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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission file number 1-10218

Collins & Aikman Corporation

250 Stephenson Highway

(248) 824-2500

     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 þ          No o.

      As of July 31, 2002, the number of outstanding shares of the Registrant’s common stock, $.01 par value, was 83,630,087 shares.

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Item 1.     Financial Statements.

COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES

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

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COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES

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

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COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES

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

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COLLINS & AIKMAN CORPORATION AND SUBSIDIARIES

      Collins & Aikman Corporation (the “Company”) is a Delaware corporation, headquartered in Troy, Michigan. The Company conducts all of its operating activities through its wholly owned Collins & Aikman Products Co. (“Products”) subsidiary. The Company is a global leader in design, engineering and manufacturing of automotive interior components, including instrument panels, fully assembled cockpit modules, floor and acoustic systems, automotive fabric, interior trim and convertible top systems. The Company operates through three divisions: North American Automotive Interior Systems, European and Rest of World Automotive Interior Systems and Specialty Automotive Products.

2.     Basis of Presentation

     a.     Basis of Presentation

      The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments necessary for a fair presentation of financial position and results of operations. Certain prior year items have been reclassified to conform to the 2002 presentation. Results of operations for interim periods are not necessarily indicative of results for the full year. The accompanying consolidated financial statements and footnotes should be read in conjunction with the Company’s 2001 Annual Report on Form 10-K/A.

     b.     Reverse Stock Split

      On May 28, 2002, the Company effected a one-for-2.5 reverse stock split of C&A common stock. All shares and per share data have been adjusted retroactively for all periods presented to reflect the stock split.

     c.     Other Income and Other Expense

      For the quarter ended and six months ended June 30, 2002, “other income” related primarily to $12.1 million of foreign currency transaction gains. “Other expense” related primarily to $11.5 million of losses related to derivatives used in the Company’s foreign currency hedging strategy and substantially offset the foreign currency transaction gains included in other income.

      For the quarter ended June 30, 2001, “other expense” related primarily to $3.0 million of losses related to a sale-leaseback transaction. For the six months ended June 30, 2001, “other income” related primarily to $4.6 million of gains related to derivatives used in the Company’s foreign currency hedging strategy. “Other expense” related primarily to $6.5 million of foreign currency transaction losses and $3.0 million of losses related to a sale-leaseback transaction.

3.     Acquisitions and Goodwill

     a.     Acquisitions

      The Company completed its acquisitions of Textron Automotive Company’s automotive trim division (“TAC-Trim”) in December 2001, the automotive fabric operations of Joan Fabrics and all of the operating assets in Joan Fabric’s affiliated yarn dying operation Western Avenue Dyers (collectively “Joan”) in September 2001, and Becker Group, LLC (“Becker”) a supplier of plastic components to the automotive industry in July 2001. The results of operations of the acquired companies are included in the Company’s consolidated statements of operations from the dates of acquisition.

      Appraisals for Becker and Joan were performed during 2001 and the related allocation of purchase price was completed. In the second quarter 2002, the Company’s external consultants completed the valuations of all TAC-Trim acquired intangible and fixed assets. Based upon these valuations: 1) an intangible asset of $51.0 million for customer contracts was recorded based on the value of individual customer contracts — these

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)

intangible assets are being amortized over the contract’s performance period, which extends through 2012; 2) the Company revised its first quarter estimate for specifically identifiable intangible assets acquired as part of the Tac-Trim purchase from $40.0 to $24.0 million (the weighted average lives increased from 7 to 10 years; and 3) the valuations also resulted in a $31.7 million increase in fixed assets and adjustment of their useful lives. The allocation of the purchase price for the TAC-Trim acquisition is substantially complete but may be revised based upon the Company’s final review of valuations prepared by external consultants. This review is not expected to result in significant adjustments. The Becker, Joan and TAC-Trim acquisitions are intended to solidify the Company’s position as a premier supplier of interior components and automotive fabrics.

