10-Q 1 gk10q1203edg.txt GOLD KIST INC. FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 27, 2003 Commission File Number 2-62681 GOLD KIST INC. (Exact name of registrant as specified in its charter) GEORGIA 58-0255560 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 244 Perimeter Center Parkway, N.E., Atlanta, Georgia 30346 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code(770) 393-5000 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X GOLD KIST INC. INDEX Page No. Part I. Financial Information Item 1. Unaudited Financial Statements Consolidated Balance Sheets - June 28, 2003 and December 27, 2003 1 Consolidated Statements of Operations - Three Months and Six Months Ended December 28, 2002 and December 27, 2003 2 Consolidated Statements of Cash Flows - Six Months Ended December 28, 2002 and December 27, 2003 3 Notes to Consolidated Financial Statements 4 - 7 Item 2. Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition 8 - 16 Item 3. Quantitative and Qualitative Disclosure About Market Risks 17 Item 4. Controls and Procedures 17 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 18 Page 1 Item 1. Financial GOLD KIST INC. Statements CONSOLIDATED BALANCE SHEETS (Amounts in Thousands) (Unaudited)

Page 2 GOLD KIST INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in Thousands) (Unaudited)

Page 3 GOLD KIST INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)

Page 4 GOLD KIST INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands) (Unaudited) 1. The accompanying unaudited consolidated financial statements reflect the accounts of Gold Kist Inc. and its subsidiaries ("Gold Kist", the "Company" or the "Association") as of December 27, 2003 and for the three and six months ended December 27, 2003. These consolidated financial statements should be read in conjunction with Management's Discussion and Analysis of Results of Operations and Financial Condition and the Notes to Consolidated Financial Statements of Gold Kist's Annual Report in the previously filed Form 10-K for the fiscal year ended June 28, 2003. The Association employs a 52/53 week fiscal year. Fiscal 2004 will be a 52-week year and fiscal 2003 was also a 52-week year with each quarter in both periods consisting of 13 weeks. 2. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, the results of operations, and the cash flows of the Company. All significant intercompany balances and transactions have been eliminated in consolidation. Results of operations for interim periods are not necessarily indicative of results for the entire fiscal year. 3. Comprehensive income (loss) was $(28,048) and $4,371 for the three months ended December 28, 2002 and December 27, 2003, respectively, and $(54,196) and $28,824 for the six months ended December 28, 2002 and December 27, 2003, respectively. 4. Revenue is recognized upon shipment and transfer of ownership of the product to the customer. Revenue is recorded net of any discounts, allowances or promotions. Estimates for any special pricing arrangements, promotions or other volume-based incentives are recorded upon shipment of the product in accordance with the terms of the promotion, allowance or pricing arrangements. 5. Inventories consist of the following:

The Company has historically accounted for marketable products inventory principally at selling prices less estimated brokerage, freight and certain other selling costs where applicable (estimated net realizable value). The Company has begun to focus its growth efforts and production on further-processed or value-added poultry products and anticipates that an increasing amount of its poultry sales will be from further-processed products. As such, the Company began accounting for its marketable products inventory at the lower of cost or market during the second quarter of fiscal 2004. Page 5 6. Depreciation and amortization included in cost of goods sold in the accompanying consolidated statements of operations were $8.7 million and $17.7 million for the three and six months ended December 28, 2002, respectively, and $8.6 million and $17.2 million for the three and six months ended December 27, 2003, respectively. 7. At June 28, 2003, the Association had a minimum pension liability of $43.4 million, net of the deferred tax benefit of $25.9 million. The minimum pension liability, net of deferred taxes, has been included as a component of patrons' and other equity in accumulated other comprehensive loss. At December 27, 2003, the cumulative minimum pension liability included in accumulated other comprehensive loss was $41.5 million, net of the deferred tax benefit of $24.7 million. 