cash and cash equivalents	$	181
Accounts receivable, net		10,470
Prepaid expenses		975

Total current assets held for sale		11,626
Property and equipment, net		1,936

Total assets sold		13,562


Liabilities:
Accounts payable and drafts		1,074
Accrued payroll and benefits		1,918
Other accrued liabilities		2,714

Total liabilities sold		5,706


Net assets sold	$	7,856

The following summary results of operations information is derived from the businesses that were sold or are in the disposal process as of October 2, 2005:


	Fiscal Quarter Ended						Fiscal Nine Months Ended
	October 2,			October 3,			October 2,			October 3,
	2005			2004			2005			2004
Net sales	$	15,305		$	36,034		$	80,492		$	118,185
Cost of sales		13,233			34,024			74,285			111,060

Gross profit		2,072			2,010			6,207			7,125
Selling, general and administrative expense		990			2,154			4,672			6,285
Restructuring and severance		—			1,133			6,604			1,133
Goodwill impairment charge		—			—			7,131			—

Operating income (loss)		1,082			(1,277	)		(12,200	)		(293	)
Interest (income) expense, net		(16	)		159			53			540
Net loss on sale of businesses		33			—			4,031			—

Income (loss) before taxes, net		1,065			(1,436	)		(16,284	)		(833	)
Income tax benefit		(824	)		(576	)		(892	)		(641	)

Income (loss) from discontinued operations	$	1,889		$	(860	)	$	(15,392	)	$	(192	)

Results of discontinued operations include restructuring charges of $6.6 million and $1.1 million for the first nine months of fiscal 2005 and 2004, respectively, related primarily to employment actions taken in our technical and commercial publishing business in Italy. Charges for 2005 were related to an agreement with various trade union organizations that establishes a program for permanent employment reductions affecting 124 personnel. Affected employees are expected to utilize the program beginning in the first half of 2006. The Italian government approved the agreements and related program during the second quarter of 2005. Charges during 2004 were related to various restructuring and severance actions.

Results of discontinued operations reflect a goodwill impairment charge of $7.1 million for the first nine months of fiscal 2005 related to our technical and commercial publishing business in Italy. The impairment charge was calculated based on the estimated fair value of this business versus the carrying value of assets held for sale in accordance with SFAS No. 142. Fair value of such assets was estimated based upon market values contemplated in the proposed sale.

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

The following 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 sale. At October 2, 2005, assets held for sale include our remaining engineering operations in Germany as well as our Italian technical and commercial publishing business. Net assets held for sale at January 2, 2005 include only our European engineering and staffing businesses, a substantial portion of which were sold during the second quarter of 2005.


	At October 2,		At January 2,
	2005		2005
Assets:
Cash and cash equivalents	$	710	$	—
Accounts receivable, net		21,703		12,140
Inventory		2,775		—
Prepaid expenses		368		1,313

Total current assets held for sale		25,556		13,453
Property and equipment, net		4,467		2,259
Goodwill, net		9,625		359

Total assets held for sale		39,648		16,071


Liabilities:
Note payable and current portion of long-term debt		931		—
Accounts payable and drafts		15,737		2,880
Accrued payroll and benefits		7,367		4,642
Other accrued liabilities		1,067		2,611

Total current liabilities held for sale		25,102		10,133
Long-term deferred compensation liabilities and other		8,348		—

Total liabilities held for sale		33,450		10,133


Net assets held for sale	$	6,198	$	5,938

The net proceeds received from a prospective sale may be subject to limitations in the Company’s senior credit facility. When such net proceeds become known and available, management anticipates applying them to reduce indebtedness pursuant to the terms of our senior credit facility.

Restructuring and Severance:

The following table presents the activity related to restructuring reserves for the fiscal nine months ended October 2, 2005:


							Other
	Termination			Facility			Contractual
	Benefits			Consolidation			Costs			Total
Reserve at January 2, 2005	$	573		$	562		$	199		$	1,334
Charges from continuing operations through October 2, 2005		1,166			—			—			1,166
Charges from discontinued operations through October 2, 2005		5,198			260			1,146			6,604
Payments and reserve utilization through October 2, 2005		(1,239	)		(563	)		(201	)		(2,003	)

Reserve at October 2, 2005	$	5,698		$	259		$	1,144		$	7,101

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

Accounts Receivable:

Accounts receivable include both billed and unbilled receivables. Unbilled receivables amounted to $27.2 million and $46.5 million at October 2, 2005 and January 2, 2005, respectively, excluding assets held for sale. All such amounts are expected to be collected within the ensuing year. Accounts receivable also include the portion of our billings for certain vendor management services attributable to services provided by our vendors, which are passed on to our customers. These amounts totaled $37.1 million as of October 2, 2005 and $47.6 million as of January 2, 2005. A corresponding liability to our vendors for these amounts is recorded in accounts payable at the time the receivable is recognized.

Goodwill, net:

The following summarizes the changes in our goodwill balances by segment, net of assets held for sale as of January 2, 2005, during the fiscal nine months ended October 2, 2005:


	Business			Human
	Outsourcing			Capital			Engineering
	Services			Services			Services		Total
Balance at January 2, 2005	$	37,703		$	97,392		$	—	$	135,095
Transfer of business unit		(1,809	)		1,809			—		—
Goodwill classified as held for sale during the fiscal period		(17,816	)		(69	)		—		(17,885	)
Translation changes and other		(809	)		—			—		(809	)

Balance at October 2, 2005	$	17,269		$	99,132		$	—	$	116,401

Results of discontinued operations reflect a goodwill impairment charge totaling $7.1 million as discussed further in Note 2.

Debt:

Debt is comprised of the following, excluding amounts held for sale:


	Interest Rates at						Outstanding at
	October 2,			January 2,			October 2,		January 2,
	2005			2005			2005		2005
Senior credit facility		6.75	%		5.50	%	$	—	$	590
Senior secured notes, net of unamortized discount		11.00	%		11.00	%		75,185		75,063
Mezzanine term notes, net of unamortized discount		11.50	%		11.50	%		24,639		24,506
Fourth lien term notes		10.00	%		10.00	%		21,243		19,710
Senior subordinated notes		11.375	%		11.375	%		130,000		130,000
Satiz facility		—			4.455	%		—		8,065
Other		7.00	%		7.00	%		2,642		2,930

								253,709		260,864
Less current portion								2,642		10,995


Total long-term debt							$	251,067	$	249,869

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

Commitments and Contingencies:

On October 8, 2005, Delphi Corporation and 38 of its domestic U.S. subsidiaries (collectively, “Delphi”) filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. Annual revenues derived from Delphi represent approximately 4% of our consolidated revenues. We have received payments for pre-bankruptcy petition accounts receivable related to services provided in the third quarter of 2005. We cannot yet estimate with any reasonable assurance whether pre-bankruptcy petition payments made to us will be challenged in the bankruptcy proceedings or the impact on future business with Delphi as a result of their Chapter 11 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 our consolidated financial condition, results of operation or cash flows.