     b.     Goodwill

      During the second quarter of 2002, the Company completed the implementation of SFAS 142, “Goodwill and Other Intangible Assets”. Under SFAS 142, goodwill is no longer amortized. Instead, goodwill and indefinite-lived intangible assets are tested for impairment in accordance with the provisions of SFAS 142. In accordance with its impairment policy, the Company employed a discounted cash flow analysis in conducting its impairment tests. The Company completed its impairment test and recorded an impairment loss of $11.7 million (having no tax impact), or $0.17 per average basic and diluted share relating to the UK Plastics business in the European and Rest of World Automotive Systems segment. The impairment loss was reported as a cumulative effect of a change in accounting principle and, therefore, is accounted for as if it occurred on January 1, 2002.

      In accordance with the provisions of SFAS 142, the Company did not amortize goodwill for the quarter and six month periods ended June 30, 2002. If goodwill amortization had not been recorded for the quarter and six months ended June 30, 2001, net income would have increased $1.6 and $3.2 million to an adjusted net income of $10.8 and $5.0 million, respectively. The related earnings per share for the quarter and six months ended June 30, 2001 would have increased $0.05 and $0.11 per share resulting in adjusted income per share of $0.31 and $0.16 for each period, respectively.

      The changes in the carrying amounts of goodwill for the six months ended June 30, 2002 were as follows (in millions):

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     c.     Acquired Intangible Assets

      The components of the Company’s acquired amortizable intangible assets as of June 30, 2002 were as follows (in millions):

4.     Inventories

      Inventory balances are summarized below (in millions):

5.     Customer Engineering and Tooling

      The Company had assets of approximately $10.6 million and $22.7 million recognized pursuant to agreements that provide for contractual reimbursement of pre-production design and development costs at June 30, 2002 and December 31, 2001, respectively. The Company also capitalized $67.7 million and $90.2 million in costs, for molds, dies and other tools, at June 30, 2002 and December 31, 2001, respectively, that are reimbursable by customers. In addition, the Company had $10.3 million and $9.1 million at June 30, 2002 and December 31, 2001, respectively, for molds, dies and other tools that the Company owns.

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6.     Long-term Debt, Mandatorily Redeemable Preferred Stock of Subsidiary and Common Stock

     a.     Long-term Debt

      Long-term debt is summarized below (in millions):

      The weighted average rate of interest on the Senior Credit Facilities at June 30, 2002 and December 31, 2001 was 6.94% and 7.67%, respectively.

      The Senior Credit Facilities contain restrictive covenants including maintenance of interest coverage and leverage ratios and various other restrictive covenants that are customary for such facilities. The covenants of the Senior Credit Facilities limit investments, dividends or other distributions of capital stock, capital expenditures, the purchase of subsidiary preferred stock, the prepayment of debt other than loans under the senior facilities, liens and certain lease transactions.

      In December 2001, Products issued 10 3/4% Senior Notes, due 2011 in a total principal amount of $500.0 million. The notes were not registered under the Securities Act of 1933 and were offered only to qualified institutional buyers. In April 2002, the Company filed a registration statement with the Securities and Exchange Commission for an exchange offer of a new issue of 10 3/4% Senior Notes, due 2011 of Products in exchange for the outstanding Senior Notes of Products. The exchange offer raised no new proceeds for the Company and was made in accordance with contractual commitments arising from the December 2001 issuance. The exchange offer allowed the Senior Notes, due 2011 to be transferred without restriction.

