1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File number: 333-49821
MSX INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3323099
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
275 REX BOULEVARD AUBURN HILLS, MICHIGAN 48326
(Address of principal executive offices) (Zip Code)
(248) 299-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
2
MSX INTERNATIONAL, INC.
INDEX
PAGES
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Balance Sheet as of September 27, 1998 and
December 28, 1997....................................................................2
Condensed Consolidated Statement of Operations for the Fiscal Quarters and
Fiscal Nine-Month Periods Ended September 27, 1998 and September 28, 1997...........3
Condensed Consolidated Statement of Cash Flows for the Fiscal Nine-Month
Periods Ended September 27, 1998 and September 28, 1997..............................4
Notes to Condensed Consolidated Financial Statements.................................5 -14
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.........................................................15-20
PART II - Other Information and Signature.....................................................21-23
EXHIBITS ........................................................................................24
1
3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
as of September 27, 1998 and December 28, 1997
SEPTEMBER 27, DECEMBER 28,
1998 1997
------------- ------------
(dollars in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 3,949 $ 11,575
Receivables, net 164,445 178,938
Inventory 1,681 1,239
Prepaid expenses and other assets 9,766 5,638
Deferred income taxes 2,015 2,352
------------- ------------
Total current assets 181,856 199,742
Property and equipment, net of accumulated depreciation
of $68,673 and $58,693, respectively 31,829 34,337
Goodwill, net of accumulated amortization of $1,674 and $892, respectively 34,082 31,934
Other assets 11,610 8,783
Deferred income taxes 15,680 12,380
------------- ------------
Total assets $ 275,057 $ 287,176
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt $ 4,511 $ 87,930
Accounts payable 77,375 80,366
Accrued payroll and benefits 21,492 16,984
Accrued expenses 18,341 20,907
Deferred income taxes 2,704 984
------------- ------------
Total current liabilities 124,423 207,171
Long-term debt 134,850 65,000
Long-term capital lease obligations 281 316
Long-term deferred compensation liability and other 3,911 5,053
------------- ------------
Total liabilities 263,465 277,540
------------- ------------
Redeemable Series A preferred stock: authorized 500,000 shares;
issued and outstanding, 360,000 shares 36,000 36,000
------------- ------------
Shareholders' equity (deficit):
Common stock, $.01 par: authorized, 2,000,000 shares;
issued and outstanding, 95,004 shares 1 1
Additional paid-in capital (22,251) (22,251)
Accumulated other comprehensive loss (706) (1,141)
Accumulated deficit (1,452) (2,973)
------------- ------------
Total shareholders' equity (deficit) (24,408) (26,364)
------------- ------------
Total liabilities and shareholders' equity (deficit) $ 275,057 $ 287,176
============= ============
The accompanying notes are an integral part of the condensed
consolidated financial statements.
2
4
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
for the fiscal quarters and fiscal nine-month periods ended September 27, 1998
and September 28, 1997
FISCAL QUARTERS FISCAL NINE MONTHS
---------------------- ---------------------
1998 1997 1998 1997
-------- -------- --------- ---------
(dollars in thousands)
Net sales $273,383 $143,955 $ 783,749 $ 310,500
Cost of sales (251,934) (131,212) (723,722) (278,150)
-------- -------- --------- ---------
Gross profit 21,449 12,743 60,027 32,350
Selling, general and administrative expenses (14,644) (8,424) (41,069) (22,260)
Michigan Single Business Tax (990) (735) (2,733) (2,150)
Restructuring costs - (2,000) - (2,000)
-------- -------- --------- ---------
Operating income 5,815 1,584 16,225 5,940
-------- -------- --------- ---------
Interest expense, net (4,263) (1,567) (11,936) (3,090)
Interest expense, related parties - (1,685) (1,040) (5,960)
-------- -------- --------- ---------
(4,263) (3,252) (12,976) (9,050)
-------- -------- --------- ---------
Income (loss) before income taxes 1,552 (1,668) 3,249 (3,110)
Income tax provision (benefit) 684 (721) 1,728 (1,090)
-------- -------- --------- ---------
Net income (loss) $ 868 $ (947) $ 1,521 $ (2,020)
======== ======== ========= =========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
5
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the fiscal nine-month periods ended September 27, 1998
and September 28, 1997
FISCAL NINE MONTHS
---------------------------
1998 1997
----------- -----------
Cash from (used for) operating activities:
Net income (loss) $ 1,521 $ (2,020)
Adjustments to reconcile net income (loss)
to net cash from (used for) operating activities:
Depreciation 10,431 5,719
Amortization 999 630
Deferred taxes (1,331) -
Net loss on sale of property and equipment 124 -
(Increase) decrease in receivables, net 19,394 (21,446)
(Increase) decrease in inventory (442) (350)
(Increase) decrease in prepaid expenses (4,129) (315)
Increase (decrease) in current liabilities (7,675) 20,528
Other, net (738) 2,910
----------- -----------
Net cash from operating activities 18,154 5,656
----------- -----------
Cash from (used for) investing activities:
Capital expenditures (8,748) (8,220)
Acquisition of business, net of cash received (3,783) (159,219)
Proceeds from sale of property and equipment 686 -
----------- -----------
Net cash (used for) investing activities (11,845) (167,439)
----------- -----------
Cash from (used for) financing activities:
Proceeds from long-term debt issues 99,377 130,655
Repayment of long-term debt (91,548) -
Change in notes payable (24,895) -
Change in book overdraft 2,929 -
Sale of Redeemable Preferred Stock - 36,000
Sale of Common Stock - 3,800
Other, net (233) (402)
----------- -----------
Net cash from (used for) financing activities (14,370) 170,053
----------- -----------
Effect of foreign exchange rate changes on cash 435 (1,960)
----------- -----------
Cash:
Increase (decrease) for the period (7,626) 6,310
Balance, beginning of period 11,575 -
----------- -----------
Balance, end of period $ 3,949 $ 6,310
=========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
6
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands unless otherwise stated)
1. ORGANIZATION AND BASIS OF PRESENTATION:
The accompanying financial statements represent the consolidated assets
and liabilities and operations of MSX International, Inc. and its
subsidiaries ("MSXI" or the "Company"). Effective August 31, 1997, the
Company acquired certain service-providing operations of Ford Motor
Company ("Ford") through the acquisition of Geometric Results
Incorporated ("GRI"), a wholly-owned subsidiary of Ford. The results of
operations of GRI have been included in the results of the operations
of the Company from September 1, 1997.