Redeemable Series A Preferred Stock:

As of October 2, 2005 and January 2, 2005 there are 359,448 shares of Redeemable Series A Preferred Stock (“the Preferred Stock”) outstanding with a stated value of $100 per share or about $36 million in total. We are authorized to issue up to 1,500,000 shares of Preferred Stock, divided into two classes: 500,000 shares of Series A Preferred Stock, par value $0.01, and 1,000,000 shares of New Preferred Stock, par value $0.01. The Preferred Stock is redeemable to the extent that funds are legally available, on or after December 31, 2008, at the option of the Company or the shareholder. As of October 2, 2005, dividends accrued totaled $63.7 million; however, we have not declared or paid any dividends. We may not declare or pay any dividends or other distribution with respect to any common stock or other class or series of stock ranking junior to the Preferred Stock without first complying with restrictions specified in the Amended and Restated Stockholders’ Agreement. Our ability to pay cash dividends, and to acquire or redeem the preferred stock, is subject to restrictions contained in our debt agreements.

Comprehensive Income (Loss):

Our comprehensive income (loss) was:


	Fiscal Quarter Ended					Fiscal Nine Months Ended
	October 2,		October 3,			October 2,			October 3,
	2005		2004			2005			2004
Net income (loss)	$	2,512	$	(1,184	)	$	(16,768	)	$	(906	)
Other comprehensive income (loss) - foreign currency translation adjustments		1,408		1,216			(1,552	)		(260	)

Comprehensive income (loss)	$	3,920	$	32		$	(18,320	)	$	(1,166	)

10.

Income Taxes:

The company currently provides valuation allowances for a significant portion of its deferred tax assets. The effective tax rate for all periods presented differs from the 35% federal statutory rate primarily because of such valuation allowances and the effect of certain foreign tax rates. Income taxes for the quarter and nine months ended October 2, 2005 relate to earnings in foreign jurisdictions for which valuation allowances have not previously been recorded. Variances by period are primarily related to the mix of taxable earnings versus non-taxable losses in selected jurisdictions. In addition, the provision for the third quarter of 2005 includes an income tax benefit of approximately $2.8 million related to the reversal of valuation allowances primarily in our U.K. operations. Due to changes in the composition of our U.K. operations, management determined that it is more likely than not that remaining net deferred tax assets at October 2, 2005 will be realized.

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

11.

Segment Information:

MSXI is a global provider of technical business outsourcing services to the automotive and other industries. Our operations include business outsourcing services, human capital services, and engineering services. Our business outsourcing services include warranty and retail process improvement programs and outsourcing of related administrative functions. Human capital services include a full range of staffing solutions, including direct support of our engineering and business services. Engineering services offers a full range of total product, custom, or single point engineering solutions. Certain operations within each of our segments have been aggregated following the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” due to the similar characteristics of their operations, including the nature of their service offerings, processes supporting the delivery of the services, common customers, and marketing and sales processes.

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

The following is a summary of selected data for each of our segments, excluding discontinued operations:


	Business		Human
	Outsourcing		Capital		Engineering
	Services		Services		Services		Other			Total
Quarter Ended October 2, 2005

Net sales — external	$	41,486	$	43,964	$	25,182	$	—		$	110,632
Net intercompany sales		13		2		28		(43	)		—
EBITA		5,186		3,761		2,158		—			11,105

Quarter Ended October 3, 2004

Net sales — external		41,385		45,892		24,016		—			111,293
Net intercompany sales		1,062		—		13		(1,075	)		—
EBITA		6,040		2,567		1,893		—			10,500


	Business		Human
	Outsourcing		Capital		Engineering
	Services		Services		Services		Other			Total
Nine Months Ended October 2, 2005

Net sales — external	$	128,773	$	137,975	$	73,921	$	—		$	340,669
Net intercompany sales		40		2		30		(72	)		—
EBITA		17,070		10,813		6,912		—			34,795

Nine Months Ended October 3, 2004

Net sales — external		130,333		145,732		74,292		—			350,357
Net intercompany sales		1,977		9		—		(1,986	)		—
EBITA		18,714		8,816		6,167		—			33,697

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

A reconciliation of total segment EBITA to consolidated income (loss) from continuing operations before income taxes is as follows:


	Fiscal Quarter Ended						Fiscal Nine Months Ended
	October 2,			October 3,			October 2,			October 3,
	2005			2004			2005			2004
Total segment EBITA	$	11,105		$	10,500		$	34,795		$	33,697
Net costs not allocated to segments		(3,342	)		(2,054	)		(8,849	)		(7,871	)
Interest expense		(8,212	)		(7,910	)		(25,683	)		(23,682	)
Michigan single business tax and other similar taxes		(216	)		(437	)		(1,267	)		(1,446	)

Consolidated income (loss) from continuing operations before taxes	$	(665	)	$	99		$	(1,004	)	$	698

12.

Stock-Based Compensation:

We account for stock options under the recognition and measurement principles of Accounting Principles Board Opinion No. 25 (“APB Opinion No. 25”), “Accounting for Stock Issued to Employees,” and related interpretations. As a result of option repricing transactions we account for the options under variable plan accounting in accordance with APB Opinion No. 25. We have not recognized any expense related to employee stock options as outstanding estimated fair value of the stock is below the exercise price of the options as of October 2, 2005. For the periods presented, applying the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” would have no effect on our reported results of operations.

13.

New 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 annual periods beginning after June 15, 2005. We are in the process of studying this statement, and we have to determine the effects, if any, on our consolidated financial statements.

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

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

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

The following presents condensed consolidating financial information for:

	•		MSXI—the parent company and issuer

	•		The guarantor subsidiaries

	•		The non-guarantor subsidiaries

	•		MSXI on a consolidated basis

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

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of October 2, 2005


	MSXI			Guarantor		Non-Guarantor					MSXI
	(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
	(in thousands)
ASSETS

Current assets:
Cash and cash equivalents	$	10,713		$	1,429	$	11,757	$	—		$	23,899
Accounts receivable, net		—			63,309		42,049		—			105,358
Inventory		—			7,296		6		—			7,302
Prepaid expenses and other assets		—			3,617		1,780		—			5,397
Assets held for sale		—			—		25,556		—			25,556
Deferred income taxes, net		—			3,438		4,203		(2,013	)		5,628

Total current assets		10,713			79,089		85,351		(2,013	)		173,140

Property and equipment, net		—			3,002		1,560		—			4,562
Goodwill, net		—			116,302		99		—			116,401
Investments in subsidiaries		108,792			2,743		—		(111,535	)		—
Assets held for sale		—			—		14,092		—			14,092
Other assets		4,216			2,801		417		—			7,434
Deferred income taxes, net		1,257			—		1,619		(2,558	)		318

Total assets	$	124,978		$	203,937	$	103,138	$	(116,106	)	$	315,947


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—	$	2,642	$	—		$	2,642
Accounts payable and drafts		—			52,396		21,002		—			73,398
Accrued liabilities		5,128			27,532		24,317					56,977
Liabilities held for sale		—			—		25,102		—			25,102
Deferred income taxes, net		2,013			—		—		(2,013	)		—