     b.     Mandatorily Redeemable Preferred Stock of Subsidiary

      In December 2001, Products issued 182,700 shares of its Series A Redeemable Preferred Stock, 123,700 shares of Series B Redeemable Preferred Stock and 20,000 shares of Series C Redeemable Preferred Stock. The Preferred Stock was recorded at fair value, which was less than the liquidation value of $1,000 per share or $326.4 million. The estimated fair value of $146.9 million was based on market prices for securities with similar terms, maturities and risk characteristics, and included a liquidation discount to reflect market conditions and was agreed to by the Company and Textron as part of the TAC-Trim purchase agreement. The difference between the initial recorded value and the liquidation value is being accreted over the 11 year terms of the securities. The results for the quarter and six months ended June 30, 2002, included subsidiary preferred stock requirements calculated using the effective interest method of $10.8 million and $22.0 million, respectively. The preferred stock requirement includes both accretion and dividend costs of $2.0 million and $8.8 million, respectively, for the quarter ended June 30, 2002 and $3.9 million and $18.1 million, respectively,

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for the six months ended June 30, 2002. The carrying value of the Redeemable Preferred Stock includes accretion and accrued dividends.

      In June 2002, $100.0 million of proceeds, from the 16 million share common stock offering, was used to repurchase Series A preferred stock at a price of 75% of its liquidation preference of $133.3 million. The redeemed Series A preferred stock had a carrying value of $63.7 million. In accordance with generally accepted accounting principles, the difference between the $63.7 million reduction in carrying value and the $100.0 million cash payment was excluded from net income and recorded directly to equity in the Company’s accumulated deficit account. Although this $36.3 million equity charge is excluded from net income, the charge is included in the computation of earnings/(loss) per share and is included in the net loss available to common shareholders.

     c.     Common Stock

      In April 2002, the Company issued 400,000 shares of common stock as part of the purchase of a lamination company wholly owned by Mr. McCallum (a current director and shareholder of the Company). In June the Company issued 16 million shares of common stock for $160 million before expense. The Company used $100 million of the $152 million in net proceeds to redeem $133 million of face value Series A Redeemable Preferred Stock and the remainder for general corporate purposes.

7.     Receivables Facility

      The Receivables Facility utilizes funding provided by commercial paper conduits. Carcorp, Inc. (“Carcorp”), a wholly owned, bankruptcy-remote subsidiary of Products, purchases virtually all trade receivables generated by Products and certain of its subsidiaries (the “Sellers”) in the United States and Canada. Carcorp may transfer rights to collections on those receivables to the conduits. The conduits in turn issue commercial paper, which is collateralized by those rights. The Receivables Facility has a 364-day term expiring in December 2002. The company is in the process of amending this facility to expand its size and lengthen its term.

      The maximum funding available to the Company on a revolving basis under the Receivables Facility was $250.0 million. The funding available under the facility depends primarily on the amount of receivables generated by the Sellers from sales, the rate of collection on those receivables and other characteristics of those receivables that affect their eligibility (such as a credit rating downgrade below investment grade of the obligor, delinquency and excessive concentration). The Company retains the receivables servicing responsibility.

      As of June 30, 2002, the Company’s funding under the Receivables Facility was zero with approximately $205.8 million available but unutilized. At December 31, 2001, the Company funded $79.9 million through the facility with $118.6 million available but unutilized. The discount on sold interests is equal to the interest rate paid by the conduits to the holders of the commercial paper plus a usage fee. The discount rate at June 30, 2002, was 3.37% compared to 3.50% at December 31, 2001. The usage fee under the facility is 1.50%. In addition, the Company is required to pay a fee of 0.50% on the unused portion of the facility.

      As of June 30, 2002 and December 31, 2001, Carcorp’s total receivables pool was $332.9 million and $334.6 million, respectively. When the Company sells receivables to Carcorp, it retains a subordinated interest in the receivables sold.

8.     Discontinued Operations

      During the second quarters of 2002 and 2001, the Company received payment on environmental claims related to discontinued operations, for which reserves were previously charged, and received proceeds of

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$15.8 million and $12.2 million, respectively. Of these amounts, $9.5 million and $7.4 million were recorded as income from discontinued operations in the second quarter of 2002 and 2001, respectively, net of income taxes of $6.3 million and $4.8 million, respectively.