The Company is principally engaged in the business of providing
technical support services, primarily to automobile manufacturers and
suppliers in the United States and Europe.
The Company utilizes a 52-53 week fiscal year.
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments which are normal
and recurring in nature necessary to present fairly its financial
position at September 27, 1998, its results of operations for the
fiscal quarter and fiscal nine-month periods ended September 27, 1998
and September 28, 1997 and its cash flows for the fiscal nine-month
periods ended September 27, 1998 and September 28, 1997. The operating
results for the fiscal quarter and fiscal nine-month periods ended
September 27, 1998 and September 28, 1997 are not necessarily
indicative of the results of operations for the entire year. Reference
should be made to the consolidated financial statements included in the
Company's Registration Statement on Form S-4 which was declared
effective by the Securities and Exchange Commission on July 22, 1998.
2. RESTRUCTURING ACTIONS:
As of December 28, 1997, accrued restructuring costs totaled $6.1
million. Approximately $0.6 million and $3.1 million was charged to
MSXI's accrual in the fiscal quarter and fiscal nine-month period ended
September 27, 1998, respectively, primarily for severance payments and
operating lease payments on unused facilities. Remaining accrued
restructuring costs totaled $3.3 million as of September 27, 1998, of
which $0.9 million is expected to be paid in the balance of fiscal
1998.
3. REDEEMABLE SERIES A PREFERRED STOCK:
Dividends on preferred stock are payable in cash at a rate per annum
equal to 12 percent of the stated value plus an amount equal to any
accrued and unpaid dividends. As of September 27, 1998, the Company had
not declared any dividends. Accordingly, no dividends have been paid or
accrued. Dividends accumulated but not declared aggregated
approximately $8.1 million as of September 27, 1998.
5
7
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
4. DEBT:
On January 22, 1998, the Company issued, in a private placement, $100
million aggregate principal amount of 11-3/8% unsecured senior
subordinated notes maturing January 15, 2008. On August 20, 1998, the
Company consummated an offer to exchange 11-3/8% Senior Subordinated
Notes which had been registered under the Securities Act of 1933 for
any and all outstanding Notes. The Company's Registration Statement on
Form S-4 with the Securities and Exchange Commission became effective
on July 22, 1998. Interest on the Notes is payable semiannually at
11-3/8% per annum and commenced July 15, 1998. The Notes may be
redeemed subsequent to January 15, 2003 at premiums, which begin at
105.6875 percent and decline each year to face for redemptions taking
place after January 15, 2006. In addition, at any time prior to January
15, 2001, the Company may redeem up to 35 percent of the original
aggregate principal amount of the Notes with the proceeds of one or
more public equity offerings at a redemption price of 111.375 percent
plus accrued and unpaid interest, if any. Also, upon the occurrence of
a change of control, as defined in the indenture (the "Indenture"), the
Notes may be redeemed at the option of the note holders at a premium of
one percent, plus accrued and unpaid interest, if any. The Notes
contain covenants which, among others, limit the incurrence of
additional indebtedness and restrict capital transactions,
distributions and asset dispositions of certain subsidiaries.
In connection with the Notes offering, each of the Company's domestic
restricted subsidiaries, as defined in the Indenture (the "Guarantor
Subsidiaries"), irrevocably and unconditionally guarantee the Company's
performance under the Notes as primary obligors.
Concurrently with the private placement, the Company entered into a new
credit facility with Bank One Corporation (the "New Credit Facility"),
with a borrowing base of up to $100 million, as defined, to replace the
prior Credit Facility (the "Old Credit Facility"). Interest on the
loans under the New Credit Facility is payable quarterly or, if
earlier, at the end of each interest period and accrues at an annual
rate equal to, at the option of the Company: (a) a floating rate, as
defined or (b) the London Interbank Offered Rate plus an applicable
margin, as defined.