Total current liabilities		7,141			79,928		73,063		(2,013	)		158,119

Long-term debt		234,071			—		16,996		—			251,067
Intercompany accounts		(8,451	)		7,610		841		—			—
Long-term deferred compensation and other liabilities		—			5,049		1,147		—			6,196
Liabilities held for sale		—			—		8,348		—			8,348
Deferred income taxes, net		—			2,558		—		(2,558	)		—

Total liabilities		232,761			95,145		100,395		(4,571	)		423,730

Redeemable Series A Preferred Stock		99,671			—		—		—			99,671
Shareholders’ equity (deficit)		(207,454	)		108,792		2,743		(111,535	)		(207,454	)

Total liabilities and shareholders’ equity (deficit)	$	124,978		$	203,937	$	103,138	$	(116,106	)	$	315,947

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of January 2, 2005


	MSXI			Guarantor		Non-Guarantor					MSXI
	(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
	(in thousands)
ASSETS

Current assets:
Cash and cash equivalents	$	5,650		$	11,570	$	17,157	$	—		$	34,377
Accounts receivable, net		—			68,099		90,541		—			158,640
Inventory		—			9,121		3,039		—			12,160
Prepaid expenses and other assets		—			2,736		666		—			3,402
Assets held for sale		—			—		13,453		—			13,453
Deferred income taxes, net		—			2,569		5,341		(2,569	)		5,341

Total current assets		5,650			94,095		130,197		(2,569	)		227,373

Property and equipment, net		—			4,367		6,828		—			11,195
Goodwill, net		—			116,302		18,793		—			135,095
Investment in subsidiaries		110,993			23,829		—		(134,822	)		—
Assets held for sale		—			—		2,618		—			2,618
Other assets		5,767			3,032		664		—			9,463
Deferred income taxes, net		1,257			—		—		(1,257	)		—

Total assets	$	123,667		$	241,625	$	159,100	$	(138,648	)	$	385,744


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—	$	10,995	$	—		$	10,995
Accounts payable and drafts		—			62,594		54,657		—			117,251
Accrued liabilities		10,998			27,447		28,999		—			67,444
Liabilities held for sale		—			—		10,133		—			10,133
Deferred income taxes, net		2,569			—		—		(2,569	)		—

Total current liabilities		13,567			90,041		104,784		(2,569	)		205,823

Long-term debt		232,521			—		17,348		—			249,869
Intercompany accounts		(32,963	)		31,929		1,034		—			—
Long-term deferred compensation and other liabilities		—			7,405		11,091		—			18,496
Deferred income taxes, net		—			1,257		1,016		(1,257	)		1,016

Total liabilities		213,125			130,632		135,273		(3,826	)		475,204

Redeemable Series A Preferred Stock		91,312			—		—		—			91,312
Shareholders’ equity (deficit)		(180,770	)		110,993		23,827		(134,822	)		(180,772	)

Total liabilities and shareholders’ equity (deficit)	$	123,667		$	241,625	$	159,100	$	(138,648	)	$	385,744

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended October 2, 2005 and October 3, 2004


	MSXI			Guarantor			Non-Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Fiscal Quarter Ended October 2, 2005:
Net sales	$	—		$	76,720		$	33,926		$	(14	)	$	110,632
Cost of sales		—			67,817			27,265			(14	)		95,068

Gross profit		—			8,903			6,661			—			15,564
Selling, general and administrative expenses		—			5,158			2,196			—			7,354
Restructuring and severance costs		—			663			—			—			663

Income from continuing operations before interest, income taxes, and equity in affiliates		—			3,082			4,465			—			7,547
Interest expense, net		6,948			568			696			—			8,212

Income (loss) from continuing operations before income taxes, and equity in affiliates		(6,948	)		2,514			3,769			—			(665	)
Income tax provision (benefit)		(1,400	)		1,302			(1,190	)		—			(1,288	)
Equity in affiliates		6,171			4,959			—			(11,130	)		—


Income from continuing operations		623			6,171			4,959			(11,130	)		623

Income from discontinued operations, net		1,889			1,889			1,889			(3,778	)		1,889


Net income (loss)	$	2,512		$	8,060		$	6,848		$	(14,908	)	$	2,512


Fiscal Quarter Ended October 3, 2004:
Net sales	$	—		$	82,449		$	28,943		$	(99	)	$	111,293
Cost of sales		—			71,025			23,817			(99	)		94,743

Gross profit		—			11,424			5,126			—			16,550
Selling, general and administrative expenses		—			6,542			1,990			—			8,532
Restructuring and severance costs		—			9			—			—			9

Income from continuing operations before interest, income taxes, and equity in affiliates		—			4,873			3,136			—			8,009
Interest expense, net		6,272			1,025			613			—			7,910

Income (loss) from continuing operations before income taxes, and equity in affiliates		(6,272	)		3,848			2,523			—			99
Income tax provision (benefit)		(1,180	)		1,277			326			—			423
Equity in affiliates		4,768			2,197			—			(6,965	)		—


Income (loss) from continuing operations		(324	)		4,768			2,197			(6,965	)		(324	)

Loss from discontinued operations, net		(860	)		(860	)		(860	)		1,720			(860	)


Net income (loss)	$	(1,184	)	$	3,908		$	1,337		$	(5,245	)	$	(1,184	)

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal nine months ended October 2, 2005 and October 3, 2004


	MSXI			Guarantor			Non-Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Fiscal Nine Months Ended October 2, 2005:
Net sales	$	—		$	240,242		$	100,483		$	(56	)	$	340,669
Cost of sales		—			209,286			80,828			(56	)		290,058

Gross profit		—			30,956			19,655			—			50,611
Selling, general and administrative expenses		—			17,899			6,867						24,766
Restructuring and severance costs		—			1,069			97			—			1,166

Income from continuing operations before interest, income taxes, and equity in affiliates		—			11,988			12,691			—			24,679
Interest expense, net		19,864			2,699			3,120			—			25,683

Income (loss) from continuing operations before income taxes, and equity in affiliates		(19,864	)		9,289			9,571			—			(1,004	)
Income tax provision (benefit)		(3,743	)		3,685			430			—			372
Equity in affiliates		14,745			9,141			—			(23,886	)		—


Income (loss) from continuing operations		(1,376	)		14,745			9,141			(23,886	)		(1,376	)

Loss from discontinued operations, net		(15,392	)		(15,392	)		(15,267	)		30,659			(15,392	)


Net income (loss)	$	(16,768	)	$	(647	)	$	(6,126	)	$	6,773		$	(16,768	)


Fiscal Nine Months Ended October 3, 2004
Net sales	$	—		$	266,864		$	85,505		$	(2,012	)	$	350,357
Cost of sales		—			234,307			67,026			(2,012	)		299,321

