MSX International 10Q 2006 Q1 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 April 2, 2006


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 of incorporation or organization)		(I.R.S. Employer Identification No.)

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12(b)-2 of the Securities and Exchange Act (check one):

o Large Accelerated Filer o Accelerated Filer þ Non-accelerated Filer

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 May 15, 2006, 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 April 2, 2006 and January 1, 2006		2

Consolidated Statements of Operations for the fiscal quarters ended April 2, 2006 and April 3, 2005		3

Consolidated Statements of Cash Flows for the fiscal quarters ended April 2, 2006 and April 3, 2005		4

Notes to Consolidated Financial Statements		5

*ITEM 2.*Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

*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 Pursuant to Rules 13a-15(e) and 15d-15(e)
Certification of Chief Financial Officer Pursuant to Rules 13a-15(e) and 15d-15(e)
Certification Pursuant to Section 906
Press Release Announcing 1st Quarter Results
Deed of Transfer of the Entire Quota of Satiz S.r.l.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MSX INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS (Unaudited)
as of April 2, 2006 and January 1, 2006


	April 2,			January 1,
	2006			2006
	(in thousands except share amounts)
ASSETS
Current assets:
Cash and cash equivalents (including $0.1 million and $5.0 million of restricted cash, respectively) (Note 6)	$	29,471		$	27,737
Accounts receivable, net (Note 4)		96,260			96,684
Inventory		686			785
Prepaid expenses and other assets		3,844			3,708
Assets held for sale (Note 2)		24,800			36,229
Deferred income taxes, net		5,245			5,634

Total current assets		160,306			170,777

Property and equipment, net		3,747			3,757
Goodwill, net (Note 5)		25,772			26,504
Assets held for sale (Note 2)		6,279			5,588
Other assets		6,287			6,810
Deferred income taxes, net		827			1,000

Total assets	$	203,218		$	214,436


LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and drafts	$	64,305		$	63,467
Accrued payroll and benefits		19,206			19,906
Liabilities held for sale (Note 2)		24,849			31,332
Other accrued liabilities		36,100			41,771

Total current liabilities		144,460			156,476
Long-term debt (Note 6)		252,322			251,688
Long-term deferred compensation liabilities and other		4,795			5,402
Liabilities held for sale (Note 2)		9,476			9,138

Total liabilities		411,053			422,704
Commitments and contingencies (Note 7)		—			—
Redeemable Series A Preferred Stock (Note 8)		105,635			102,566
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		(2,923	)		(2,602	)
Retained deficit		(286,421	)		(284,106	)

Total shareholders’ deficit		(313,470	)		(310,834	)

Total liabilities and shareholders’ deficit	$	203,218		$	214,436

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

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
for the fiscal quarters ended April 2, 2006 and April 3, 2005


	Fiscal Quarter Ended
	April 2,			April 3,
	2006			2005
	(in thousands)
Net sales	$	88,620		$	101,089
Cost of sales		72,862			84,594


Gross profit		15,758			16,495

Selling, general and administrative expenses		6,800			8,514
Restructuring and severance costs (Note 3)		183			126


Income from continuing operations before interest and income taxes		8,775			7,855

Interest expense, net		7,645			8,504


Income (loss) from continuing operations before income taxes		1,130			(649	)

Income tax provision		1,651			1,240


Loss from continuing operations		(521	)		(1,889	)

Income (loss) from discontinued operations, net of taxes (Note 2)		1,275			(12,947	)


Net income (loss)		754			(14,836	)

Accretion for redemption of preferred stock		(3,069	)		(2,732	)


Net loss available to common shareholders	$	(2,315	)	$	(17,568	)

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

MSX INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
for the fiscal quarters ended April 2, 2006 and April 3, 2005


	Fiscal Quarter Ended
	April 2,			April 3,
	2006			2005
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	754		$	(14,836	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Net gain on sale of businesses		(470	)		—
Depreciation		756			2,094
Goodwill impairment charges		—			7,131
Amortization of debt issuance costs		1,259			1,142
Deferred income taxes (benefits)		1,042			(316	)
(Gain) loss on sale/disposal of property and equipment		31			(8	)
(Increase) decrease in receivables, net		5,636			13,427
(Increase) decrease in inventory		54			(318	)
(Increase) decrease in prepaid expenses and other assets		(203	)		(1,495	)
Increase (decrease) in current liabilities		(18,986	)		(13,760	)
Other, net		(1,157	)		(691	)

Net cash provided by (used for) operating activities		(11,284	)		(7,630	)


Cash flows from investing activities:
Capital expenditures		(815	)		(861	)
Payments for contingent consideration		(604	)		(604	)
Proceeds from sale of businesses, net of related expenses		7,012			—
Proceeds from sale/disposal of property and equipment		52			95

Net cash provided by (used for) investing activities		5,645			(1,370	)


Cash flows from financing activities:
Debt issuance costs		(120	)		(16	)
Changes in revolving debt, net		1,691			(4,550	)
Changes in book overdrafts, net		6,457			8,067

Net cash provided by (used for) financing activities		8,028			3,501


Effect of foreign exchange rate changes on cash and cash equivalents		(499	)		(362	)

Cash and cash equivalents:
Increase (decrease) for the period		1,890			(5,861	)
Balance, beginning of period (including $273 of cash held for sale at January 1, 2006)		28,010			34,377

Balance, end of period (including $429 and $652 of cash held for sale at April 2, 2006 and April 3, 2005, respectively))	$	29,900		$	28,516

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

All intercompany transactions and balances have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring items, which are necessary for a fair presentation. The operating results for the fiscal quarters ended April 2, 2006 and April 3, 2005 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 1, 2006. Certain prior year amounts have been reclassified to conform to the presentation adopted during the current period. Operations classified as discontinued at April 2, 2006 have been excluded from the discussion of continuing operations for all periods presented and are discussed separately in Note 2.

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. 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 or completed.

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. The following are the operations classified as held for sale as of the periods presented:


				Assets Held for Sale

				At April 2, 2006

		•		MSX International Engineering GmbH, our remaining engineering operations in Germany
		•		Satiz S.r.l., our Italian technical and commercial publishing business (sold April 21, 2006)

				At January 1, 2006

		•		MSX International Engineering GmbH, our remaining engineering operations in Germany
		•		Satiz S.r.l., our Italian technical and commercial publishing business (sold April 21, 2006)
		•		Creative Technology Services, LLC (sold January 19, 2006)

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 classified as held for sale, which management believes is representative of the net assets of the businesses held for disposal.