Each significant domestic subsidiary of the Company guarantees all
obligations of the Company under the New Credit Facility. In addition,
these obligations are secured by a pledge of the stock of such domestic
subsidiaries and a first lien on substantially all assets of such
domestic subsidiaries and a pledge of 65 percent of the stock of the
significant foreign subsidiaries. The obligations of the Company under
the New Credit Facility rank senior to all other indebtedness of the
Company, including the Notes.
6
8
MSX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
4. DEBT: - (CONTINUED)
The New Credit Facility contains certain reporting covenants and other
customary affirmative covenants and various negative covenants
including, but not limited to, certain limitations on mergers, sales of
assets, acquisitions, liens, investments, indebtedness, contingent
obligations, dividends, subsidiaries' ability to agree to dividend
restrictions, affiliate transactions and changes of business. The New
Credit Facility also contains certain covenants with respect to
employee benefit arrangements and environmental matters and certain
financial covenants including but not limited to a ratio of total debt
to EBITDA, a fixed charge coverage ratio and a minimum net worth
requirement, each as defined.
On April 14, 1998, the Company syndicated the New Credit Facility to
add additional commercial lenders and to amend the New Credit Facility
to add a $30 million term loan portion. Term loan borrowings are
subject to satisfaction of the same borrowing base requirements and
financial reporting and operating covenants as are other borrowings
under the New Credit Facility. As of September 27, 1998, $34.9 million
was outstanding under the New Credit Facility.
5. BOOK OVERDRAFTS:
Book overdrafts represent checks drawn on zero balance accounts that
have not yet been presented to the Company's banks for funding. Such
overdrafts are funded when the related checks are presented and are not
subject to finance charges. Accordingly, there were negative book
balances of $24.8 million and $21.9 million at September 27, 1998 and
December 28, 1997, respectively. Such balances are included in Accounts
Payable in the Condensed Consolidated Balance Sheet.
6 INCOME TAXES:
For the fiscal nine-month period ended September 27, 1998 and September
28, 1997, the effective income tax rate was 53.2% and (35%),
respectively. This change in the effective income tax rate was due to
operations of the acquired GRI business and a change in the projected
mix of foreign earnings which were offset in part by losses from other
foreign businesses and a related valuation allowance. For the
nine-month period ended September 27, 1998 the difference between the
effective income tax rate and the statutory rate for federal income
taxes, as well as the change in the effective income tax rate from the
six-month period ended June 28, 1998, were due to a change in projected
foreign and domestic earnings for the fiscal year ended December 27,
1998.
7
9
MSX INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
7. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130
"REPORTING COMPREHENSIVE INCOME":
Effective December 29, 1997, the Company adopted Statement of Financial
Accounting Standards (FASB) No. 130, "Reporting Comprehensive Income."
This statement requires that all items recognized under accounting
standards as components of comprehensive earnings be reported in an
annual financial statement that is displayed with the same prominence
as other annual financial statements. This Statement also requires that
an entity classify items of other comprehensive earnings by their
nature in an annual financial statement. Annual financial statements
for prior periods will be reclassified, as required. The Company's
total comprehensive earnings were as follows:
FISCAL QUARTERS FISCAL NINE MONTHS
--------------------- ------------------------
SEPT. 27 SEPT. 28, SEPT. 27, SEPT. 28,
1998 1997 1998 1997
---------- -------- --------- ---------
Net income/(loss) $ 868 $ (947) $ 1,521 $ (2,020)
Other comprehensive income/(loss) 888 (727) 435 (1,960)
---------- -------- --------- ---------
$ 1,756 $ (1,674) $ 1,956 $ (3,980)
Total comprehensive income/(loss) ========== ======== ========= =========
Other comprehensive income (loss) is comprised of the change in the
accumulated foreign currency translation adjustment.
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES:
In connection with the Note Offering, the Guarantor Subsidiaries
irrevocably and unconditionally guarantee the Company's performance
under the Notes as primary obligors. The Guarantor Subsidiaries are
direct or indirect wholly-owned subsidiaries of the Company. The
remaining subsidiaries are direct or indirect subsidiaries of the
Guarantor Subsidiaries.
The following condensed consolidated financial data provides
information regarding the financial position, results of operations and
cash flows of the Guarantor Subsidiaries ("Condensed Consolidated
Financial Data"). Separate financial statements of the Guarantor
Subsidiaries are not presented because management has determined those
would not be material to the holders of the notes.
For purposes of the condensed consolidated financial data, the
Guarantor Subsidiaries include substantially all domestic subsidiaries
of the Company. The Guarantor Subsidiaries account for their
investments in the non-guarantor subsidiaries, if any, on the equity
method. The principal elimination entries are to eliminate the
investments in subsidiaries and intercompany balances and transactions.