Gross profit		—			32,557			18,479			—			51,036
Selling, general and administrative expenses		—			20,081			6,428			—			26,509
Restructuring and severance costs		—			147			—			—			147

Income from continuing operations before interest, income taxes, and equity in affiliates		—			12,329			12,051			—			24,380
Interest expense, net		18,994			3,287			1,401			—			23,682

Income (loss) from continuing operations before income taxes, and equity in affiliates		(18,994	)		9,042			10,650			—			698
Income tax provision (benefit)		(3,064	)		3,015			1,461			—			1,412
Equity in affiliates		15,216			9,189			—			(24,405	)		—


Income (loss) from continuing operations		(714	)		15,216			9,189			(24,405	)		(714	)

Loss from discontinued operations, net		(192	)		(192	)		(192	)		384			(192	)


Net income (loss)	$	(906	)	$	15,024		$	8,997		$	(24,021	)	$	(906	)

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
for the fiscal nine months ended October 2, 2005


	MSXI			Guarantor			Non-Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	(16,768	)	$	(647	)	$	(6,126	)	$	6,773		$	(16,768	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates, including discontinued operations		647			6,126			—			(6,773	)		—
Loss on asset impairment and sale		—			—			4,031			—			4,031
Depreciation		—			2,291			1,568			—			3,859
Goodwill impairment charges		—			—			7,131						7,131
Amortization of debt issuance costs		3,126			—			326			—			3,452
Deferred taxes		(556	)		432			(1,497	)		—			(1,621	)
(Gain) Loss on sale/disposal of property and equipment		—			(45	)		(56	)		—			(101	)
(Increase) decrease in receivables, net		—			4,790			28,874			—			33,664
(Increase) decrease in inventory		—			1,825			258			—			2,083
(Increase) decrease in prepaid expenses and other assets		—			(880	)		(1,143	)		—			(2,023	)
Increase (decrease) in current liabilities		(5,873	)		(16,675	)		(19,019	)		—			(41,567	)
Other, net		—			(311	)		(1,471	)		—			(1,782	)

Net cash provided by (used for) operating activities		(19,424	)		(3,094	)		12,876			—			(9,642	)


Cash flows from investing activities:
Capital expenditures		—			(938	)		(1,157	)		—			(2,095	)
Payments for contingent consideration		—			(1,813	)		—			—			(1,813	)
Proceeds from sale of business		—			—			5,088			—			5,088
Proceeds from sale/disposal of property and equipment		—			55			248			—			303

Net cash provided by (used for) investing activities		—			(2,696	)		4,179			—			1,483


Cash flows from financing activities:
Transactions with subsidiaries		24,512			(10,915	)		(13,597	)		—			—
Debt issuance costs		(25	)		—			—			—			(25	)
Changes in revolving debt, net		—			—			(8,003	)		—			(8,003	)
Change in book overdrafts		—			6,564			—			—			6,564

Net cash provided by (used for) financing activities		24,487			(4,351	)		(21,600	)		—			(1,464	)


Effect of foreign exchange rate changes on cash and cash equivalents		—			—			(145	)		—			(145	)


Cash and cash equivalents:
Increase (decrease) for the period		5,063			(10,141	)		(4,690	)		—			(9,768	)
Balance, beginning of period		5,650			11,570			17,157			—			34,377

Balance, end of period (including $710 of cash held for sale as of October 2, 2005)	$	10,713		$	1,429		$	12,467		$	—		$	24,609

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
for the fiscal nine months ended October 3, 2004


	MSXI			Guarantor			Non-Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	(906	)	$	15,024		$	8,997		$	(24,021	)	$	(906	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates, including discontinued operations		(15,024	)		(8,997	)		—			24,021			—
Depreciation		—			3,358			3,337			—			6,695
Amortization of debt issuance costs and non-cash interest		3,024			—			244			—			3,268
Deferred taxes		(2,957	)		2,997			358			—			398
(Gain) loss on sale/disposal of property and equipment		—			3			(82	)		—			(79	)
(Increase) decrease in receivables, net		—			13,812			34,227			—			48,039
(Increase) decrease in inventory		—			(699	)		81			—			(618	)
(Increase) decrease in prepaid expenses and other assets		—			(1,274	)		(619	)		—			(1,893	)
Increase (decrease) in current liabilities		(4,265	)		(10,252	)		(38,367	)		—			(52,884	)
Other, net		—			(103	)		405			—			302

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


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

Net cash provided by (used for) investing activities		—			116			(1,230	)		—			(1,114	)


Cash flows from financing activities:
Transactions with subsidiaries		19,220			(7,891	)		(11,329	)		—			—
Debt issuance costs		(462	)		—			64			—			(398	)
Changes in revolving debt, net		—			—			(636	)		—			(636	)
Change in book overdrafts, net		—			(4,322	)		—			—			(4,322	)

Net cash provided by (used for) financing activities		18,758			(12,213	)		(11,901	)		—			(5,356	)


Effect of foreign exchange rate changes on cash and cash equivalents		—			—			(448	)		—			(448	)


Cash and cash equivalents:
Increase (decrease) for the period		(1,370	)		1,772			(4,998	)		—			(4,596	)
Balance, beginning of period		18,600			390			17,660			—			36,650

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

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

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

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

	•		MSXI — the parent company

	•		MSXI Limited — the issuer

	•		The guarantor subsidiaries

	•		The non-guarantor subsidiaries

	•		MSXI on a consolidated basis

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of October 2, 2005


				MSXI
	MSXI			Limited			Guarantor		Non-Guarantor					MSXI
	(Parent)			(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
	(in thousands)
ASSETS

Current assets:
Cash and cash equivalents	$	10,713		$	1,406		$	1,429	$	10,351	$	—		$	23,899
Accounts receivable, net		—			10,060			63,309		31,989		—			105,358
Inventory		—			—			7,296		6		—			7,302
Prepaid expenses and other assets		—			596			3,617		1,184		—			5,397
Assets held for sale		—			—			—		25,556		—			25,556
Deferred income taxes, net		—			—			3,438		4,716		(2,526	)		5,628

Total current assets		10,713			12,062			79,089		73,802		(2,526	)		173,140

Property and equipment, net		—			347			3,002		1,213		—			4,562
Goodwill, net		—			99			116,302		—		—			116,401
Investments in subsidiaries		108,792			—			2,743		10,650		(122,185	)		—
Assets held for sale		—			—			—		14,092		—			14,092
Other assets		4,216			334			2,801		83		—			7,434
Deferred income taxes, net		1,257			513			—		1,106		(2,558	)		318

Total assets	$	124,978		$	13,355		$	203,937	$	100,946	$	(127,269	)	$	315,947


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—		$	—	$	2,642	$	—		$	2,642
Accounts payable and drafts		—			6,345			52,396		14,657		—			73,398
Accrued liabilities		5,128			5,970			27,532		18,347		—			56,977
Liabilities held for sale		—			—			—		25,102		—			25,102
Deferred income taxes, net		2,013			513			—		—		(2,526	)		—