      During fiscal 2000, the Company settled claims for certain environmental matters related to discontinued operations for a total of $20 million. Settlement proceeds were paid to the Company in three installments. The first and second installments of $7.5 million and $7.5 million were received in June 2000 and June 2001, respectively with the third installment of $5.0 million received in June 2002. Of the total $20 million settlement, the Company recorded the present value of the settlement as $7.0 million of additional environmental reserves, based on its assessment of potential environmental exposures.

9.     Restructuring

      In the first quarter of 2002, the Company undertook a restructuring program to rationalize operations in North America, Europe and Specialty operations that resulted in a restructuring charge of $9.1 million. This restructuring included $5.5 million of cash severance costs and $3.6 million of costs related to the establishment of reserves for lease commitments and lease termination fees. The Company incurred severance costs for over 100 personnel primarily at the Company’s North America and European headquarters and additional reductions at its Specialty operations. The reserve for lease commitments relates to contractual obligations for the Company’s former headquarters facility, while the termination fees relate to an aircraft lease on an aircraft that the company is no longer using. The company relocated its headquarters to its new resource center in order to optimize and consolidate corporate operations. Activity in the second quarter 2002, related to the restructuring programs is as follows (in millions):

(a)	Deductions, representing cash utilized.

      The Company believes that remaining payments related to these restructuring charges will occur over the remainder of the current year.

10.     Related Party Transactions

      The Company entered into a lease agreement with Becker Ventures, an entity controlled by one of the Company’s current directors and shareholders, for the Company’s headquarters at 250 Stephenson Highway, Troy, Michigan with the effective date of the lease being January 1, 2002. In March, 2002, the Company entered into lease agreements with Becker Ventures, effective January 1, 2002, for 150 Stephenson Highway and 350 Stephenson Highway, Troy, Michigan. The base rent for all three premises is $13.25 per sq. ft. Total square footage for all three locations is approximately 286,000. The leases have 20-year terms, and the Company has two five-year renewal options. The 2002 cost for the facilities will be approximately $2.4 million. For the quarter and six months ended June 30, 2002, the Company recorded a total cost of $5.6 million and $8.7 million, respectively, for rental expenses with related parties.

      On April 12, 2002, the Company signed and closed on a merger agreement with Mr. McCallum (a current director and shareholder of the Company) and a lamination company wholly owned by Mr. McCallum, pursuant to which the acquired company was merged into a wholly owned subsidiary of the Company. As consideration in the transaction, Mr. McCallum received 400,000 shares of Common Stock and $2.5 million in cash. Pursuant to the merger agreement, debt owing to Mr. McCallum of $6.7 million was also repaid. The Company acquired the lamination business to optimize the supply chain on certain of its fabric products and provide low cost lamination products and services to Tier-1 customers.

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11.     Information About the Company’s Operations

      The Company primarily supplies automotive interior systems — textile and plastic products, acoustics and convertible top systems to the global automotive industry.

      North American Automotive Interior Systems (NAAIS) and European and Rest of World Automotive Interior Systems (Europe and ROW) include the following product groups: molded floor carpet, luggage compartment trim, acoustical products, accessory floormats and plastic-based interior trim modules, systems and components. The Specialty Automotive Products (Specialty) division includes automotive fabrics and convertible top systems. The three divisions also produce other automotive and non-automotive products.

      The Company evaluates performance based on operating profit or loss.

      Information about the Company’s divisions are presented below (in millions):

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(a)

Other includes the Company’s non-operating units, the effect of eliminating entries and restructuring charges. During 2002, certain costs that were previously included at the divisional units were included as non-operating costs. In order for the information to be comparable, all non-operating costs have been allocated back to the segments based on sales and assets. For 2002, $70.9 million, $8.2 million and $16.3 million of costs were allocated back to NAAIS, Europe and ROW and Specialty, respectively.

      Sales for the Company’s primary product groups are as follows (in millions):