	At April 2,			At January 1,
	2006			2006
Assets:
Cash and cash equivalents	$	429		$	273
Accounts receivable, net		20,237			27,188
Inventory		1,699			6,657
Prepaid expenses		335			373
Deferred tax assets		2,100			1,738

Total current assets held for sale		24,800			36,229
Property and equipment, net		4,923			4,765
Goodwill, net		381			372
Other assets		—			313
Deferred tax assets		975			138

Total assets held for sale		31,079			41,817


Liabilities:
Note payable and current portion of long-term debt		2,775			1,084
Accounts payable and drafts		17,252			22,535
Accrued payroll and benefits		3,582			5,755
Other accrued liabilities		1,240			1,958

Total current liabilities held for sale		24,849			31,332
Long-term deferred compensation liabilities and other		6,059			7,532
Deferred tax liabilities		3,417			1,606

Total liabilities held for sale		34,325			40,470


Net assets (liabilities) held for sale	$	(3,246	)	$	1,347

The following summary results of operations information is derived from the businesses that are classified as held for sale at April 2, 2006 or were sold prior to April 2, 2006:


	Fiscal Quarter Ended
	April 2,			April 3,
	2006			2005
Net sales	$	22,542		$	44,848
Cost of sales		19,946			42,515

Gross profit		2,596			2,333
Selling, general and administrative expense		1,705			2,732
Restructuring and severance		11			6,633
Goodwill impairment charge		—			7,131

Operating income (loss)		880			(14,163	)
Interest (income) expense, net		(3	)		16
Net gain on sale of businesses		470			—

Income (loss) before taxes, net		1,353			(14,179	)
Income tax expense (benefit)		78			(1,232	)

Income (loss) from discontinued operations	$	1,275		$	(12,947	)

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

On March 3, 2006, MSXI concluded the sale of selected U.S. staffing businesses. The sale was completed for approximately $1.0 million plus royalties based on future performance of the business. Assets sold were comprised primarily of goodwill, net of an impairment charge recorded during the fourth quarter of fiscal 2005. The sale resulted in a minimal loss during the first quarter of fiscal 2006 after fees and related expenses.

On January 19, 2006, MSXI concluded the sale of its indirect, wholly-owned subsidiary, Creative Technology Services L.L.C. (“CTS”) for approximately $6.2 million in cash plus a note receivable for approximately $0.2 million. Net assets sold approximated $5.9 million at the time of sale. The transaction resulted in a net gain of about $0.5 million after related fees.

The net proceeds received from sales of businesses are subject to limitations in the Company’s senior credit facilities and bond indentures. In general, net proceeds from the sale of assets must be used to reduce outstanding indebtedness pursuant to the terms of our senior credit facility.

The net gain resulting from the sales during the first fiscal quarter of 2006 was derived as follows:


Gross sale price:
Cash proceeds	$	7,266
Note receivable		250

Total sale price		7,516
Less:
Net assets sold		6,656
Reserves and expenses		390

Gain on sales, net	$	470

A summary of the assets and liabilities sold during the first quarter of fiscal 2006 are as follows:


Assets:
Cash and cash equivalents	$	—
Accounts receivable, net		2,087
Inventory		5,003
Prepaid expenses		142
Deferred tax assets — current		132

Total current assets sold		7,364
Property and equipment, net		72
Goodwill, net		732
Other assets		151

Total assets sold		8,319


Liabilities:
Accounts payable and drafts		526
Accrued payroll and benefits		327
Other accrued liabilities		603

Total current liabilities sold		1,456
Deferred compensation and other liabilities		207

Total liabilities sold		1,663

Net assets sold	$	6,656

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

Restructuring and Severance:

The following table shows the activity related to restructuring reserves for the fiscal quarter ended April 2, 2006:


	Termination
	Benefits
Reserve at January 1, 2006	$	5,423

Charges from continuing operations		183

Charges from discontinued operations		11

Payments and reserve utilization		(3,164	)


Reserve at April 2, 2006	$	2,453

Accounts Receivable:

Accounts receivable includes both billed and unbilled receivables. Amounts are billed periodically in accordance with contract terms. Unbilled receivables amounted to $22.4 million and $22.7 million at April 2, 2006 and January 1, 2006, respectively, excluding assets held for sale. All such billings are expected to be collected within the ensuing year. Accounts receivable also include the portion of our billings for certain master vendor and supply chain management services attributable to services provided by our vendors, which are passed on to our customers. These amounts totaled $33.2 million as of April 2, 2006 and $37.9 million as of January 1, 2006, portions of which are included in unbilled receivables. A corresponding liability to our vendors for these amounts is recorded in accounts payable at the time the receivables are recorded.

Goodwill, net:

�� The following summarizes the changes in our goodwill balances by segment, net of assets held for sale:


	Business		Human
	Outsourcing		Capital			Engineering
	Services		Services			Services		Total
Balance at January 1, 2006	$	17,200	$	9,304		$	—	$	26,504
Goodwill classified as held for sale during the fiscal period		—		(732	)		—		(732	)

Balance at April 2, 2006	$	17,200	$	8,572		$	—	$	25,772

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

Debt:

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


					Outstanding at
	Interest			Maturity	April 2,		January 1,
	Rates			Date	2006		2006
Senior Credit Facility		n/a		January 15, 2007	$	—	$	—
Senior secured notes, net of unamortized discount		11.00	%	October 15, 2007		75,263		75,224
Mezzanine term notes, net of unamortized discount		11.50	%	October 15, 2007		24,729		24,684
Fourth lien term notes		10.00	%	January 15, 2008		22,330		21,780
Senior subordinated notes		11.375	%	January 15, 2008		130,000		130,000


Total long-term debt					$	252,322	$	251,688

Cash and cash equivalents include $0.1 million and $5.0 million of restricted cash as of April 2, 2006 and January 1, 2006, respectively. Restricted cash represents the net proceeds received from the sale of businesses. Restricted cash may be used to reduce debt outstanding or to fund selected operational cash needs subject to restrictions in our senior credit facility and bond indentures.

On March 15, 2006, we amended our senior credit facility to, among other things:

	•		Extend the maturity date of the Credit Agreement from August 1, 2006 to January 15, 2007;

	•		Reduce the aggregate commitments under the Credit Agreement from $45 million to $25 million subject to limitations based on domestic accounts receivable and cash collateral held in blocked accounts in connection with prepayments of obligations under the facility;

	•		Allow for future permanent reductions of commitment and related borrowings via use of funds from any asset sales held in blocked accounts by the bank; and

	•		Modify certain covenants and restrictions on the Company’s ability to borrow under the facility, including the elimination of all commitments related to non-domestic subsidiaries of the Company.

Commitments and Contingencies:

We believe that our financing arrangements provide us with sufficient financial flexibility to fund our operations, debt service requirements and contingent earnout obligations through the extended term of our senior credit facility in January 2007, although there can be no assurance that will be the case. We expect to obtain a suitable extension or replacement to our amended and restated credit facility on or before expiration. In addition, we intend to seek alternative financing to address our senior and subordinated debt obligations, which mature in late 2007 and early 2008. 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.

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. 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. Since their filing for bankruptcy, we have exited substantially all of our Delphi business by transitioning affected programs to other vendors.

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

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, our subsidiaries and we 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 April 2, 2006 and January 1, 2006 there are 359,448 shares of the Preferred Stock outstanding with a stated value of $100 per share or about $36 million in total. We are authorized to issue up to 1,500,000 shares of Preferred Stock, divided into two classes: 500,000 shares of Series A Preferred Stock, par value $0.01, and 1,000,000 shares of New Preferred Stock, par value $0.01. 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 April 2, 2006, dividends accrued totaled $69.7 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
	April 2,			April 3,
	2006			2005
Net income (loss)	$	754		$	(14,836	)
Other comprehensive loss — foreign currency translation adjustments		(321	)		(1,551	)

Comprehensive income (loss)	$	433		$	(16,387	)

10.

Income Taxes:

The Company currently provides valuation allowances for a significant portion of its deferred tax assets. The effective tax rate for the quarters ended April 2, 2006 and April 3, 2005 differs from the 35% federal statutory rate primarily because of such valuation allowances and the effect of certain foreign tax rates. Tax expense for the periods relates primarily to earnings in foreign jurisdictions for which valuation allowances have not previously been recorded.

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.