Total current liabilities		7,141			12,828			79,928		60,748		(2,526	)		158,119

Long-term debt		234,071			16,996			—		—		—			251,067
Intercompany accounts		(8,451	)		(27,495	)		7,610		28,336		—			—
Long-term deferred compensation and other liabilities		—			376			5,049		771		—			6,196
Liabilities held for sale		—			—			—		8,348		—			8,348
Deferred income taxes, net		—			—			2,558		—		(2,558	)		—

Total liabilities		232,761			2,705			95,145		98,203		(5,084	)		423,730

Redeemable Series A Preferred Stock		99,671			—			—		—		—			99,671
Shareholders’ equity (deficit)		(207,454	)		10,650			108,792		2,743		(122,185	)		(207,454	)

Total liabilities and shareholders’ equity (deficit)	$	124,978		$	13,355		$	203,937	$	100,946	$	(127,269	)	$	315,947

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING BALANCE SHEET
as of January 2, 2005


				MSXI
	MSXI			Limited			Guarantor		Non-Guarantor					MSXI
	(Parent)			(Issuer)			Subsidiaries		Subsidiaries		Eliminations			Consolidated
	(in thousands)
ASSETS

Current assets:
Cash and cash equivalents	$	5,650		$	18		$	11,570	$	17,139	$	—		$	34,377
Accounts receivable, net		—			12,867			68,099		77,674		—			158,640
Inventory		—			—			9,121		3,039		—			12,160
Prepaid expenses and other assets		—			188			2,736		478		—			3,402
Assets held for sale		—			7,420			—		6,033		—			13,453
Deferred income taxes, net		—			350			2,569		4,991		(2,569	)		5,341

Total current assets		5,650			20,843			94,095		109,354		(2,569	)		227,373

Property and equipment, net		—			1,084			4,367		5,744		—			11,195
Goodwill, net		—			108			116,302		18,685		—			135,095
Investment in subsidiaries		110,993			—			23,829		10,102		(144,924	)		—
Assets held for sale		—			526			—		2,092		—			2,618
Other assets		5,767			493			3,032		171		—			9,463
Deferred income taxes, net		1,257			—			—		—		(1,257	)		—

Total assets	$	123,667		$	23,054		$	241,625	$	146,148	$	(148,750	)	$	385,744


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	590		$	—	$	10,405	$	—		$	10,995
Accounts payable and drafts		—			6,538			62,594		48,119		—			117,251
Accrued liabilities		10,998			4,548			27,447		24,451		—			67,444
Liabilities held for sale		—			5,542			—		4,591		—			10,133
Deferred income taxes, net		2,569			—			—		—		(2,569	)		—

Total current liabilities		13,567			17,218			90,041		87,566		(2,569	)		205,823

Long-term debt		232,521			16,758			—		590		—			249,869
Intercompany accounts		(32,963	)		(21,753	)		31,929		22,787		—			—
Long-term deferred compensation and other liabilities		—			378			7,405		10,713		—			18,496
Deferred income taxes, net		—			349			1,257		667		(1,257	)		1,016

Total liabilities		213,125			12,950			130,632		122,323		(3,826	)		475,204

Redeemable Series A Preferred Stock		91,312			—			—		—		—			91,312
Shareholders’ equity (deficit)		(180,770	)		10,104			110,993		23,825		(144,924	)		(180,772	)

Total liabilities and shareholders’ equity (deficit)	$	123,667		$	23,054		$	241,625	$	146,148	$	(148,750	)	$	385,744

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal quarters ended October 2, 2005 and October 3, 2004


				MSXI
	MSXI			Limited			Guarantor			Non-Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
							(in thousands)
Fiscal Quarter Ended October 2, 2005:

Net sales	$	—		$	6,129		$	76,720		$	27,797		$	(14	)	$	110,632
Cost of sales		—			3,926			67,817			23,339			(14	)		95,068

Gross profit		—			2,203			8,903			4,458			—			15,564
Selling, general and administrative expenses		—			636			5,158			1,560			—			7,354
Restructuring and severance costs		—			—			663			—			—			663

Income from continuing operations before interest, income taxes, and equity in affiliates		—			1,567			3,082			2,898			—			7,547
Interest expense (income), net		6,948			562			568			134			—			8,212

Income (loss) from continuing operations before income taxes, and equity in affiliates		(6,948	)		1,005			2,514			2,764			—			(665	)
Income tax provision (benefit)		(1,400	)		—			1,302			(1,190	)		—			(1,288	)
Equity in affiliates		6,171			—			4,959			1,005			(12,135	)		—


Income from continuing operations		623			1,005			6,171			4,959			(12,135	)		623

Income (loss) from discontinued operations, net		1,889			(217	)		1,889			1,889			(3,561	)		1,889


Net income (loss)	$	2,512		$	788		$	8,060		$	6,848		$	(15,696	)	$	2,512


Fiscal Quarter Ended October 3, 2004:

Net sales	$	—		$	5,206		$	82,449		$	23,737		$	(99	)	$	111,293
Cost of sales		—			4,127			71,025			19,690			(99	)		94,743

Gross profit		—			1,079			11,424			4,047			—			16,550
Selling, general and administrative expenses		—			532			6,542			1,458			—			8,532
Restructuring and severance costs		—			—			9			—			—			9

Income from continuing operations before interest, income taxes, and equity in affiliates		—			547			4,873			2,589			—			8,009
Interest expense (income), net		6,272			642			1,025			(29	)		—			7,910

Income (loss) from continuing operations before income taxes, and equity in affiliates		(6,272	)		(95	)		3,848			2,618			—			99
Income tax provision (benefit)		(1,180	)		—			1,277			326			—			423
Equity in affiliates		4,768			—			2,197			(95	)		(6,870	)		—


Income (loss) from continuing operations		(324	)		(95	)		4,768			2,197			(6,870	)		(324	)

Loss from discontinued operations		(860	)		(103	)		(860	)		(860	)		1,823			(860	)


Net income (loss)	$	(1,184	)	$	(198	)	$	3,908		$	1,337		$	(5,047	)	$	(1,184	)

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
For the fiscal nine months ended October 2, 2005 and October 3, 2004


				MSXI
	MSXI			Limited			Guarantor			Non-Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Fiscal Nine Months Ended October 2, 2005

Net sales	$	—		$	18,769		$	240,242		$	81,714		$	(56	)	$	340,669
Cost of sales		—			12,916			209,286			67,912			(56	)		290,058

Gross profit		—			5,853			30,956			13,802			—			50,611
Selling, general and administrative expenses		—			1,906			17,899			4,961			—			24,766
Restructuring and severance costs		—			—			1,069			97			—			1,166

Income from continuing operations before interest, income taxes, and equity in affiliates		—			3,947			11,988			8,744			—			24,679
Interest expense (income), net		19,864			2,537			2,699			583			—			25,683

Income (loss) from continuing operations before income taxes, and equity in affiliates		(19,864	)		1,410			9,289			8,161			—			(1,004	)
Income tax provision (benefit)		(3,743	)		—			3,685			430			—			372
Equity in affiliates		14,745			—			9,141			1,410			(25,296	)		—