8
10
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
as of September 27, 1998
GUARANTOR NON-GUARANTOR MSXI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 180 $ 3,769 $ - $ 3,949
Receivables, net 110,185 54,260 - 164,445
Inventory 1,645 36 - 1,681
Prepaid expenses and other assets 3,856 5,910 - 9,766
Deferred income taxes 863 1,152 - 2,015
------------ ---------- --------- -----------
Total current assets 116,729 65,127 - 181,856
Property and equipment, net 20,556 11,273 - 31,829
Goodwill, net 30,323 3,759 - 34,082
Other assets 39,382 4,004 31,776 11,610
Deferred income taxes 13,819 1,861 - 15,680
------------ ---------- --------- -----------
Total assets $ 220,809 $ 86,024 $ 31,776 $ 275,057
============ ========== ========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt $ - $ 4,511 $ - $ 4,511
Accounts payable 64,479 12,896 - 77,375
Accrued liabilities 31,360 8,506 (33) 39,833
Deferred income taxes 1,477 1,227 - 2,704
------------ ---------- --------- -----------
Total current liabilities 97,316 27,140 (33) 124,423
Long-term debt 133,158 1,692 - 134,850
Intercompany accounts (37,532) 37,532 - -
Long-term capital lease obligations 281 - - 281
Long-term deferred compensation liability and other 3,873 38 - 3,911
------------ ---------- --------- -----------
Total liabilities 197,096 66,402 (33) 263,465
------------ ---------- --------- -----------
Redeemable Series A preferred stock 36,000 33 (33) 36,000
------------ ---------- --------- -----------
Shareholders' equity (deficit):
Common stock 1 2,949 (2,949) 1
Additional paid-in capital (9,442) 28,851 (41,660) (22,251)
Accumulated other comprehensive income/(loss) (1,386) (3,144) 3,824 (706)
Retained earnings (deficit) (1,460) (9,067) 9,075 (1,452)
------------ ---------- --------- -----------
Total shareholders' equity (deficit) (12,287) 19,589 (31,710) (24,408)
------------ ---------- --------- -----------
Total liabilities and shareholders' equity (deficit) $ 220,809 $ 86,024 $ (31,776) $ 275,057
============ ========== ========= ===========
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MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
as of December 28, 1997
GUARANTOR NON-GUARANTOR MSXI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,449 $ 9,126 $ - $ 11,575
Receivables, net 130,404 48,534 - 178,938
Inventory 1,204 35 - 1,239
Prepaid expenses and other assets 2,106 3,532 - 5,638
Deferred income taxes 863 1,489 - 2,352
------------ ------- -------- ----------
Total current assets 137,026 62,716 - 199,742
Property and equipment, net 23,208 11,129 - 34,337
Goodwill, net 31,934 - - 31,934
Other assets 28,877 489 (20,583) 8,783
Deferred income taxes 11,036 1,344 - 12,380
------------ ------- -------- ----------
Total assets $ 232,081 $75,678 $(20,583) $ 287,176
============ ======= ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt $ 71,280 $16,650 $ - $ 87,930
Accounts payable 73,726 6,640 - 80,366
Accrued liabilities 31,752 6,171 (32) 37,891
Deferred income taxes - 984 - 984
------------ ------- -------- ----------
Total current liabilities 176,758 30,445 (32) 207,171
Long-term debt 65,000 - - 65,000
Intercompany accounts (31,389) 31,389 - -
Long-term capital lease obligations 316 - - 316
Long-term deferred compensation liability and other 4,654 399 - 5,053
------------ ------- -------- ----------
Total liabilities 215,339 62,233 (32) 277,540
------------ ------- -------- ----------
Redeemable Series A preferred stock 36,000 32 (32) 36,000
------------ ------- -------- ----------
Shareholders' equity (deficit):
Common stock 1 2,702 (2,702) 1
Additional paid-in capital (16,263) 19,154 (25,142) (22,251)
Accumulated other comprehensive income/(loss) (23) (3,598) 2,480 (1,141)
Retained earnings (deficit) (2,973) (4,845) 4,845 (2,973)
------------ ------- -------- ----------
Total shareholders' equity (deficit) (19,258) 13,413 (20,519) (26,364)
------------ ------- -------- ----------
Total liabilities and shareholders' equity (deficit) $ 232,081 $75,678 $(20,583) $ 287,176
============ ======= ======== ==========
10
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MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES: - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
for the fiscal quarters ended September 27, 1998 and September 28, 1997
1998
----------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MSI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------- ------------- ------------ ------------
(dollars in thousands)
Net sales $ 228,262 $ 45,121 $ - $ 273,383
Cost of sales (213,176) (38,758) (251,934)
------------ ------------ ----------- -----------
Gross profit 15,086 6,363 - 21,449
Selling, general and administrative expenses (10,216) (4,428) - (14,644)
Michigan Single Business Tax (990) - (990)
------------ ------------ ----------- -----------
Operating income 3,880 1,935 - 5,815
Interest expense, net (3,279) (984) (4,263)
Equity in subsidiary earnings 515 - (515) -
------------ ------------ ----------- -----------
Income before income taxes 1,116 951 (515) 1,552
Income tax provision 248 436 - 684
------------ ------------ ----------- -----------
Net Income $ 868 $ 515 $ (515) $ 868
============ ============ =========== ===========
1997
---------------------------------------------------------------------
Net sales $ 119,356 $ 24,599 $ - $ 143,955
Cost of sales (109,405) (21,807) - (131,212)
------------ ------------ ----------- -----------
Gross profit 9,951 2,792 - 12,743
Selling, general and administrative expenses (5,559) (2,865) - (8,424)
Michigan Single Business Tax (735) - - (735)
Restructuring costs (2,000) - - (2,000)
------------ ------------ ----------- -----------