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

The accounting policies 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 April 2, 2006

Net sales — external	$	40,256	$	26,606	$	21,758	$	—		$	88,620
Net intercompany sales		11		—		—		(11	)		—
EBITA		5,353		2,787		1,817		—			9,957

Quarter Ended April 3, 2005

Net sales — external		43,170		36,470		21,449		—			101,089
Net intercompany sales		89		—		98		(187	)		—
EBITA		5,603		3,347		1,832		—			10,782

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


	Fiscal Quarter Ended
	April 2,			April 3,
	2006			2005
Total segment EBITA	$	9,957		$	10,782
Net costs not allocated to segments		(838	)		(2,417	)
Interest expense		(7,645	)		(8,504	)
Michigan single business tax and other similar taxes		(344	)		(510	)

Consolidated income (loss) from continuing operations before income taxes	$	1,130		$	(649	)

12.

Stock-Based Compensation:

During the fourth quarter of fiscal 2000, the board of directors approved the MSXI 2000 Stock Option Plan (the “Stock Option Plan”). Under the terms of the Stock Option Plan, officers, directors and certain employees may be granted both incentive and non-qualified options to purchase our common stock. Incentive stock options may not be issued at less than 100% of the estimated market price on the date the option is granted. Also during fiscal 2000, we approved a one-time grant of 10,000 non-qualified stock options to an officer of MSXI. The 10,000 non-qualified stock options were not issued under the MSXI 2000 Stock Option Plan. All options generally vest over a five-year period and have a maximum term of ten years. During the second quarter of fiscal 2003, the Company increased the maximum number of shares that may be granted under the Stock Option Plan to 40,000 shares.

Prior to fiscal 2006, the Company applied the intrinsic value method as outlined in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations in accounting for stock options granted. During fiscal 2003 the Company repriced selected outstanding stock options. In accordance with APB No. 25, the Company used variable plan accounting for outstanding stock options subsequent to the repricing. To date, the Company has not recognized any expense related to employee stock options as the estimated fair value of the stock has remained below the exercise price of options outstanding.

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

Effective January 2, 2006 the Company adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS No. 123(R)”). This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supersedes APB No. 25. SFAS No. 123(R) requires that all stock-based compensation be recognized in the financial statements and that such cost be measured at the fair value of the grant. This statement was adopted using the modified prospective method of application, which requires recognition of share based payments on a prospective basis. Therefore, prior period financial statements have not been restated. SFAS No. 123(R) also requires that excess tax benefits (none for the Company due to tax losses) related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows.

A summary of stock option activity during the most recent fiscal quarter is presented below:


						Weighted
						average
	Number of			Weighted		remaining		Aggregate
	stock			average		contractual life in		Intrinsic
	options			exercise price		years		Value (000s)
Outstanding at January 1, 2006		39,650		$	64.04		6.6	$	—
Granted		—			—		—		—
Forfeited		(6,650	)		60.00		—		—

Outstanding at April 2, 2006		33,000			64.85		6.1		—

Exercisable at April 2, 2006		19,725		$	63.78		5.5	$	—

With the adoption of SFAS No. 123(R), the Company is required to record the fair value of stock-based compensation grants as an expense. In order to determine the fair value of stock options on the date of grant, the Company applies the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility and option life assumptions require a greater level of judgment which make them critical accounting estimates.

No options were granted or exercised during fiscal 2005 or 2006. The adoption of SFAS No. 123(R) had no effect on our reported financial position, results of operations or cash flows for the periods presented.

13.

Subsequent Event:

On April 21, 2006, MSX International Netherlands BV, a wholly-owned indirect subsidiary of the Company, sold Satiz S.r.l., (“Satiz”) a wholly-owned indirect Italian subsidiary of the Company to Localfin S.r.l. (the “Purchaser”) an Italian company with offices in Via Sant ‘Ennodio 1/A, Pavia, Italy. The Purchaser paid €1.5 million at closing for Satiz, with the potential for additional payments based on (i) any refunds to Satiz by the Italian Government of certain taxes and (ii) 2007 revenues generated by Satiz. As part of the sale agreement, the Company agreed to honor certain intercompany debts payable to Satiz, which totaled approximately $5.8 million.

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 April 2, 2006


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

Current assets:
Cash and cash equivalents	$	20,480		$	547		$	8,444		$	—		$	29,471
Accounts receivable, net		—			50,903			45,357			—			96,260
Inventory		—			680			6			—			686
Prepaid expenses and other assets		—			2,371			1,473			—			3,844
Assets held for sale		—			—			24,800			—			24,800
Deferred income taxes, net		—			3,862			5,245			(3,862	)		5,245

Total current assets		20,480			58,363			85,325			(3,862	)		160,306

Property and equipment, net		—			1,868			1,879			—			3,747
Goodwill, net		—			25,742			30			—			25,772
Investments in subsidiaries		21,144			(7,074	)		—			(14,070	)		—
Assets held for sale		—			—			6,279			—			6,279
Other assets		3,235			2,734			318			—			6,287
Deferred income taxes, net		3,636			—			1,097			(3,906	)		827

Total assets	$	48,495		$	81,633		$	94,928		$	(21,838	)	$	203,218


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—		$	—		$	—		$	—
Accounts payable and drafts		—			43,912			20,393			—			64,305
Accrued liabilities		5,264			24,665			25,377						55,306
Liabilities held for sale		—			—			24,849			—			24,849
Deferred income taxes, net		3,862			—			—			(3,862	)		—

Total current liabilities		9,126			68,577			70,619			(3,862	)		144,460

Long-term debt		235,161			—			17,161			—			252,322
Intercompany accounts		12,043			(16,155	)		4,112			—			—
Long-term deferred compensation and other liabilities		—			4,161			634			—			4,795
Liabilities held for sale		—			—			9,476			—			9,476
Deferred income taxes, net		—			3,906			—			(3,906	)		—

Total liabilities		256,330			60,489			102,002			(7,768	)		411,053

Redeemable Series A Preferred Stock		105,635			—			—			—			105,635
Shareholders’ equity (deficit)		(313,470	)		21,144			(7,074	)		(14,070	)		(313,470	)

Total liabilities and shareholders’ equity (deficit)	$	48,495		$	81,633		$	94,928		$	(21,838	)	$	203,218

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 1, 2006


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

Current assets:
Cash and cash equivalents	$	11,995		$	432		$	15,310		$	—		$	27,737
Accounts receivable, net		—			55,279			41,405			—			96,684
Inventory		—			778			7			—			785
Prepaid expenses and other assets		—			2,095			1,613			—			3,708
Assets held for sale		—			7,327			28,902			—			36,229
Deferred income taxes, net		—			3,718			5,766			(3,850	)		5,634

Total current assets		11,995			69,629			93,003			(3,850	)		170,777

Property and equipment, net		—			2,154			1,603			—			3,757
Goodwill, net		—			26,475			29			—			26,504
Investment in subsidiaries		14,493			(6,006	)		—			(8,487	)		—
Assets held for sale		—			497			5,091			—			5,588
Other assets		3,698			2,760			352			—			6,810
Deferred income taxes, net		3,373			—			1,138			(3,511	)		1,000

Total assets	$	33,559		$	95,509		$	101,216		$	(15,848	)	$	214,436


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—		$	—		$	—		$	—
Accounts payable and drafts		—			42,049			21,418			—			63,467
Accrued liabilities		11,499			26,655			23,523			—			61,677
Liabilities held for sale		—			1,653			29,679			—			31,332
Deferred income taxes, net		3,850			—			—			(3,850	)		—