Income (loss) from continuing operations		(1,376	)		1,410			14,745			9,141			(25,296	)		(1,376	)

Income (loss) from discontinued operations, net		(15,392	)		826			(15,392	)		(15,267	)		29,833			(15,392	)


Net income (loss)	$	(16,768	)	$	2,236		$	(647	)	$	(6,126	)	$	4,537		$	(16,768	)


Fiscal Nine Months Ended October 3, 2004

Net sales	$	—		$	16,243		$	266,864		$	69,262		$	(2,012	)	$	350,357
Cost of sales		—			12,295			234,307			54,731			(2,012	)		299,321

Gross profit		—			3,948			32,557			14,531			—			51,036
Selling, general and administrative expenses		—			2,631			20,081			3,797			—			26,509
Restructuring and severance costs		—			—			147			—			—			147

Income from continuing operations before interest, income taxes, and equity in affiliates		—			1,317			12,329			10,734			—			24,380
Interest expense (income), net		18,994			1,280			3,287			121			—			23,682

Income (loss) from continuing operations before income taxes, and equity in affiliates		(18,994	)		37			9,042			10,613			—			698
Income tax provision (benefit)		(3,064	)		52			3,015			1,409			—			1,412
Equity in affiliates		15,216			—			9,189			(15	)		(24,390	)		—


Income (loss) from continuing operations		(714	)		(15	)		15,216			9,189			(24,390	)		(714	)

Income (loss) from discontinued operations		(192	)		615			(192	)		(192	)		(231	)		(192	)


Net income (loss)	$	(906	)	$	600		$	15,024		$	8,997		$	(24,621	)	$	(906	)

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal nine months ended October 2, 2005


				MSXI
	MSXI			Limited			Guarantor			Non-Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	(16,768	)	$	2,236		$	(647	)	$	(6,126	)	$	4,537		$	(16,768	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates, including discontinued operations		647			—			6,126			(2,236	)		(4,537	)		—
Loss on asset impairment and sale		—			(547	)		—			4,578			—			4,031
Depreciation		—			572			2,291			996			—			3,859
Goodwill impairment charges		—			—			—			7,131						7,131
Amortization of debt issuance costs		3,126			326			—			—			—			3,452
Deferred taxes		(556	)		—			432			(1,497	)		—			(1,621	)
(Gain) on sale/disposal of property and equipment		—			(1	)		(45	)		(55	)		—			(101	)
(Increase) decrease in receivable, net		—			2,367			4,790			26,507			—			33,664
(Increase) decrease in inventory		—			—			1,825			258			—			2,083
(Increase) decrease in prepaid expenses and other assets		—			(284	)		(880	)		(859	)		—			(2,023	)
Increase (decrease) in current liabilities		(5,873	)		(883	)		(16,675	)		(18,136	)		—			(41,567	)
Other, net		—			34			(311	)		(1,505	)		—			(1,782	)

Net cash provided by (used for) operating activities		(19,424	)		3,820			(3,094	)		9,056			—			(9,642	)


Cash flows from investing activities:
Capital expenditures		—			(171	)		(938	)		(986	)					(2,095	)
Payments for contingent consideration		—			—			(1,813	)		—						(1,813	)
Proceeds from sale of business		—			5,608			—			(520	)		—			5,088
Proceeds from sale/disposal of property and equipment		—			8			55			240						303

Net cash provided by (used for) investing activities		—			5,445			(2,696	)		(1,266	)		—			1,483


Cash flows from financing activities:
Transactions with subsidiaries		24,512			(5,767	)		(10,915	)		(7,830	)		—			—
Debt issuance costs		(25	)		—			—			—			—			(25	)
Changes in revolving debt, net		—			(581	)		—			(7,422	)		—			(8,003	)
Changes in book overdrafts, net		—			—			6,564			—			—			6,564

Net cash provided by (used for) financing activities		24,487			(6,348	)		(4,351	)		(15,252	)		—			(1,464	)


Effect of foreign exchange rate changes on cash and cash equivalents		—			(1,529	)		—			1,384			—			(145	)


Cash and cash equivalents:
Increase (decrease) for the period		5,063			1,388			(10,141	)		(6,078	)		—			(9,768	)
Balance, beginning of period		5,650			18			11,570			17,139			—			34,377

Balance, end of period (including $710 of cash held for sale as of October 2, 2005)	$	10,713		$	1,406		$	1,429		$	11,061		$	—		$	24,609

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

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

MSX INTERNATIONAL, INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
for the fiscal nine months ended October 3, 2004


				MSXI
	MSXI			Limited			Guarantor			Non-Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	(906	)	$	600		$	15,024		$	8,997		$	(24,621	)	$	(906	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates, including discontinued operations		(15,024	)		—			(8,997	)		(600	)		24,621			—
Depreciation		—			1,177			3,358			2,160			—			6,695
Amortization of debt issuance costs		3,024			244			—			—			—			3,268
Deferred taxes		(2,957	)		—			2,997			358			—			398
(Gain) loss on sale/disposal of property and equipment		—			(95	)		3			13			—			(79	)
(Increase) decrease in receivable, net		—			5,934			13,812			28,293			—			48,039
(Increase) decrease in inventory		—			(4	)		(699	)		85			—			(618	)
(Increase) decrease in prepaid expenses and other assets		—			(321	)		(1,274	)		(298	)		—			(1,893	)
Increase (decrease) in current liabilities		(4,265	)		(13,333	)		(10,252	)		(25,034	)		—			(52,884	)
Other, net		—			80			(103	)		325			—			302

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


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

Net cash provided by (used for) investing activities		—			(161	)		116			(1,069	)		—			(1,114	)


Cash flows from financing activities:
Transactions with subsidiaries		19,220			(1,094	)		(7,891	)		(10,235	)		—			—
Debt issuance costs		(462	)		64			—			—			—			(398	)
Changes in revolving debt, net		—			1,724			—			(2,360	)		—			(636	)
Changes in book overdrafts, net		—			—			(4,322	)		—			—			(4,322	)

Net cash provided by (used for) financing activities		18,758			694			(12,213	)		(12,595	)		—			(5,356	)


Effect of foreign exchange rate changes on cash and cash equivalents		—			(322	)		—			(126	)		—			(448	)


Cash and cash equivalents:
Increase (decrease) for the period		(1,370	)		(5,507	)		1,772			509			—			(4,596	)
Balance, beginning of period		18,600			5,639			390			12,021			—			36,650

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

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

Results of Operations

Outlook

Our business segments are affected by differing industry dynamics within a highly competitive automotive market. Our traditional product offerings, particularly in the engineering and staffing areas, are under intense pressures due to continuing cost containment and consolidation actions at our major customers. As a result of these and other industry trends, we have experienced an overall revenue decline during the past several years. We believe that automotive OEM budgets will continue to be challenged due to excess capacity, competition for market share, and pressure to reduce costs. In response to these trends, we are focused on growing specific high value offerings to our customers while maintaining our traditional customer programs and offerings. To remain competitive, we are continually streamlining our cost structure and evaluating our product offerings based on current market conditions.