Operating income (loss) 1,657 (73) - 1,584
Interest income (expense), net (3,386) 134 (3,252)
Equity in subsidiary earnings 25 - (25) -
------------ ------------ ----------- -----------
Income before income taxes (1,704) 61 (25) (1,668)
Income tax provision (benefit) (757) 36 - (721)
------------ ------------ ----------- -----------
Net income (loss) $ (947) $ 25 $ (25) $ (947)
============ ============ =========== ===========
11
13
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
for the fiscal nine-month periods ended September 27, 1998
and September 28, 1997
1998
------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR MSXI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------------- ------------- ----------- -------------
Net sales $ 663,802 $ 119,947 $ - $ 783,749
Cost of sales (621,523) (102,199) - (723,722)
-------------- ------------- -------- -------------
Gross profit 42,279 17,748 - 60,027
Selling, general and administrative expenses (28,214) (12,855) - (41,069)
Michigan Single Business Tax (2,733) - - (2,733)
-------------- ------------- -------- -------------
Operating income 11,332 4,893 - 16,225
Interest expense, net (10,238) (2,738) - (12,976)
Equity in subsidiary earnings 868 - (868) -
-------------- ------------- -------- -------------
Income before income taxes 1,962 2,155 (868) 3,249
Income tax provision 441 1,287 - 1,728
-------------- ------------- -------- -------------
Net income $ 1,521 $ 868 $ (868) $ 1,521
============== ============= ======== =============
1997
------------------------------------------------------------------------
Net sales $ 245,110 $ 65,390 $ - $ 310,500
Cost of sales (219,368) (58,782) - (278,150)
-------------- ------------- -------- -------------
Gross profit 25,742 6,608 - 32,350
Selling, general and administrative expenses (14,844) (7,416) - (22,260)
Michigan Single Business Tax (2,150) - - (2,150)
Restructuring costs (2,000) - - (2,000)
-------------- ------------- -------- -------------
Operating income (loss) 6,748 (808) - 5,940
Interest expense, net (7,318) (1,732) - (9,050)
Equity in subsidiary loss (1,780) - 1,780 -
-------------- ------------- -------- -------------
Loss before income taxes (2,350) (2,540) 1,780 (3,110)
Income tax benefit (330) (760) - (1,090)
-------------- ------------- -------- -------------
Net loss $ (2,020) $ (1,780) $ 1,780 $ (2,020)
============== ============= ======== =============
12
14
MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
for the fiscal nine-month period ended September 27, 1998
GUARANTOR NON-GUARANTOR MSXI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Cash from (used for) operating activities:
Net income $ 653 $ 868 $ - $ 1,521
Equity in earnings of subsidiaries 868 - (868) -
Adjustments to reconcile net income to net cash
from (used for) operating activities:
Depreciation 5,880 4,551 - 10,431
Amortization 975 24 - 999
Deferred taxes (1,306) (25) - (1,331)
(Gain) loss on sale of property and equipment 152 (28) - 124
(Increase) decrease in receivables, net 25,120 (5,726) - 19,394
(Increase) decrease in inventory (442) - - (442)
(Increase) decrease in prepaid expenses and
other assets (1,838) (2,291) - (4,129)
Increase (decrease) in current liabilities (14,520) 6,845 - (7,675)
Other, net (763) (18) 43 (738)
---------- ----------- -------- ----------
Net cash from (used for) operating activities 14,779 4,200 (825) 18,154
---------- ----------- -------- ----------
Cash from (used for) investing activities:
Capital expenditures (3,677) (5,071) - (8,748)
Acquisition of business, net - (3,783) - (3,783)
Proceeds from sale of property and equipment 274 412 - 686
---------- ----------- -------- ----------
Net cash from (used for) investing activities (3,403) (8,442) - (11,845)
---------- ----------- -------- ----------
Cash from (used for) financing activities:
Intercompany (6,143) 6,143 - -
Investment in subsidiaries 602 4,661 (5,263) -
Equity in subsidiaries (1,019) (3,697) 4,716 -
Proceeds from long-term debt issues 99,377 - - 99,377
Payment of long-term debt (81,444) (10,104) - (91,548)
Change in notes payable (24,552) (343) - (24,895)
Change in book overdraft 1,184 1,745 - 2,929
Other, net (300) 36 31 (233)
---------- ----------- -------- ----------
Net cash from (used for) financing activities (12,295) (1,559) (516) (14,370)
---------- ----------- -------- ----------
Effect of foreign exchange rate changes on cash (1,350) 444 1,341 435
---------- ----------- -------- ----------
Cash:
Decrease for the period (2,269) (5,357) - (7,626)
Balance, beginning of period 2,449 9,126 - 11,575
---------- ----------- -------- ----------
Balance, end of period $ 180 $ 3,769 $ - $ 3,949
========== =========== ======== ==========
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MSX INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(dollars in thousands unless otherwise noted)
8. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES: - (CONTINUED)
MSX INTERNATIONAL, INC.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
for the fiscal nine-month period ended September 28, 1997
GUARANTOR NON-GUARANTOR MSXI
SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Cash from (used for) operating activities:
Net income (loss) $ (240) $ (1,780) $ - $ (2,020)
Equity in earnings of subsidiaries (1,780) - 1,780 -
Adjustments to reconcile net income (loss) to net cash
from (used for) operating activities:
Depreciation 3,560 2,159 - 5,719
Amortization 630 - - 630
(Increase) decrease in receivables, net (14,242) (7,204) - (21,446)
(Increase) decrease in inventory (352) 2 - (350)
(Increase) decrease in prepaid expenses
and other assets (547) 232 - (315)