8. In October 1998, the Association completed the sale of assets of its Agri-Services business to Southern States Cooperative, Inc. (SSC). In order to complete the transaction, the Association committed to purchase from SSC, subject to certain terms and conditions, up to $60 million in principal amount of capital trust securities and $40 million in principal amount of cumulative preferred securities if SSC was unable to market the securities to other purchasers. In October 1999, the Company purchased for $98.6 million the $100 million principal amount of the securities under this commitment. No dividends from the cumulative preferred securities have been received since the quarterly payment received in January 2002. The SSC capital trust securities have a fixed maturity and therefore are considered to be subject to the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115). The SSC preferred stock securities are considered outside the scope of SFAS 115 and are accounted for at cost as they do not have a fixed maturity, are not redeemable by Gold Kist, and do not have a readily determinable fair value. In October 2002, SSC notified the Association that, pursuant to the provisions of the indenture under which the Association purchased the capital trust securities, SSC would defer the quarterly interest payment due on October 5, 2002. All subsequent quarterly interest payments have also been deferred. The terms of the capital trust securities allow for the deferral of quarterly interest payments for up to 20 quarters, with any deferred payments bearing interest at 10.75%. As a result of the deferral of the interest payments, the Association followed the guidance of paragraph 16 of SFAS 115 and reduced the carrying value of the capital trust securities by $24.1 million with a corresponding charge against margins from operations before income taxes for the six months ended December 28, 2002. Page 6 As of December 31, 2003, SSC's total stockholders' and patrons' equity fell below the Association's carrying value of the preferred stock investment, which the Company believes is a triggering event indicating impairment. The Association valued the preferred securities based on a discounted cash flow approach and recorded an "other-than-temporary" impairment charge of $18.5 million for the three and six months ended December 27, 2003. The carrying value of the SSC securities was $57.3 million at June 28, 2003 and $38.8 million on December 27, 2003. As interest rates and market conditions change, the carrying value of the securities could be further reduced. Also, the proceeds from any future sale of the SSC securities could differ from these estimates. If these events were to occur, they could have a material impact on results of operations and financial position of the Association. Gold Kist is permitted to sell the SSC securities pursuant to applicable securities regulations and the terms of the securities. The SSC securities are classified as noncurrent assets - investments in the accompanying consolidated balance sheets at June 28 and December 27, 2003. 9. On September 27, 2002, the Company refinanced and extended its Senior Secured Credit Facility to include a $110 million Revolving Credit Facility maturing November 2004 and a $95 million Term Loan maturing November 2005. The interest rates on the facility range from 1.50% to 2.25% over the London Interbank Offered Rate (LIBOR), adjusted quarterly based on the Association's financial condition. Other terms and conditions were essentially unchanged. The terms and conditions on the $45 million five-year Term Loan due November 2005 were also unchanged. In February 2003, the Company amended its Senior Secured Credit Facility and entered into a Temporary Revolving Credit Facility to provide up to $35 million of incremental liquidity. The Temporary Revolving Credit Facility matured on September 30, 2003 with no outstanding balance. At December 27, 2003, the Association was in compliance or had obtained waivers for all applicable loan covenants under its credit facilities. 10. The Company announced the closing of a poultry processing facility on September 3, 2003 and wrote down the carrying value of the related assets by $2.5 million to the expected sales price less costs of disposal. Additional charges of $1 million were also taken in the first quarter of fiscal 2004, primarily related to employee severance amounts, which were paid during the quarter ended December 27, 2003. No significant additional charges were taken in the second quarter of fiscal 2004. 11. Pension expense included in the statement of operations was $1.9 million and $3.8 million for the three and six months ended December 27, 2003, respectively. Pension expense included in the statement of operations was $55 thousand and $109 thousand for the three and six months ended December 28, 2002, respectively. Page 7 Effective January 1, 2004, the Association's qualified pension plan was prospectively amended. For benefits earned in calendar 2004 and future years, the basic pension formula was changed from 50% to 45% of final average earnings, early retirement benefits were reduced, and the lump sum distribution option is no longer available. The pension benefits earned by employees through 2003 were unchanged. The Association anticipates an estimated $10.0 million of pension settlement accounting expense in the six months ended June 26, 2004 as a result of expected lump sum distribution payments to electing retiring employees exceeding service and interest cost components of pension expense in the plan year. There was no pension settlement accounting expense in the statements of operations for any of the periods ended December 2003 and 2002. 