Our long-term strategy is to expand warranty and retail process improvement related programs with current and prospective customers. Our warranty programs focus on reducing overall customer warranty and warranty administration costs through outsourcing arrangements while implementing process improvements and best practices. The goal of our retail programs is to increase aftermarket and related sales while maximizing customer satisfaction for our customers. We believe that these services address specific customer needs in the increasingly competitive market. As we continue to penetrate new customers in the automotive industry, we are also working to expand our product offerings to other industries. Our targeted markets include non-automotive transportation and aftermarket retail among others. Although we cannot provide assurance about the future, we believe this strategy will enhance profitability and competitiveness on existing business while we work to expand higher value offerings to current and prospective customers.

We are continually evaluating the rate of return on our portfolio of service offerings based on changing market conditions. During the fourth quarter of fiscal 2004, we determined we would seek to divest substantially all of our engineering and staffing businesses in Europe. The sales of portions of these businesses were completed during the second quarter of 2005. During the first quarter of 2005, we determined we would seek to divest our technical and commercial publishing business primarily in Italy. Management will continue to explore and evaluate additional development alternatives to focus the company on business units with higher growth and return prospects, particularly in the areas of warranty and dealership consulting. Operations classified as discontinued at October 2, 2005 have been excluded from the discussion of continuing operations and are discussed separately under the heading “Discontinued Operations”.

Net Sales

For the third quarter of 2005, consolidated net sales decreased $0.7 million, or 0.6%, compared to 2004. For the first nine months of fiscal 2005, consolidated net sales decreased $9.7 million, or 2.8%, from $350.4 million in fiscal 2004 to $340.7 million during fiscal 2005. The first nine months of fiscal 2005 reflect one week less sales for selected businesses due to the additional week included in the first nine months of fiscal 2004 as a result of our fiscal calendar. This reduction in billable days is the primary reason for the reduction in net sales from continuing operations during the first nine months of 2005. Our sales by segment, net of intercompany sales, were as follows:


					Inc / (Dec) vs. 2004
	2005		2004		$			%
	(dollars in thousands)
Fiscal Quarter:
Business Outsourcing Services	$	41,486	$	41,385	$	101			0.2	%
Human Capital Services		43,964		45,892		(1,928	)		(4.2	%)
Engineering Services		25,182		24,016		1,166			4.9	%

Total net sales	$	110,632	$	111,293	$	(661	)		(0.6	%)


Fiscal Nine Months:
Business Outsourcing Services	$	128,773	$	130,333	$	(1,560	)		(1.2	%)
Human Capital Services		137,975		145,732		(7,757	)		(5.3	%)
Engineering Services		73,921		74,292		(371	)		(0.5	%)

Total net sales	$	340,669	$	350,357	$	(9,688	)		(2.8	%)

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

Year over year sales of business outsourcing services reflect favorable volumes on warranty and retail service improvement programs in both European and U.S. operations. Our sales also reflect variations in exchange rates on non-U.S. operations during 2005. Foreign exchange rate movements increased sales $1.1 million versus the third quarter of 2004 and decreased sales by $0.6 million versus the first nine months of 2004. Improvements in sales volumes in warranty and retail programs have been offset by reductions in other traditional programs, primarily related to document management programs. Reductions were primarily due to the exit / cancellation of such programs due to cost reduction actions at our customers.

The decline in human capital services reflects a 2.1% decline for the third quarter of 2005 and a 6.4% decline for the first nine months of 2005 in automotive contract staffing volumes. Other non-automotive human capital services volumes decreased 8.8% for the third quarter of 2005 and 5.2% for the first nine months of 2005. Reductions for the nine-month period reflect reduced billable days versus 2004 due to our fiscal calendar year.

Sales of engineering services reflect increased volumes from selected programs. Most notably, our tire and wheel assembly operations benefited from the launch of a second line during the fourth quarter of 2004 and our Brazilian engineering operations realized increased headcounts on Ford related programs. The decrease during the first nine months of 2005 reflects one week less sales due to the additional week included in the first nine months of fiscal 2004. Engineering programs with automotive OEMs remain under pressure due to reductions in outsourced program spending.

Operating Profit

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


							Inc (Dec) vs. 2004
	2005			2004			$			%
	(dollars in thousands)
Fiscal Quarter:
Gross profit	$	15,564		$	16,550		$	(986	)		(6.0	%)
% of net sales		14.1	%		14.9	%		n/a			n/a
Selling, general and administrative expenses	$	7,354		$	8,532		$	(1,178	)		(13.8	%)
% of net sales		6.6	%		7.7	%		n/a			n/a
Operating income	$	7,547		$	8,009		$	(462	)		(5.8	%)
% of net sales		6.8	%		7.2	%		n/a			n/a

Fiscal Nine Months:
Gross profit	$	50,611		$	51,036		$	(425	)		(0.8	%)
% of net sales		14.9	%		14.6	%		n/a			n/a
Selling, general and administrative expenses	$	24,766		$	26,509		$	(1,743	)		(6.6	%)
% of net sales		7.3	%		7.6	%		n/a			n/a
Operating income	$	24,679		$	24,380		$	299			1.2	%
% of net sales		7.2	%		7.0	%		n/a			n/a

Gross profits declined during the third quarter despite stable sales volume. The reduction reflects an unfavorable mix versus the third quarter of 2004 due to the reduced revenues in selected high margin programs from 2004. Selling, general and administrative expenses decreased versus both the third quarter and first nine months of 2004 due to cost reductions, net of increased investment in selected sales and business development initiatives during 2005. These reductions had a larger impact on the third quarter versus the nine month results due to the timing of implementation. Cost reduction actions resulted in restructuring costs totaling $0.7 million and $1.2 million for the quarter and first nine months of 2005, respectively. We will continue to review operational and support costs relative to projected levels of business and take actions to optimize our cost structure. Employment actions taken to date are expected to result in additional selling, general and administrative savings during the fourth quarter of 2005.

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

Interest expense

Interest expense increased from $7.9 million during the third quarter of 2004 to $8.2 million during the third quarter of 2005, an increase of $0.3 million. For the first nine months of 2005, interest expense increased $2.0 million versus 2004. The increase in interest expense compared to 2004 primarily resulted from the impact of foreign exchange rates on the recorded value of U.S. dollar denominated debt issued by our U.K. subsidiary. Changes in exchange rates resulted in an adverse impact in the first nine months of 2005 and a favorable impact in the comparable period of 2004.