Total current liabilities		15,349			70,357			74,620			(3,850	)		156,476

Long-term debt		234,610			—			17,078			—			251,688
Intercompany accounts		(8,132	)		2,160			5,972			—			—
Long-term deferred compensation and other liabilities		—			4,916			486			—			5,402
Liabilities held for sale		—			72			9,066			—			9,138
Deferred income taxes, net		—			3,511			—			(3,511	)		—

Total liabilities		241,827			81,016			107,222			(7,361	)		422,704

Redeemable Series A Preferred Stock		102,566			—			—			—			102,566
Shareholders’ equity (deficit)		(310,834	)		14,493			(6,006	)		(8,487	)		(310,834	)

Total liabilities and shareholders’ equity (deficit)	$	33,559		$	95,509		$	101,216		$	(15,848	)	$	214,436

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 April 2, 2006 and April 3, 2005


	MSXI			Guarantor			Non-Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
							(in thousands)
Fiscal Quarter Ended April 2, 2006:
Net sales	$	—		$	53,792		$	34,839		$	(11	)	$	88,620
Cost of sales		—			44,799			28,074			(11	)		72,862

Gross profit		—			8,993			6,765			—			15,758
Selling, general and administrative expenses		—			4,169			2,631			—			6,800
Restructuring and severance costs		—			79			104			—			183

Income from continuing operations before interest, income taxes, and equity in affiliates		—			4,745			4,030			—			8,775
Interest expense, net		7,403			(47	)		289			—			7,645

Income (loss) from continuing operations before income taxes, and equity in affiliates		(7,403	)		4,792			3,741			—			1,130
Income tax provision (benefit)		(1,185	)		1,191			1,645			—			1,651
Equity in affiliates		5,697			2,096			—			(7,793	)		—


Income (loss) from continuing operations		(521	)		5,697			2,096			(7,793	)		(521	)

Income from discontinued operations, net		1,275			1,275			547			(1,822	)		1,275


Net income	$	754		$	6,972		$	2,643		$	(9,615	)	$	754


Fiscal Quarter Ended April 3, 2005:
Net sales	$	—		$	68,859		$	32,258		$	(28	)	$	101,089
Cost of sales		—			58,754			25,868			(28	)		84,594

Gross profit		—			10,105			6,390			—			16,495
Selling, general and administrative expenses		—			6,239			2,275			—			8,514
Restructuring and severance costs		—			101			25			—			126

Income from continuing operations before interest, income taxes, and equity in affiliates		—			3,765			4,090			—			7,855
Interest expense, net		6,253			1,291			960			—			8,504

Income (loss) from continuing operations before income taxes, and equity in affiliates		(6,253	)		2,474			3,130			—			(649	)
Income tax provision (benefit)		(808	)		790			1,258			—			1,240
Equity in affiliates		3,556			1,872						(5,428	)		—


Income (loss) from continuing operations		(1,889	)		3,556			1,872			(5,428	)		(1,889	)

Loss from discontinued operations, net		(12,947	)		(12,947	)		(12,722	)		25,669			(12,947	)


Net loss	$	(14,836	)	$	(9,391	)	$	(10,850	)	$	20,241		$	(14,836	)

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 quarter ended April 2, 2006


	MSXI			Guarantor			Non-Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	754		$	6,972		$	2,643		$	(9,615	)	$	754
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates, including discontinued operations		(6,972	)		(2,643	)		—			9,615			—
Gain on sale of businesses		—			(470	)		—			—			(470	)
Depreciation		—			454			302			—			756
Amortization of debt issuance costs and non-cash interest		1,133			—			126			—			1,259
Deferred taxes		(251	)		389			904			—			1,042
(Gain) loss on sale/disposal of property and equipment		—			31			—			—			31
(Increase) decrease in receivables, net		—			4,721			915			—			5,636
(Increase) decrease in inventory		—			99			(45	)		—			54
(Increase) decrease in prepaid expenses and other assets		—			(276	)		73			—			(203	)
Increase (decrease) in current liabilities		(6,233	)		(7,430	)		(5,323	)		—			(18,986	)
Other, net		—			171			(1,328	)		—			(1,157	)

Net cash provided by (used for) operating activities		(11,569	)		2,018			(1,733	)		—			(11,284	)


Cash flows from investing activities:
Capital expenditures		—			(249	)		(566	)		—			(815	)
Payments for contingent consideration and minority interests		—			(604	)		—			—			(604	)
Proceeds from sale/disposal of businesses, net of expenses paid		—			7,012			—			—			7,012
Proceeds from sale/disposal of property and equipment		—			30			22			—			52
Other, net		—			—			—			—			—

Net cash provided by (used for) investing activities		—			6,189			(544	)		—			5,645


Cash flows from financing activities:
Transactions with subsidiaries		20,174			(14,924	)		(5,250	)		—			—
Debt issuance costs		(120	)		—			—			—			(120	)
Changes in revolving debt, net		—			—			1,691			—			1,691
Change in book overdrafts, net		—			6,832			(375	)		—			6,457

Net cash provided by (used for) financing activities		20,054			(8,092	)		(3,934	)		—			8,028


Effect of foreign exchange rate changes on cash and cash equivalents		—			—			(499	)		—			(499	)


Cash and cash equivalents:
Increase (decrease) for the period		8,485			115			(6,710	)		—			1,890
Balance, beginning of period (including $273 of cash held for sale)		11,995			432			15,583			—			28,010

Balance, end of period (including $429 of cash held for sale)	$	20,480		$	547		$	8,873		$	—		$	29,900

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 quarter ended April 3, 2005


	MSXI			Guarantor			Non-Guarantor						MSXI
	(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
							(in thousands)
Cash flows from operating activities:
Net income (loss)	$	(14,836	)	$	(9,391	)	$	(10,850	)	$	20,241		$	(14,836	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates, including discontinued operations		9,391			10,850			—			(20,241	)		—
Depreciation		—			820			1,274			—			2,094
Goodwill impairment charges		—			—			7,131						7,131
Amortization of debt issuance costs		1,030			—			112			—			1,142
Deferred taxes		(818	)		818			(316	)		—			(316	)
(Gain) Loss on sale/disposal of property and equipment		—			(5	)		(3	)		—			(8	)
(Increase) decrease in receivables, net		—			2,716			10,711			—			13,427
(Increase) decrease in inventory		—			(444	)		126			—			(318	)
(Increase) decrease in prepaid expenses and other assets		—			(544	)		(951	)		—			(1,495	)
Increase (decrease) in current liabilities		(6,174	)		(5,861	)		(1,725	)		—			(13,760	)
Other, net		—			95			(786	)		—			(691	)

Net cash provided by (used for) operating activities		(11,407	)		(946	)		4,723			—			(7,630	)


Cash flows from investing activities:
Capital expenditures		—			(305	)		(556	)		—			(861	)
Payments for contingent consideration		—			(604	)		—			—			(604	)
Proceeds from sale/disposal of property and equipment		—			7			88			—			95

Net cash provided by (used for) investing activities		—			(902	)		(468	)		—			(1,370	)


Cash flows from financing activities:
Transactions with subsidiaries		3,684			(3,896	)		212			—			—
Debt issuance costs		(16	)		—			—			—			(16	)
Changes in revolving debt, net		2,089			—			(6,639	)		—			(4,550	)
Change in book overdrafts		—			8,067			—			—			8,067

Net cash provided by (used for) financing activities		5,757			4,171			(6,427	)		—			3,501


Effect of foreign exchange rate changes on cash and cash equivalents		—			—			(362	)		—			(362	)