12. Gold Kist is a party to various other legal, environmental and administrative proceedings, all of which management believes constitute ordinary routine litigation incidental to the business conducted by the Company and are not material in amount. Page 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION General After two decades of rapid growth, the broiler industry is maturing and will be dependent on new and value-added product development, as well as expanded export opportunities for continued revenue growth. Production and operating efficiencies will also be necessary for increased profitability. In addition, the industry is undergoing consolidation as a number of acquisitions and mergers have occurred in the last five years. The market share of the top five U.S. firms in terms of ready-to-cook broiler meat production has increased from 49% to 59.8% during that period, and we expect this trend to continue. The industry has experienced volatility in results of operations over the last five years and expects the volatility to continue in the foreseeable future. Volatility in results of operations is generally attributable to fluctuations, which can be substantial, in broiler sales prices and cost of feed grains. Broiler sales prices tend to fluctuate due to supply of chicken, viability of export markets, supply and prices of competing meats and proteins, animal health factors in the global meat complex and general economic conditions. According to the USDA World Agricultural Outlook Board, the forecast for calendar 2003 U.S. broiler meat production is 32.288 billion pounds, ready-to- cook weight, which is a 0.91% increase from the 31.895 billion pounds produced in calendar 2002. This is the smallest increase in broiler production for the industry in recent history, and has led to improved broiler market prices in the six-month period ended December 27, 2003. Heavier bird weights slightly offset lower egg sets and chick placements. The estimate for calendar 2004 broiler meat production is 33.25 billion pounds, which is a 2.98% increase from the calendar 2003 forecast. Subject to the supplies of competing meats, the status of export markets and other factors, we believe this increase in supply, which is below historical averages for years prior to 2003, should continue to contribute to improved broiler sales prices in fiscal 2004 compared to average prices for the year ended June 28, 2003. However, current broiler sales prices are approaching their highest levels since 1999 and are not expected to continue at these levels. Gold Kist's poultry export sales historically have been less than 10% of total net sales. The poultry industry historically has exported 15% to 20% of domestic production, principally dark meat products. Any disruption in the export markets can significantly impact domestic broiler sales prices due to excess domestic supply. The Russian ban on the import of U.S. poultry in March 2002 depressed broiler sales prices through fiscal 2003 and coupled with higher feed costs resulted in the Company's net operating losses in fiscal 2003. The lifting of the Russian ban on U.S. chicken imports and implementation of an import quota system has brought stability to the export market for U.S. chicken and has contributed to an improved supply and demand balance and higher broiler sales prices in the first six months of fiscal 2004. Page 9 The cost of feed grains, primarily corn and soybean meal, represents approximately fifty percent of total broiler production costs. Prices of feed grains fluctuate in response to worldwide supply and demand. Corn and soybean meal prices increased in fiscal 2003 by 25% and 18%, respectively, due to stronger worldwide demand and a reduced U.S. crop due to weather problems in grain producing areas. Higher feed grain prices, particularly soybean meal, are expected to continue at least through fiscal 2004. The Company believes that increasing its value-added product lines, continuing to improve its cost structure and continuing its commitment to an unbranded strategy to grow private label sales will help to reduce its exposure to the industry volatility of the past five years and generate higher gross margins on a consistent basis. The Association also plans to increase its base of longer-term capital and improve its financial leverage; however, due to its cooperative structure, it does not have access to equity capital markets and has exposure to increases in interest rates. General issues such as increased domestic and global competition in the meat industry, heightened concerns over the safety of the U.S. food supply, volatility in feed grain commodity prices and export markets, increasing government regulation over animal production and animal welfare activism continue as significant risks and challenges to the profitability and growth of the Company and the broiler industry. RESULTS OF OPERATIONS Net Sales Volume Gold Kist's net sales volume for the quarter ended December 27, 2003 increased 22.7% compared to the quarter ended December 28, 2002. For the six- month period ended December 27, 2003, net sales volume increased 17.3% from $898 million in the comparable period last year to $1.1 billion in the current year. The increase in net sales volume was due primarily to an approximate 14% increase in average chicken sales prices and to a 1.2% increase in pounds of chicken sold. An overall strengthening economy, favorable production levels, improved export demand and higher