Income taxes

The company currently provides valuation allowances for a significant portion of its deferred tax assets. The effective tax rate for all periods presented differs from the 35% federal statutory rate because of such valuation allowances and the effect of taxable earnings in foreign jurisdictions for which valuation allowances have not been recorded. Variances by period are primarily related to the mix of taxable earnings versus non-taxable losses in selected jurisdictions. In addition, the provision for the third quarter of 2005 includes an income tax benefit of approximately $2.8 million related to the reversal of valuation allowances primarily in our U.K. operations. Due to changes in the composition of our U.K. operations, management determined that it is more likely than not that remaining net deferred tax assets at October 2, 2005 will be realized.

Discontinued Operations

Selected European businesses are reflected as discontinued operations and eliminated from the on-going operations of MSXI due to management’s decision to divest such operations. Operations reflected as discontinued include substantially all engineering and staffing business in Europe as well as our technical and commercial publishing business based primarily in Italy. Management has determined these businesses are no longer core to the company’s strategy due to changing competitive requirements, customer demands and our focus on businesses with higher growth and return prospects. For all businesses reflected as discontinued a process for selling such operations has been initiated. In accordance with SFAS No. 144, discontinued operations have been eliminated from the on-going operations of MSXI.

On July 1, 2005, we completed the disposition of substantially all the engineering and staffing operations of MSX International Limited, a U.K. subsidiary. The operations were sold to a newly organized subsidiary of ARRK Product Development Group Ltd. for a total purchase price of about $7.4 million, before related expenses. $6.5 million in proceeds have been received as of October 2, 2005, and $0.9 million of the proceeds remain in escrow pending the outcome of certain contingencies. Proceeds from the U.K. sale are subject to a blocked account control agreement with our banking institution pending resolution pursuant to the terms of our senior credit facility. MSX International Limited continues to deliver technical business services and vendor management programs to customers.

Results of discontinued operations include restructuring charges of $6.6 million and $1.1 million for the first nine months of fiscal 2005 and 2004, respectively, related primarily to employment actions taken in our technical and commercial publishing business in Italy. Charges for 2005 were related to an agreement with various trade union organizations that establishes a program for permanent employment reductions affecting 124 personnel. Affected employees are expected to utilize the program beginning in the first half of 2006. There were no such related charges for the third quarter of fiscal 2005. Charges during 2004 were related to various restructuring and severance actions.

Results of discontinued operations also reflect a goodwill impairment charge of $7.1 million for the first nine months of fiscal 2005 related to our technical and commercial publishing business in Italy. The impairment charge was calculated based on the estimated fair value of this business versus the carrying value of assets held for sale. Fair value of such assets was estimated based upon market values contemplated in a proposed sale.

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

Liquidity and Capital Resources

Cash Flows

General.Historically, our principal capital requirements are for working capital, product development initiatives, and capital expenditures for customer programs. These requirements have been met through a combination of senior secured debt, issuance of senior subordinated notes and cash from operations. Capital expenditure requirements are evaluated based on funded program requirements and expected return on investment. Days sales outstanding, accounts receivable agings, and other working capital metrics are monitored closely to minimize investments in working capital. We believe that such metrics are important to identify opportunities and potential problems, particularly those associated with the automated payment processes of our large automotive customers. Cash balances in excess of amounts required to fund daily operations are used to pay down any amounts outstanding under our credit facility. Thereafter, surplus funds are invested in short term, money market investments.

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

Operating Activities. Net cash used for operating activities was $9.6 million for the first nine months of fiscal 2005 compared to net cash provided by operating activities of $2.3 million during fiscal 2004. Cash flows from operating activities are impacted by the timing of payments for vendor management programs. Funding for vendor management programs reduced operating cash flow by $11.7 million during the first nine months of 2005. Funding for vendor management programs in 2004 resulted in increased cash flows of $4.1 million. Unfunded payments for such programs are reflected as book overdrafts in our financial statements. Cash flows during 2004 included payments for 2003 restructuring obligations totaling $11.9 million. Equivalent payments totaled $2.0 million during 2005. Cash from operating activities during 2005 also reflect the payment of management incentives totaling about $3.5 million. No such payments were made in 2004. As of October 2, 2005, $3.6 million of cash was held on behalf of a vendor management solutions partner. Subsequent to the third fiscal quarter in 2005, approximately $3.0 million of such balances were paid to the vendors in accordance with normal terms.

Investing Activities.Net cash provided by investing activities was $1.5 million for the first nine months of 2005 compared to net cash used for investing activities of $1.1 million for the comparable period of 2004. Initial net proceeds of $5.1 million were generated from the sale of selected European operations. The net proceeds received are maintained with our banking institution, which is subject to a blocked account control agreement pending resolution pursuant to our senior credit facility. During the first nine months of 2005, net cash used for investing activities included $1.8 million of payments related to an on-going acquisition earnout obligation. Payments for this obligation will continue through the end of 2007.

Financing Activities. Net cash used for financing activities was $1.5 million for the first nine months of 2005 compared to net cash used of $5.4 million for the first nine months of 2004. Financing activities during 2005 include a decrease in book overdrafts, of $10.9 million, compared to 2004 due primarily to the timing of payments for vendor management programs.

Liquidity and Available Financings

Our total indebtedness as of October 2, 2005 consists of senior secured notes, mezzanine term notes, fourth lien term notes, senior subordinated notes and borrowings under various short-term arrangements. In addition to our total indebtedness, we also have contingent commitments related to letters of credit totaling about $4.2 million at October 2, 2005.

Available borrowings under our credit facility as of October 2, 2005 are subject to accounts receivable balance requirements. As of October 2, 2005 we have $31.1 million available for immediate borrowing based on eligible accounts receivable as determined in accordance with our credit agreement, as amended.

We believe that our financing arrangements, including further expected changes to arrangements in Italy, provide us with sufficient financial flexibility to fund our operations, debt service requirements and contingent earnout obligations (“see Part II, Item I. 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 or other alternative to our amended and restated credit facility on or before it’s expiration on August 1, 2006. 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.

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

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 of current debt arrangement and other restructurings or financings. In addition, we may from time to time seek to retire our outstanding notes in open market purchases, privately negotiated transactions or otherwise. These repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amount of repurchases of our notes may be material and may involve significant amounts of cash and/or financing availability.

New 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 annual periods beginning after June 15, 2005. We are is in the process of studying this statement, and we have to determine the effects, if any, on our consolidated financial statements.

Forward — Looking Statements

Certain of the statements made in this report on Form 10-Q, 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. MSX International disclaims any intent or obligation to update such statements.

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

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of MSX International, Inc. management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15. Based upon this evaluation the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our periodic SEC reports is recorded, processed, summarized, and reported as and when required.

There have been no significant changes in internal control over financial reporting that have materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

None.

ITEM 6. EXHIBITS

(a)

Exhibits:

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

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

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

	99.1		Press release announcing 3^rd quarter results.

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 16, 2005


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)

EXHIBIT INDEX


EXHIBIT NO.		DESCRIPTION
EXHIBIT	31.1	Certification of Chief Executive Officer pursuant to rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended.

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

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

EXHIBIT	99.1	Press release announcing 3^rd quarter results.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	6th grade Avg

MSX International Inactive 10-Q2005 Q3 Quarterly report

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