Cash and cash equivalents:
Increase (decrease) for the period		(5,650	)		2,323			(2,534	)		—			(5,861	)
Balance, beginning of period		5,650			11,570			17,157			—			34,377

Balance, end of period (including $652 of cash held for sale as of April 3, 2005)	$	—		$	13,893		$	14,623		$	—		$	28,516

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 April 2, 2006


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

Current assets:
Cash and cash equivalents	$	20,480		$	2,039		$	547		$	6,405		$	—		$	29,471
Accounts receivable, net		—			11,184			50,903			34,173			—			96,260
Inventory		—			—			680			6			—			686
Prepaid expenses and other assets		—			527			2,371			946			—			3,844
Assets held for sale		—			—			—			24,800			—			24,800
Deferred income taxes, net		—			—			3,862			5,505			(4,122	)		5,245

Total current assets		20,480			13,750			58,363			71,835			(4,122	)		160,306

Property and equipment, net		—			262			1,868			1,617			—			3,747
Goodwill, net		—			30			25,742			—			—			25,772
Investments in subsidiaries		21,144			—			(7,074	)		15,424			(29,494	)		—
Assets held for sale		—			—			—			6,279			—			6,279
Other assets		3,235			253			2,734			65			—			6,287
Deferred income taxes, net		3,636			2,591			—			—			(5,400	)		827

Total assets	$	48,495		$	16,886		$	81,633		$	95,220		$	(39,016	)	$	203,218


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—		$	—		$	—		$	—		$	—
Accounts payable and drafts		—			6,386			43,912			14,007			—			64,305
Accrued liabilities		5,264			6,523			24,665			18,854			—			55,306
Liabilities held for sale		—			—			—			24,849			—			24,849
Deferred income taxes, net		3,862			260			—			—			(4,122	)		—

Total current liabilities		9,126			13,169			68,577			57,710			(4,122	)		144,460

Long-term debt		235,161			17,161			—			—			—			252,322
Intercompany accounts		12,043			(28,819	)		(16,155	)		32,931			—			—
Long-term deferred compensation and other liabilities		—			(49	)		4,161			683			—			4,795
Liabilities held for sale		—			—			—			9,476			—			9,476
Deferred income taxes, net		—			—			3,906			1,494			(5,400	)		—

Total liabilities		256,330			1,462			60,489			102,294			(9,522	)		411,053

Redeemable Series A Preferred Stock		105,635			—			—			—			—			105,635
Shareholders’ equity (deficit)		(313,470	)		15,424			21,144			(7,074	)		(29,494	)		(313,470	)

Total liabilities and shareholders’ equity (deficit)	$	48,495		$	16,886		$	81,633		$	95,220		$	(39,016	)	$	203,218

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 1, 2006


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

Current assets:
Cash and cash equivalents	$	11,995		$	6,980		$	432		$	8,330		$	—		$	27,737
Accounts receivable, net		—			10,616			55,279			30,789			—			96,684
Inventory		—			—			778			7			—			785
Prepaid expenses and other assets		—			578			2,095			1,035			—			3,708
Assets held for sale		—			—			7,327			28,902			—			36,229
Deferred income taxes, net		—			—			3,718			6,023			(4,107	)		5,634

Total current assets		11,995			18,174			69,629			75,086			(4,107	)		170,777

Property and equipment, net		—			300			2,154			1,303			—			3,757
Goodwill, net		—			29			26,475			—			—			26,504
Investment in subsidiaries		14,493			—			(6,006	)		13,920			(22,407	)		—
Assets held for sale		—			—			497			5,091			—			5,588
Other assets		3,698			288			2,760			64			—			6,810
Deferred income taxes, net		3,373			2,562			—			—			(4,935	)		1,000

Total assets	$	33,559		$	21,353		$	95,509		$	95,464		$	(31,449	)	$	214,436


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Notes payable and current portion of long-term debt	$	—		$	—		$	—		$	—		$	—		$	—
Accounts payable and drafts		—			7,409			42,049			14,009			—			63,467
Accrued liabilities		11,499			5,609			26,655			17,914			—			61,677
Liabilities held for sale		—			—			1,653			29,679			—			31,332
Deferred income taxes, net		3,850			257			—			—			(4,107	)		—

Total current liabilities		15,349			13,275			70,357			61,602			(4,107	)		156,476

Long-term debt		234,610			17,078			—			—			—			251,688
Intercompany accounts		(8,132	)		(22,870	)		2,160			28,842			—			—
Long-term deferred compensation and other liabilities		—			(50	)		4,916			536			—			5,402
Liabilities held for sale		—			—			72			9,066			—			9,138
Deferred income taxes, net		—			—			3,511			1,424			(4,935	)		—

Total liabilities		241,827			7,433			81,016			101,470			(9,042	)		422,704

Redeemable Series A Preferred Stock		102,566			—			—			—			—			102,566
Shareholders’ equity (deficit)		(310,834	)		13,920			14,493			(6,006	)		(22,407	)		(310,834	)

Total liabilities and shareholders’ equity (deficit)	$	33,559		$	21,353		$	95,509		$	95,464		$	(31,449	)	$	214,436

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 April 2, 2006 and April 3, 2005


				MSXI
	MSXI			Limited		Guarantor			Non-Guarantor						MSXI
	(Parent)			(Issuer)		Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Fiscal Quarter Ended April 2, 2006:												��

Net sales	$	—		$	6,098	$	53,792		$	28,741		$	(11	)	$	88,620
Cost of sales		—			4,166		44,799			23,908			(11	)		72,862

Gross profit		—			1,932		8,993			4,833			—			15,758
Selling, general and administrative expenses		—			786		4,169			1,845			—			6,800
Restructuring and severance costs		—			—		79			104			—			183

Income from continuing operations before interest, income taxes, and equity in affiliates		—			1,146		4,745			2,884			—			8,775
Interest expense (income), net		7,403			55		(47	)		234			—			7,645

Income (loss) from continuing operations before income taxes, and equity in affiliates		(7,403	)		1,091		4,792			2,650			—			1,130
Income tax provision (benefit)		(1,185	)		—		1,191			1,645			—			1,651
Equity in affiliates		5,697			—		2,096			1,091			(8,884	)		—


Income (loss) from continuing operations		(521	)		1,091		5,697			2,096			(8,884	)		(521	)

Income (loss) from discontinued operations, net		1,275			—		1,275			547			(1,822	)		1,275


Net income (loss)	$	754		$	1,091	$	6,972		$	2,643		$	(10,706	)	$	754


Fiscal Quarter Ended April 3, 2005:

Net sales	$	—		$	5,985	$	68,859		$	26,273		$	(28	)	$	101,089
Cost of sales		—			4,537		58,754			21,331			(28	)		84,594

Gross profit		—			1,448		10,105			4,942			—			16,495
Selling, general and administrative expenses		—			547		6,239			1,728			—			8,514
Restructuring and severance costs		—			—		101			25			—			126

Income from continuing operations before interest, income taxes, and equity in affiliates		—			901		3,765			3,189			—			7,855
Interest expense, net		6,253			737		1,291			223			—			8,504

Income (loss) from continuing operations before income taxes, and equity in affiliates		(6,253	)		164		2,474			2,966			—			(649	)
Income tax provision (benefit)		(808	)		—		790			1,258			—			1,240
Equity in affiliates		3,556			—		1,872			162			(5,590	)		—


Income (loss) from continuing operations		(1,889	)		164		3,556			1,870			(5,590	)		(1,889	)