Increase (decrease) in current liabilities 24,041 (3,513) - 20,528
Other, net 3,219 (309) - 2,910
------------ ----------- ------------ ---------------
Net cash from (used for) operating activities 14,289 (10,413) 1,780 5,656
------------ ----------- ------------ ---------------
Cash from (used for) investing activities:
Capital expenditures (5,710) (2,510) - (8,220)
Acquisition of business, net (122,046) (37,173) - (159,219)
Investment in foreign subsidiaries (30,936) - 30,936 -
------------ ----------- ------------ ---------------
Net cash from (used for) investing activities (158,692) (39,683) 30,936 (167,439)
------------ ----------- ------------ ---------------
Cash from (used for) financing activities:
Intercompany (25,483) 25,483 - -
Investment in subsidiaries - 30,704 (30,704) -
Equity in subsidiaries 1,780 - (1,780) -
Proceeds from long-term debt issues 128,973 1,682 - 130,655
Sale of redeemable preferred stock 36,000 - - 36,000
Sale of common stock 3,800 232 (232) 3,800
Other, net (387) (15) - (402)
------------ ----------- ------------ ---------------
Net cash from (used for) financing activities 144,683 58,086 (32,716) 170,053
------------ ----------- ------------ ---------------
Effect of foreign exchange rate changes on cash - (1,960) - (1,960)
------------ ----------- ------------ ---------------
Cash:
Increase for the period 280 6,030 - 6,310
Balance, beginning of period - - - -
------------ ----------- ------------ ---------------
Balance, end of period $ 280 $ 6,030 $ - $ 6,310
============ ============= =========== ===============
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16
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
MSXI's net sales for the quarter ended September 27, 1998 increased $129.4
million (90%) from $144.0 million to $273.4 million, as compared to the fiscal
quarter ended September 28, 1997. For the fiscal nine months ended September 27,
1998, net sales increased $473.3 million (152%) from $310.5 million to $783.8
million, as compared to the fiscal nine months ended September 28, 1997. These
increases resulted principally from the GRI acquisition. In addition, net sales
for the quarter and fiscal year to date 1998 increased approximately 10% from
the comparable prior periods throughout the balance of the business.
Operating income for the fiscal quarter ended September 27, 1998 increased $4.2
million (267%) from $1.6 million to $5.8 million, as compared to the fiscal
quarter ended September 28, 1997. As a percent of net sales operating income
increased to 2.1% for the fiscal quarter ended September 28, 1998 from 1.1% for
the fiscal quarter ended September 28, 1997. For the fiscal nine months ended
September 27, 1998 operating income increased $10.3 million (173.1%) from $5.9
million to $16.2 million as compared to the fiscal nine months ended September
28, 1997. As a percent of net sales operating income increased to 2.1% for the
fiscal nine months ended September 27, 1998 from 1.9% for the fiscal nine months
ended September 28, 1997. The changes in operating income and operating income
as a percent of net sales for the 1998 periods as compared to the 1997 periods
are primarily due to the inclusion of the GRI businesses, which operate at a
lower gross profit margin on a higher volume of net sales, offset by the
reduction of selling, general and administrative expenses as a percentage of
sales. In addition, $2.0 million of the increase resulted from restructuring
costs recorded in the fiscal quarter ended September 28, 1997.
Net income for the fiscal quarter ended September 27, 1998 was $0.9 million
(0.3% of net sales) as compared to a net loss of $0.9 million (0.7% of net
sales) for the fiscal quarter ended September 28, 1997. For the fiscal nine
months ended September 27, 1998 net income was $1.5 million (0.2% of net sales)
as compared to a net loss of $2.0 million (0.7% of net sales) for the comparable
prior period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal capital requirements are for the acquisition of
businesses and capital expenditures. These requirements have been met through a
combination of bank debt, issuance of securities and cash from operations.
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17
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES - (CONTINUED)
During the fiscal nine months ended September 27, 1998 net cash provided from
operating activities was $18.2 million which resulted primarily from improved
accounts receivable collections. The cash provided was used to finance capital
expenditures and acquisitions of business of $12.5 million and repayment of bank
debt.
The Company's total indebtedness as of September 27, 1998 consists of Notes,
borrowings under the New Credit Facility, and borrowings under the Ford
Facility. On April 14, 1998, the Company amended and restated the New Credit
Facility to add a $30 million term loan portion. On the same date, the Company
borrowed the full amount available under the term loan and used the funds to
reduce outstanding bank balances under the revolving loan portion of the New
Credit Facility. The amount is classified as long-term debt as the Company has
both the ability and intent to refinance such amount under the New Credit
Facility.
OTHER MATTERS
On August 20, 1998, the Company consummated an offer to exchange 11-3/8% Senior
Subordinated Notes which had been registered under the Securities Act of 1933
for any and all outstanding Notes. The Company's Registration Statement on Form
S-4 with the Securities and Exchange Commission became effective on July 22,
1998.
On August 4, 1998, the Company acquired Gold Arrow Contract Services, Ltd.
