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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 October 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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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

1.     Organization

      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 accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries and in the opinion of management, contain all adjustments, including adjustments of a normal and recurring nature, 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 Expense, net

      For the quarter ended September 30, 2002, “other expense, net” related primarily to $1.8 million of losses from an investment in a joint venture and $1.4 million of foreign currency transaction losses, reduced by minority interest share of losses of a consolidated subsidiary of $1.6 million. For the nine months ended September 30, 2002, “other expense, net” related primarily to $12.6 million of losses related to derivatives used in the Company’s foreign currency hedging strategy and $4.1 million of losses from an investment in a joint venture, reduced by $3.7 million of foreign currency transaction gains and minority interest share of losses of a consolidated subsidiary of $2.6 million.

      For the quarter and nine months ended September 30, 2001, “other expense, net” related primarily to foreign currency transaction losses of $2.4 million and $9.0 million, respectively, losses related to a sale-leaseback transaction of $3.0 million for the nine months ended, reduced by gains related to derivatives used in the Company’s foreign currency hedging strategy of $1.4 and $6.0 million, respectively.

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     d.     Impact of Prior Period Adjustment

      During the Company’s review of its financial information, an error in the mathematical computation of foreign currency exchange gains was discovered. The third quarter 2002 financial statements reflect the correction of the error as a prior period adjustment. The impact of the adjustment on the prior period financial statements follows:

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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 intangible assets are being amortized over the contract’s performance period, which extends through 2012; 2) the Company revised its first quarter estimate for patents and other 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) In June 2002, the valuations resulted in a $30.1 million increase in fixed assets and adjustment of their useful lives. In September 2002, the Company revised its valuation resulting in a $27.7 million increase in fixed assets and adjustment of their useful lives, based upon revised information from external consultants. 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 $0.16 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 nine month periods ended September 30, 2002. If goodwill amortization had not been recorded for the quarter and nine months ended September 30, 2001, net loss would have decreased $1.6 and $4.8 million to an adjusted net loss of $10.8 and $5.8 million, respectively. The related loss per share for the quarter and nine months ended September 30, 2001 would have decreased $0.04 and $0.14 per share resulting in adjusted loss per share of $0.25 and $0.16 for each period, respectively.

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

(A)	The Company and Textron finalized the purchase price and related working capital adjustments in May 2002 and paid Textron $15.5 million in cash.
(B)	Includes effect of foreign currency translation.

     c.     Intangible Assets

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

4.     Inventories

      Inventory balances are summarized below (in millions):

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5.     Customer Engineering and Tooling

      The Company had assets of approximately $9.5 million and $22.7 million recognized pursuant to agreements that provide for contractual reimbursement of pre-production design and development costs at September 30, 2002 and December 31, 2001, respectively. The Company also capitalized $57.7 million and $90.2 million in costs, for molds, dies and other tools, at September 30, 2002 and December 31, 2001, respectively, that are reimbursable by customers. In addition, the Company had $9.3 million and $9.1 million at September 30, 2002 and December 31, 2001, respectively, for molds, dies and other tools that the Company owns.

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 both September 30, 2002 and December 31, 2001 was 6.94%.

      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 June 2002, the Company effected and registered an exchange offer of a new and identical 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.

     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 of $146.9, which was less than the liquidation value of $1,000 per share or $326.4 million. The estimated fair value was based on market prices for securities with

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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 nine months ended September 30, 2002, included subsidiary preferred stock requirements calculated using the effective interest method of $8.0 million and $30.0 million, respectively. The preferred stock requirement includes both accretion and dividend costs of $1.8 million and $6.2 million, respectively, for the quarter ended September 30, 2002 and $5.6 million and $24.4 million, respectively, for the nine months ended September 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 in carrying value and the $100.0 million cash payment was excluded from net income and recorded as a charge to equity in the Company’s accumulated deficit account. This $36.3 million equity 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 a current director and shareholder of the Company. In June, the Company issued 16 million shares of common stock for $160 million before expenses. 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. The Company issued 5,182,930 options during the year and repriced 854,000 options that had an original average exercise price of $14.05 to an exercise price of $10.00.

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. In September 2002, the Company amended the Receivables Facility lengthening its term to expire in December 2004.

      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 of the obligor, delinquency and excess concentration). The Company retains the receivables servicing responsibility.

      As of September 30, 2002, the utilization of the Receivables Facility was zero but there was approximately $149.9 million of available but unutilized funding. At December 31, 2001, utilization of the Receivables Facility was $79.9 million and an additional $118.6 million of funding was 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 September 30, 2002 was 3.32% compared to 3.53% 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.

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      As of September 30, 2002 and December 31, 2001, Carcorp’s total receivables pool was $271.8 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 proceeds of $15.8 million and $12.2 million, respectively, on environmental claims related to discontinued operations, for which reserves were previously charged. 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.

      In addition, during the third quarter of 2001, the Company received payment of $2.3 million on environmental claims related to discontinued operations. Of this amount $1.4 million, net of taxes of $0.9 million, was recorded as income from discontinued operations in the quarter ended September 30, 2001.

      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 and final 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 third quarter of 2002, the Company undertook a restructuring program primarily to realign the operations in North America that resulted in a restructuring charge of $33.8 million. This restructuring charge included $23.8 million of severance costs, $1.3 million of costs related to the establishment of reserves for lease commitments and lease termination fees, and $8.7 million of costs related to fixed asset impairments. The severance costs related to over 700 personnel.

      Included in the third quarter 2002 restructuring charge severance costs was $8.9 million related to the separation agreement with Thomas Evans the former Chairman and CEO. In August 2002, the Company’s Board of Directors appointed Jerry L. Mosingo as President, Chief Executive Officer (CEO) and Director of the Company. Mr. Mosingo replaced Thomas E. Evans, the Company’s previous Chairman and CEO, as CEO. Under the terms of his separation agreement, Mr. Evans received $5.5 million on August 15, and will receive quarterly payments of $0.3 million through June 30, 2004.

      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.

      In 2002, the Company also reserved for costs incurred as a result of acquisitions. The balance reserved totaled $12.5 million for lease costs an employee severance costs.

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      Activity in the third quarter 2002, related to the restructuring programs is as follows (in millions):

(a)	Deductions, representing cash utilized.

      The remaining severance payments related to these restructurings will be paid by 2004.

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 nine months ended September 30, 2002, the Company recorded a total cost of $5.2 million and $14.0 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 was repaid $2.5 million in cash as reimbursement for amounts invested to fund the company’s working capital needs. Subsequent to the merger, debt owing to Mr. McCallum of $6.7 million was 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.

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.

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