Income (loss) from discontinued operations		(12,947	)		198		(12,947	)		(12,720	)		25,469			(12,947	)


Net income (loss)	$	(14,836	)	$	362	$	(9,391	)	$	(10,850	)	$	19,879		$	(14,836	)

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 quarter ended April 2, 2006


				MSXI
	MSXI			Limited			Guarantor			Non-Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	754		$	1,091		$	6,972		$	2,643		$	(10,706	)	$	754
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Equity in affiliates, including discontinued operations		(6,972	)		—			(2,643	)		(1,091	)		10,706			—
Gain on sale of businesses		—			—			(470	)		—			—			(470	)
Depreciation		—			57			454			245			—			756
Amortization of debt issuance costs		1,133			126			—			—			—			1,259
Deferred taxes		(251	)		(27	)		389			931			—			1,042
Loss on sale/disposal of property and equipment		—			—			31			—			—			31
(Increase) decrease in receivable, net		—			(566	)		4,721			1,481			—			5,636
(Increase) decrease in inventory		—			—			99			(45	)		—			54
(Increase) decrease in prepaid expenses and other assets		—			51			(276	)		22			—			(203	)
Increase (decrease) in current liabilities		(6,233	)		(109	)		(7,430	)		(5,214	)		—			(18,986	)
Other, net		—			2			171			(1,330	)		—			(1,157	)

Net cash provided by (used for) operating activities		(11,569	)		625			2,018			(2,358	)		—			(11,284	)


Cash flows from investing activities:
Capital expenditures		—			(23	)		(249	)		(543	)		—			(815	)
Payments for contingent consideration and minority interests		—			—			(604	)		—			—			(604	)
Proceeds from sale/disposal of businesses, net of expenses paid		—			—			7,012			—			—			7,012
Proceeds from sale/disposal of property and equipment		—			7			30			15			—			52
Other, net		—			—			—			—			—			—

Net cash provided by (used for) investing activities		—			(16	)		6,189			(528	)		—			5,645


Cash flows from financing activities:
Transactions with subsidiaries		20,174			(5,949	)		(14,924	)		699			—			—
Debt issuance costs		(120	)		—			—			—			—			(120	)
Changes in revolving debt, net		—			—			—			1,691			—			1,691
Changes in book overdrafts, net		—			—			6,832			(375	)		—			6,457

Net cash provided by (used for) financing activities		20,054			(5,949	)		(8,092	)		2,015			—			8,028


Effect of foreign exchange rate changes on cash and cash equivalents		—			399			—			(898	)		—			(499	)


Cash and cash equivalents:
Increase (decrease) for the period		8,485			(4,941	)		115			(1,769	)		—			1,890
Balance, beginning of period (including $273 of cash held for sale)		11,995			6,980			432			8,603			—			28,010

Balance, end of period (including $429 of cash held for sale)	$	20,480		$	2,039		$	547		$	6,834		$	—		$	29,900

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 quarter ended April 3, 2005


				MSXI
	MSXI			Limited			Guarantor			Non-Guarantor						MSXI
	(Parent)			(Issuer)			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(in thousands)
Cash flows from operating activities:
Net income (loss)	$	(14,836	)	$	362		$	(9,391	)	$	(10,850	)	$	19,879		$	(14,836	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities:
Equity in affiliates, including discontinued operations		9,391			—			10,850			(362	)		(19,879	)		—
Depreciation		—			300			820			974			—			2,094
Goodwill impairment charges		—			—			—			7,131			—			7,131
Amortization of debt issuance costs		1,030			112			—			—			—			1,142
Deferred taxes		(818	)		1			818			(317	)		—			(316	)
Gain on sale/disposal of property and equipment		—			(3	)		(5	)		—			—			(8	)
(Increase) decrease in receivable, net		—			341			2,716			10,370			—			13,427
(Increase) decrease in inventory		—			—			(444	)		126			—			(318	)
(Increase) decrease in prepaid expenses and other assets		—			(69	)		(544	)		(882	)		—			(1,495	)
Increase (decrease) in current liabilities		(6,174	)		(864	)		(5,861	)		(861	)		—			(13,760	)
Other, net		—			28			95			(814	)		—			(691	)

Net cash provided by (used for) operating activities		(11,407	)		208			(946	)		4,515			—			(7,630	)


Cash flows from investing activities:
Capital expenditures		—			(130	)		(305	)		(426	)		—			(861	)
Payments for contingent consideration		—			—			(604	)		—			—			(604	)
Proceeds from sale/disposal of property and equipment		—			3			7			85						95

Net cash provided by (used for) investing activities		—			(127	)		(902	)		(341	)		—			(1,370	)


Cash flows from financing activities:
Transactions with subsidiaries		3,684			2,742			(3,896	)		(2,530	)		—			—
Debt issuance costs		(16	)		—			—			—			—			(16	)
Changes in revolving debt, net		2,089			(588	)		—			(6,051	)		—			(4,550	)
Changes in book overdrafts, net		—			—			8,067			—			—			8,067

Net cash provided by (used for) financing activities		5,757			2,154			4,171			(8,581	)		—			3,501


Effect of foreign exchange rate changes on cash and cash equivalents		—			(797	)		—			435			—			(362	)


Cash and cash equivalents:
Increase (decrease) for the period		(5,650	)		1,438			2,323			(3,972	)		—			(5,861	)
Balance, beginning of period		5,650			18			11,570			17,139			—			34,377

Balance, end of period (including $652 of cash held for sale as of April 3, 2005)	$	—		$	1,456		$	13,893		$	13,167		$	—		$	28,516

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. As a result of trends, we have experienced overall revenue declines during the past several years. Our revenue remains under pressure from continuing cost containment actions at our major customers. We believe that automotive OEM budgets will continue to be challenged due to excess capacity, competition for market share, and pressure to reduce costs.

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 sale of portions of these businesses was 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. The sale of this business was completed subsequent to the first quarter of 2006. In January 2006, we completed the sale of a contract-manufacturing subsidiary in the U.S. During the first quarter of fiscal 2006, the Company approved, and subsequently completed, the sale of selected U.S. staffing operations. Management will continue to explore and evaluate additional development alternatives to focus the Company on business units with high growth and return prospects, particularly in the areas of warranty and dealership consulting. Operations classified as discontinued at April 2, 2006 have been excluded from the discussion of continuing operations and are discussed separately under the heading “Discontinued Operations”.

Net Sales

For the first quarter of fiscal 2006, consolidated net sales decreased $12.5 million, or 12.3%, from $101.1 million in the first quarter of fiscal 2005 to $88.6 million during fiscal 2005. Our sales by segment, net of intercompany sales, were as follows:


	Fiscal Quarter Ended
	April 2,		April 3,		Inc / (Dec) vs. 2005
	2006		2005		$			%
	(dollars in thousands)
Business Outsourcing Services	$	40,256	$	43,170	$	(2,914	)		(6.8	%)
Human Capital Services		26,606		36,470		(9,864	)		(27.0	%)
Engineering Services		21,758		21,449		309			1.4	%


Total net sales	$	88,620	$	101,089	$	(12,469	)		(12.3	%)

The decline in business outsourcing services reflect the loss of selected programs from 2005, unfavorable exchange rates on non-U.S. sales, and nominal growth in selected areas. Programs lost primarily impacted our traditional U.S. operations, reducing overall sales by approximately $2.7 million. Unfavorable exchange rates in our european operations resulted in a $1.6 million reduction in overall business outsourcing service sales. Net of these variances, our warranty and retail programs in the U.S. and Europe posted over $1 million of sales growth versus the first quarter of fiscal 2005.