("Gold Arrow"), a U.K. technical and information technology staffing services
company with annual sales of approximately $20 million. Funding for the
transaction was provided by borrowings under the New Credit Facility.
SUBSEQUENT EVENTS
In October 1998, the Company finalized the purchase price of the APX acquisition
dated November 6, 1996. This resulted in a favorable purchase price adjustment
of $4.9 million which was collected in October 1998.
Effective October 31, 1998 the Company acquired Lexstra International, Inc. and
Lexus Temporaries, Inc., providers of contract computer consultants, systems
analysts and network support personnel. The companies are headquartered in New
York, NY and have offices in Boston, MA, Red Banks, NJ and Silver Spring, MD.
The companies have combined annual sales of approximately $50 million. The
purchase price is $24 million with additional payments contingent on achieving
certain operating results for the years 1998 through 2000. Funding for the
transaction was provided by borrowings under the New Credit Facility.
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18
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
On December 27, 1997, Cambridge Industries, Inc. filed a complaint against the
Company in Michigan State Court. This complaint was settled in October, 1998
with no material effect to the Company.
INFLATION
Although the Company cannot anticipate future inflation, it does not believe
that inflation has had, or is likely in the forseeable future, to have a
material impact on its results of operations. While the Company's contracts
typically do not include automatic adjustments for inflation, the Ford Master
Vendor Agreement does provide for automatic adjustments for inflation for
services provided under the Master Vendor Program.
SEASONALITY
The Company's quarterly operating results are affected primarily by the number
of billing days in the quarter and the seasonality of its customers' businesses.
Demand for services of the Company have historically been lower during the
year-end holidays.
YEAR 2000
The Year 2000 ("Y2K") issue is the result of computer programs having been
written using two digits, rather than four, to define the applicable year. Any
of the Company's computers, computer programs and manufacturing and
administrative equipment that have date-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. If any of the Company's
systems or equipment that have date-sensitive software use only two digits,
system failures or miscalculations may result causing disruptions of operations,
including, among other things, a temporary inability to process transactions or
send and receive electronic data with third parties or engage in similar normal
business activities.
17
19
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
The Company, on a coordinated basis and with the assistance of consultants, is
addressing the Y2K issue. The Company's Y2K Methodology categorizes its assets
into four areas: applications, facility systems, PCs and peripherals, and third
party providers.
1. Applications have been classified depending on the associated business unit
or corporate sponsor. Managers are in place with responsibility for
prioritization, assessment, remediation planning and implementation, and
testing. Substantially all applications are projected for remediation by the
end of 1998. The balance of remediation and testing will be accomplished in
1999. Although there can be no assurances that the Company will identify and
correct every Y2K issue, the Company believes it has in place a
comprehensive program to identify, remediate and test all applicable
applications.
2. All facility systems (HVAC, Security, Phones etc.) have been inventoried
worldwide. Non-compliance reports will be distributed in the fourth fiscal
quarter of 1998. Business units will replace, retire or repair facility
systems as necessary.
3. PC's and peripherals have been inventoried worldwide. All PC's will be
upgraded to ensure hardware and software compliance by the second fiscal
quarter of 1999. All network operations hardware and software will be
upgraded and compliant by the first fiscal quarter of 1999.
4. Third party providers and key suppliers will be contacted in the fourth
fiscal quarter of 1998 and the first fiscal quarter of 1999 to determine
Y2K status. Contingency plans will be developed based on information
received. Additionally, preliminary contingency planning is
currently underway with emphasis on mission critical facilities and systems.
The ability of key service providers, such as utility companies, to
facilitate the Company's needs is of paramount importance. In some cases,
especially with respect to its utility vendors, alternative suppliers may
not be available.
For its information technology, the Company currently uses a mid-range,
non-mainframe based computer environment which is complemented by a series of
local-area networks ("LANs") that are connected via a wide-area network ("WAN").
Enabled versions of the Company's financial, human resource and business systems
are in place. The Company incorporates limited use of embedded technology.
The Company's most significant risks with respect to Y2K problems are: lost
revenue and damaged relations with Company's customers resulting from a delay in
the delivery of goods and services and the effect of shutting down production or
a customer facility. The Company believes the risks may be somewhat mitigated
as the majority of the Company's revenue is generated from the sale of business
systems, system technology and staffing services as opposed to the delivery of
manufactured product.
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20
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
The Company's cost for Y2K compliance in 1998 is estimated at $500,000. Cost for
1999 is expected to reach $2.0 million which includes upgrades, repair and
programming. As the Y2K project continues, the company may discover additional
Y2K problems, may not be able to develop, implement, or test remediation or
contingency plans, or may find that the costs of these activities exceed current
expectations. In many cases, the Company must rely on assurances from suppliers
that new and upgraded information systems as well as key services will be Y2K
compliant. While the Company plans to validate supplier representations, it
cannot be sure that its tests will be adequate, or that, if problems are
identified, they will be addressed in a timely and satisfactory manner. Even if
the Company, in a timely manner, completes all of its assessments, implements
and tests all remediation plans believed to be adequate, and develops
contingency plans believed to be adequate, some problems may not be identified
or corrected in time to prevent material adverse consequences or business
interruptions to the Company.