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

The decline in human capital services primarily reflects reduced volumes in our U.S. automotive contract staffing services. Sales declined by approximately $5.3 million versus the first quarter of fiscal 2005 due to the exit of substantially all staffing programs with Delphi Corporation. Delphi programs were transitioned to other suppliers subsequent to their bankrupcty in October 2005. In addition, revenues reflect additional reductions in staffing levels of automotive customers due to continued cost reduction initiatives at such customers.

Sales of engineering services reflect declining volumes in selected outsourced OEM engineering programs and specialty shop programs due to reduced OEM budgets. Reductions in U.S. based programs were offset by increased sales at our Brazilian contract engineering operations due to increased headcounts on Ford related programs.

Operating Profit

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


	Fiscal Quarter Ended
	April 2,			April 3,			Inc (Dec) vs. 2005
	2006			2005			$			%
	(dollars in thousands)
Gross profit	$	15,758		$	16,495		$	(737	)		(4.5	%)
% of net sales		17.8	%		16.3	%		n/a			n/a
Selling, general and administrative expenses	$	6,800		$	8,514		$	(1,714	)		(20.1	%)
% of net sales		7.7	%		8.4	%		n/a			n/a
Operating income	$	8,775		$	7,855		$	920			11.7	%
% of net sales		9.9	%		7.8	%		n/a			n/a

Overall gross profit declined quarter over quarter due to reduced volumes across our business segments. Such volume reductions resulted in a decrease in gross profit of approximately $2.0 million versus 2005. The impact of reduced volumes was partially offset by improved profits on 2006 programs due to reductions in operating costs and displacement of lower margin operations and related programs. As a result of profit improvement initiatives, gross profit as a percent of sales improved versus 2005. Selling, general and administrative costs decreased as a percentage of sales from 2005. The overall decline is due to cost reductions, net of increased investment in selected sales and business development initiatives during fiscal 2006. The Company continually evaluates such costs relative to projected levels of business and implement additional reductions as necessary. Operating results also include restructuring costs totaling $0.2 million and $0.1 million related to employment related actions taken during the first quarter of fiscal 2006 and 2005, respectively.

Interest expense, net

Interest expense, net decreased from $8.5 million during the first quarter of 2005 to $7.6 million during the first quarter of 2006, a $0.9 million decrease. The decrease in interest expense compared to 2005 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.

Income taxes

The Company currently provides valuation allowances for a significant portion of its deferred tax assets. The effective tax rate for the quarters ended April 2, 2006 and April 3, 2005 differs from the 35% federal statutory rate primarily because of these valuation allowances. Tax expense for the periods relates primarily to earnings in foreign jurisdictions for which valuation allowances have not previously been recorded.

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

Discontinued Operations

In accordance with SFAS No. 144, discontinued operations include components of entities or entire entities that, through anticipated disposal transactions, will be eliminated from the on-going operations of MSXI. 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 or completed. The following are the operations classified as discontinued for the periods presented:

Assets Held for Sale

At April 2, 2006

	•		MSX International Engineering GmbH, our remaining engineering operations in Germany

	•		Satiz S.r.l., our Italian technical and commercial publishing business (sold April 21, 2006)

At January 1, 2006

	•		MSX International Engineering GmbH, our remaining engineering operations in Germany

	•		Satiz S.r.l., our Italian technical and commercial publishing business (sold April 21, 2006)

	•		Creative Technology Services, LLC (sold January 19, 2006)

The following summary results of operations information is derived from the businesses that are classified as held for sale at April 2, 2006 or were sold during the first fiscal quarter of 2006:


	Fiscal Quarter Ended
	April 2,			April 3,
	2006			2005
Net sales	$	22,542		$	44,848	��
Cost of sales		19,946			42,515

Gross profit		2,596			2,333
Selling, general and administrative expense		1,705			2,732
Restructuring and severance		11			6,633
Goodwill impairment charge		—			7,131

Operating income (loss)		880			(14,163	)
Interest (income) expense, net		(3	)		16
Net gain on sale of businesses		470			—

Income (loss) before taxes, net		1,353			(14,179	)
Income tax expense (benefit)		78			(1,232	)

Income (loss) from discontinued operations	$	1,275		$	(12,947	)

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. In response to lower sales volumes and a de-emphasis on capital intensive businesses we have reduced our capital expenditures for existing programs and selected new product development initiatives. We also emphasize disciplined management of working capital. Capital expenditure requirements for current programs have decreased commensurate with reduced demand for selected services and by redeploying underutilized assets. Days sales outstanding, accounts receivable agings, and other working capital metrics are monitored closely to minimize investments in working capital. We believe that such metrics are important to identify opportunities and potential problems, particularly those associated with the automated payment processes of our large automotive customers. Cash balances in excess of amounts required to fund daily operations are used to pay down any amounts outstanding under our credit facility. Thereafter, surplus funds are invested in short term, money market investments.

We typically pay our employees on a weekly basis 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 $11.3 million for the first quarter of fiscal 2006 compared to net cash used for operating activities of $7.6 million during for the first quarter of fiscal 2005. The reduction in cash from operating activities reflects $2.5 million of additional cash usage for pass through programs versus the first quarter of fiscal 2005. Funded vendor payments are reflected in operating cash flows while unfunded vendor payments are reflected as in financing cash flows as bank overdrafts. Net of pass-through cash flows, cash from operations decreased by $1.2 million versus the first quarter of fiscal 2005 due to changes in working capital. As of April 2, 2006, $2.9 million of cash balances were held on behalf of a vendor management solutions partner. Such amounts are subsequently paid to vendors or our partner company in accordance with normal terms.

Investing Activities.Net cash provided by investing activities was $5.6 million for the first quarter of 2006 compared to net cash used for investing activities of $1.4 million for the first quarter of 2005. Capital expenditures and payments for contingent consideration were consistent with 2005 levels. Cash flows during the first quarter of 2006 include proceeds from the sale of discontinued operations totaling $7.0 million.

Financing Activities. Net cash provided by financing activities was $8.0 million for the first quarter of 2006 compared to net cash provided by financing activities of $3.5 million for the first quarter of 2005. Financing activities during 2006 also include a decrease in the change in book overdrafts of $1.6 million compared to 2005 due to the timing of vendor payments.

Liquidity and Available Financings

Our total indebtedness as of April 2, 2006 consists of senior secured notes, mezzanine term notes, senior subordinated notes, our fourth lien term notes, borrowings under our credit facilities, and borrowings under various short-term arrangements. At April 2, 2006, cash and cash equivalents include $70 thousand of restricted cash subject to a blocked account control agreement with our banking institution. Restricted cash represents the net proceeds received from the sale of selected operations during fiscal 2005. Restricted cash may be used to reduce debt outstanding or to fund selected operational cash needs subject to restrictions in our senior credit facility and bond indentures. In addition to our total indebtedness, we also have contingent commitments related to letters of credit totaling about $4.3 million that are cash collateralized at April 2, 2006.

Available borrowings under our credit facility as of April 2, 2006 is subject to accounts receivable collateral requirements. As of April 2, 2006 we have $7.8 million available for immediate borrowing, subject to minimum availability requirements and based on eligible accounts receivable as determined in accordance with our amended credit facility agreement.

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

Availability under our credit agreement reflects changes implemented during the first quarter of 2006 as discussed below.

On March 15, 2006, we completed the fifth amendment to our credit facility to, among other things:

	•		Extend the maturity date of the credit facility from August 1, 2006 to January 15, 2007;

	•		Reduce the aggregate commitments under the credit facility from $45 million to $25 million subject to limitations based on domestic accounts receivable and cash collateral held in blocked accounts in connection with prepayments of obligations under the credit facility;

	•		Allow for future permanent reductions of commitment and related borrowings via use of funds from any asset sales held in blocked accounts by the bank; and

	•		Modify certain covenants and restrictions on the Company’s ability to borrow under the credit facility, including the elimination of all commitments related to non-domestic subsidiaries of the Company.

In connection with the amendment, the Company utilized $8.3 million of restricted funds from prior asset sales held in a blocked account to permanently reduce debt outstanding under the credit facility. Aggregate commitments after the completion of the fifth amendment to the credit facility remain at $25 million. Available borrowing under the revised agreement is limited to $6 million over cash collateral balances.

We believe that our financing arrangements, 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 in January 2007, although there can be no assurance that will be the case. We expect to obtain a suitable extension or replacement to our amended and restated credit facility on or before its expiration. In addition, we intend to seek alternative financing to address our senior and subordinated debt obligations, which mature in late 2007 and early 2008. Our ability to access additional capital in the long term depends on availability of capital markets and pricing on commercially reasonable terms as well as our credit profile at the time we are seeking funds. From time to time, we review our long-term financing and capital structure. As a result of our review, we may periodically explore alternatives to our current financing, including the issuance of additional long-term debt, refinancing our amended and restated credit facility and other restructurings or financings. In addition, we may from time to time seek to retire our outstanding notes in open market purchases, privately negotiated transactions or otherwise. These repurchases, if any, will depend on prevailing market conditions based on our liquidity requirements, contractual restrictions and other factors. The amount of repurchases of our notes may be material and may involve significant amounts of cash and/or financing availability.

Forward — Looking Statements

Certain of the statements made in this Quarterly Report on Form 10-Q, which include but are not limited to those concerning projections of revenues, earnings, segment performance, cash flows, cost reduction efforts and other operational improvements, contain forward-looking statements that are based on management’s current expectations, estimates, projections and assumptions. Such statements may be identified by the use of forward looking terminology such as “believes,” “expects,” “estimates,” “will,” “should,” “plans,” “anticipates” and variations of these words and similar expressions or the negative thereof, or by discussions of strategy. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. These statements are not guarantees of future performance and involve certain significant risks and uncertainties, which are difficult to predict. Therefore, actual future results and trends may differ materially from what is forecast in the forward-looking statements due to a variety of factors, many of which are beyond the control of management, including without limitation:

	•		Our substantial leverage and related exposure to changes in interest rates;

	•		Our reliance on the automotive industry and major customers in such industry, including without limitation the timing of such customers’ product development and other initiatives;

	•		The market demand for our business services in general;

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

	•		Our ability to attract, retain, develop and place qualified personnel, particularly technical personnel;

	•		Delays or unexpected costs associated with our cost reduction efforts;

	•		Risks associated with operating internationally, including economic, political and currency risks; and

	•		Risks associated with material weaknesses we have identified in our internal controls over financial reporting and the potential adverse affect of those weaknesses on our business if such weaknesses are not adequately addressed.

For more information concerning these and other factors, see the discussion under the heading “Risk Factors�� in our Annual Report on Form 10-K for the fiscal year ended January 1, 2006.

All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to MSXI or any person acting on MSXI’s behalf are qualified by the cautionary statements in this section. MSXI does not undertake any obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedure:

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of MSXI’s Disclosure Committee and management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15. Based upon this evaluation, which included the matters discussed below, the Company’s Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were not effective, as described further below, to ensure that information required to be disclosed in our periodic SEC reports is recorded, processed, summarized, and reported as and when required, and that such information is accumulated and communicated to the Company’s management, including our CFO and CEO, to allow timely decisions regarding required disclosures.

A material weakness is a control deficiency or a combination of control deficiencies that results in a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Notwithstanding the material weaknesses described below, the Company’s management has determined that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented in accordance with generally accepted accounting principles.

Material Weaknesses in Internal Control over Financial Reporting:

As we were preparing the Form 10-Q, management determined that the material weaknesses described below were present as of April 2, 2006:

	•		The Company did not maintain an effective control environment over the financial reporting and general ledger processes due primarily to limitations in the capacity of the accounting and other departments. Limitations are believed to be caused by voluntary and involuntary staff turnover resulting from downsizing of operations and related support functions. These limitations, in addition to other factors resulted in weaknesses identified for (1)Authorization of Journal Entries —multiple individuals have the ability to initiate and record journal entries into the general ledger without prior review or approval. Reviews of such journal entries are not done on a regular basis. Formal policies and procedures for authorization and/or review of posted journal entries are not developed or implemented (2)Financial Reporting and Oversight —The financial statements of Satiz S.r.l. for 2003 and 2004 were not correct primarily as a result of unsubstantiated amounts recorded as unbilled accounts receivable. In addition, the financial statements of other subsidiaries for 2004 were not correct as a result of misstated pension and other liabilities. These errors caused the financial statements of the Company for 2003 and 2004 to be restated in our Annual Report on Form 10-K filed on April 17, 2006. These restatements are an indication that the controls over financial reporting are not adequate and (3)Segregation of Duties —The Company does not maintain adequate segregation of duties over certain general ledger activities or maintain adequate monitoring controls in such areas.

	•		Employees within certain departments have access rights within the accounting system that are incompatible with their assigned roles. Appropriate controls are not in place to provide assurance over the information technology process such as review of security event logs and activity reports.

Plan for Remediation of Material Weaknesses in Internal Control over Financial Reporting:

The Company completed the sale of Satiz S.r.l. on April 21, 2006. In addition, in order to remediate these internal control deficiencies, the company is taking actions to (1) implement policies and procedures related to the review of journal entries posted by selected individuals, (2) assess areas with inadequate segregation of duties to determine what procedural changes or additional monitoring controls need to be implemented, and (3) perform a comprehensive review of user security and make required changes to ensure adequate functionality and internal control are present.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in various legal proceedings incidental to the ordinary conduct of our business. One such matter is an arbitration and related action in state court to enforce/vacate a March 2004 arbitration award totaling $3.8 million. The underlying dispute involves a claim for a contingent earnout payment under the terms of a purchase agreement for the acquisition of Management Resources, Inc. On October 4, 2004, the state court granted MSXI’s motion to vacate the arbitration award and subsequently ordered that the matter be re-arbitrated in its entirety before a new arbitrator. The opposing party has filed an appeal in the Michigan Court of Appeals. During fiscal 2004, there was a settlement related to a contingent earnout obligation pursuant to a prior acquisition. The monetary terms of the settlement are consistent in present value with amounts previously reserved by the Company, with the balance paid in equal quarterly installments over three years. In addition, our subsidiaries and we are parties to various legal proceedings arising in the normal course of business. While litigation is subject to inherent uncertainties, management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s consolidated financial condition, results of operation or cash flows.

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

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 1^st quarter results

	99.2		Deed of Transfer of the Entire Quota of Satiz S.r.l., an Italian Company with a Sole Quotaholder – English Translation

SIGNATURE

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

Date: May 17, 2006


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


Exhibits		Description
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 1^st quarter results

99.2		Deed of Transfer of the Entire Quota of Satiz S.r.l., an Italian Company with a Sole Quotaholder – English Translation

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	6th grade Avg

MSX International Inactive 10-Q2006 Q1 Quarterly report

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