EURO CURRENCY
On January 1, 1999 the member states of the European Economic and Monetary Union
have agreed to adopt the Euro as their common legal currency. The existing
member state currencies are scheduled to remain legal tender as denominations of
the Euro until at least January 1, 2002 but not later than July 1, 2002. During
this transition period, monetary transactions may be settled using either the
Euro or the existing member state currencies.
The Company is in the process of implementing system software required for the
Euro currency conversion and does not anticipate the conversion to have a
significant impact on the operations, financial position or liquidity of its
European businesses.
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21
MSX INTERNATIONAL, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS - (CONTINUED)
FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "estimates," "will," "should,"
"plans" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. Such forward-looking
statements are not guarantees of future performance and involve significant
risks and uncertainties. Actual results may vary materially from those in the
forward-looking statements as a result of any number of factors, many of which
are beyond the control of management. These factors include, but are not limited
to, the Company's leverage, its reliance on major customers in the automotive
industry, the degree and nature of competition, the Company's ability to recruit
and place qualified personnel, risks associated with its acquisition strategy,
and employment liability risk. They are hereby incorporated by reference from
the risk factors and other factors included in the Company's Registration
Statement on Form S-4.
20
22
MSX INTERNATIONAL, INC.
PART II. OTHER INFORMATION
ITEM 1. On December 27, 1997, Cambridge Industries, Inc. filed a complaint
against the Company in Michigan State Court. This complaint was settled
in October, 1998 with no material effect to the Company.
ITEM 2. On August 14, 1998, Ralph L. Miller, Special Assistant to the Chairman
of the Board, completed the acquisition of certain shares of Class A
Common and Series A Preferred Stock from Citicorp Venture Capital, Ltd.
Mr. Miller did not borrow any portion of the purchase price from the
Company, as was indicated in the Company's Registration Statement on
Form S-4 dated July 22, 1998.
On October 1, 1998, the Company issued 1,000 shares of Class A Common
Stock to John Risk, President, Product Development Services Group, for
an aggregate purchase price of $40,000.
On October 31, 1998, the Company issued 1,000 shares of Class A Common
Stock to Don Springer, Vice President, Business and Technology
Services, for an aggregate purchase price of $40,000.
On November 4, 1999, the Company issued 1,000 shares of Class A Common
Stock to Erwin H. Billig, Chief Executive Officer and Chairman of the
Board of Directors, for an aggregate purchase price of $40,000.
ITEM 3. Not applicable.
ITEM 4. Not applicable.
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23
MSX INTERNATIONAL, INC.
PART II. OTHER INFORMATION (CONTINUED)
Item 5. ACQUISITION OR DISPOSITION OF ASSETS
Effective October 31, 1998, the Company consummated its acquisition of
Lexstra International, Inc, and Lexus Temporaries, Inc.
("Lexstra\Lexus") pursuant to an Asset Purchase Agreement dated as of
October 23, 1998. Under the Asset Purchase Agreement, a wholly-owned
subsidiary of MSX International, Inc. purchased substantially all of
Lexstra\Lexus' assets and assumed substantially all operating
liabilities (the "Acquisition"). The Company did not assume any bank
debt. The total purchase price for these net assets was $24 million at
the closing with additional payments contingent on achieving certain
operating results for the years 1998 through 2000. The Acquisition was
initially announced on October 27, 1998 and will be accounted for under
the purchase method of accounting. Funding for the transaction was
provided by borrowings under the New Credit Facility.
Lexus\Lexstra are providers of contract computer consultants, systems
analysts, and network support personnel. The companies are
headquartered in New York, NY and have locations in Boston, MA, Red
Bank, NJ, and Silver Spring, MD. The combined annual revenue of the two
companies is approximately $50 million. Larry Levine, president of
Lexstra International, Inc., and Karen Suss, vice president of Lexus
Temporaries, Inc., who founded the companies in 1991, will continue in
their senior management roles.
It is presently impracticable to provide the financial statements and
the pro forma financial information required to be included herein with
respect to the businesses acquired. Such financial statements and pro
forma information will be filed under cover of Form 8-K as soon as
practicable, and in no event later than January 11, 1999.
22
24
MSX INTERNATIONAL, INC.
PART II. OTHER INFORMATION (CONTINUED)
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 10 - Asset Purchase Agreement dated October 23, 1998
Exhibit 12 - Computation of Ratio of Earnings to Fixed
Charges
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
1. A Report on Form 8-K dated October 28, 1998 was filed by
MSX International, Inc. reporting under Item 5. "Other
Events" regarding the announcement of the acquisition of
Lexstra International, Inc. and Lexus Temporaries, Inc.
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.
MSX INTERNATIONAL, INC.
(Registrant)
Date: November 11, 1998
By: /s/ Frederick K. Mintum
Frederick K. Mintum
Executive Vice President and
Chief Financial Officer
(Chief accounting officer
and authorized signatory)
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25
MSX INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit Sequential Page No.
- ------- -------------------
Exhibit 10- Asset Purchase Agreement dated October 23,1998 between MSX
International Engineering Services, Inc.; Lexstra International,
Inc.; and Lexus Temporaries, Inc.
Exhibit 12 - Computation of Ratio of Earnings to Fixed Charges
Exhibit 27 - Financial Data Schedule
24