prices in the beef and pork meat sectors contributed to stronger demand and higher chicken sales prices in the 2003 periods. Current diet trends emphasizing low fat proteins such as chicken or fish have also favorably impacted product demand. The Association's export sales of $30.3 million and $48.7 million for the three and six months ended December 27, 2003, respectively, were 112% and 90.8% higher than the 2002 periods, due to substantially increased prices, the resumption of shipments to Russia and increased demand from other countries. An import quota system was negotiated and announced by Russian officials in December 2003. The U.S. share of the total quota was 771,900 tons or 73.5%. This is below the U.S. levels of imports prior to the embargo; however, increased demand from other countries has partially offset this reduction. The Company's export sales to Russia increased 20.4% in pounds shipped and 89% in dollar value from $9.7 million in the December 2002 year-to-date period to $18.3 million in the December 2003 year-to-date period. Page 10 Net Operating Margins (Loss) The Association had net operating margins of $39.2 million and $77.6 million for the three and six months ended December 27, 2003, respectively, compared to net operating losses of $(33.5) million and $(31.2) million in the comparable periods last year. The increase in operating margins in the December 2003 periods was due primarily to higher chicken selling prices and additional pounds sold partially offset by higher feed ingredient costs, principally soybean meal. Soybean meal prices were 19.9% higher per ton during the six-month period ended December 27, 2003 than the same period a year ago. The increased feed grain costs were due to adverse weather conditions experienced late in the growing season. The Company expects that higher soybean meal prices will continue through at least the remainder of the fiscal year due to tighter supplies. Cost of sales also included a $3.5 million charge to write down the assets and recognize other expenses, primarily employee severance amounts, related to the closing of a poultry processing facility announced in September 2003. The Association's pork production operations were breakeven for the six months ended December 27, 2003 as compared to a net operating loss of $1.9 million for the six months ended December 28, 2002. The improvement was attributable to improved hog market prices. The 31.1% year-to-date increase in distribution, administrative and general expenses was principally due to incentive compensation accruals associated with the net margins for the year-to-date December 2003 periods compared to the net losses in the December 2002 periods. The Company also experienced higher benefit costs, principally pension expense and employee medical claims during the first six months of fiscal 2004, which contributed to the increase in these expenses. Other Deductions Other deductions totaled $24.8 million and $28.0 million for the three and six months ended December 27, 2003, respectively, compared to $8.5 million and $38.1 million for the comparable periods last year. In October 2002, Southern States Cooperative, Inc. (SSC) notified the Association that, pursuant to the provisions of the indenture under which the Association purchased the capital trust securities, SSC would defer the quarterly interest payment due on October 5, 2002. Interest payments for subsequent quarters have also been deferred. The terms of the capital trust securities allow for the deferral of quarterly interest payments for up to 20 quarters, with the deferred payments bearing interest at 10.75%. As a result of the deferral of the interest payments, the Association reduced the carrying value of the capital trust securities by $24.1 million with a corresponding charge included in other deductions for the six months ended December 28, 2002. As of December 31, 2003, SSC's total stockholders' and patrons' equity fell below the Association's carrying value of the preferred stock investment, which the Company believes is a triggering event indicating impairment. The Association valued the preferred securities based on a discounted cash flow approach and recorded an "other-than-temporary" impairment charge of $18.5 million included in other deductions for the three and six months ended December 27, 2003. Page 11 As interest rates and market conditions change, the carrying value of the securities could be further reduced. Also, the proceeds from any future sale of the securities could differ from these estimates. If these events were to occur, they could have a material impact on the Association's results of operations and financial position. Interest expense was $6.8 million and $14.4 million for the three and six- month periods ended December 27, 2003, respectively, compared to $5.6 million and $11.7 million for the comparable periods last year. The increase in the quarter and year-to-date interest expense was due to higher interest rate spreads over the London Interbank Offered Rate (LIBOR) and higher fees resulting from the February 2003 amendment to the Senior Credit Facility and the arrangement of the Temporary Revolving Credit Facility that matured on September 30, 2003. Miscellaneous, net was income of $291 thousand and $4.5 million for the three and six months ended December 27, 2003, respectively, compared to expense of $4.0 million and $3.7 million for the comparable periods last year. Gains from the sale of assets and from the settlement in August 2003 of notes receivable that exceeded their carrying value were the primary items accounting for the December 2003 year-to-date income amounts. The notes receivable were acquired from the parent corporation of the other general partner of a pecan processing and marketing partnership dissolved in January 2003. A payment in December 2002 representing the Company's share of a legal settlement as a former partner of Golden Peanut Company accounted for the expense in the three and six months ended December 28, 2002. Income from a hog grow-out joint venture with another regional cooperative was $.4 million for the six months ended December 27, 2003 as compared to a loss of $.6 million for the six months ended December 28, 2002 due to improved hog market prices. Income Tax Expense (Benefit) For the three and six months ended December 27, 2003, the Association's combined federal and state effective income tax rates used to calculate the tax expense of the margins before income taxes were 76.3% and 45.8%, respectively. The increased effective tax rate over the federal and state statutory rates for the three and six months ended December 27, 2003 was due to the deferred income tax valuation allowance established for the unrealized capital loss resulting from the write down of the SSC preferred stock investment. The combined effective rates for the three and six months ended December 28, 2002 were 33.3% and 21.8%, respectively. The lower tax benefit on the net loss for the six months ended December 28, 2002 was due to the deferred income tax valuation allowance established for the unrealized capital loss resulting from the write down of the SSC capital trust securities. Income tax expense (benefit) for the periods presented reflects income taxes at statutory rates adjusted for available tax credits and deductible nonqualified equity redemptions. Page 12 LIQUIDITY AND CAPITAL RESOURCES The Association's liquidity is dependent upon funds from operations and external sources of financing. On September 27, 2002, the Company refinanced and extended its Senior Secured Credit Facility to include a $110 million Revolving Credit Facility maturing November 2004 and a $95 million Term Loan maturing November 2005. The interest rates on the facility ranged from 1.50% to 2.25% over the London Interbank Offered Rate (LIBOR), adjusted quarterly based on the Association's financial condition. Other terms and conditions were essentially unchanged. The terms and conditions on the $45 million five- year Term Loan due November 2005 were also unchanged. In February 2003, the Company amended its Senior Secured Credit Facility and arranged a Temporary Revolving Credit Facility to provide up to $35 million of incremental liquidity. The Temporary Revolving Credit Facility matured on September 30, 2003. There was no outstanding balance under the Temporary Facility at June 28 or September 30, 2003. The Association also has $42.2 million in term loans outstanding with an agricultural credit bank and $45.0 million in senior notes outstanding with an insurance company. The Association's senior notes, senior secured credit facilities and term loans are secured by substantially all of the Association's inventories, receivables, and property, plant and equipment. Covenants under the terms of the debt agreements with lenders include conditions that could limit short-term and long-term financing available from various external sources. The terms of debt agreements specify minimum consolidated tangible net worth, current ratio and coverage ratio requirements, as well as a limitation on the total debt to total capital ratio. The debt agreements place a limitation on capital expenditures, equity distributions, cash patronage refunds, commodity hedging contracts and additional loans, advances or investments and other items. At December 27, 2003, the Association was in compliance with or had obtained waivers for all applicable loan covenants under its credit facilities. For the first six months of fiscal 2004, cash provided by operating activities was $85.8 million compared to cash used in operating activities of $27.3 million for the first six months of 2003. The increased cash flow was due to the strong operating results for the period as adjusted for non-cash items, principally depreciation and amortization, the unrealized loss on investment and deferred income taxes. Cash used in financing activities for the six months ended December 2003 was $73.4 million compared to cash provided by financing activities for the six months ended December 2002 of $50.8 million. During the period, the Company repaid outstanding debt of $70.7 million, including scheduled long-term debt amounts and payments on the revolving credit facility. At February 6, 2004, the Association had unused loan commitments of $84.9 million. Working capital and patrons' and other equity were $181.9 million and $210.0 million, respectively, at December 27, 2003 compared to $210.2 million and $183.9 million, respectively, at June 28, 2003. The reclassification of the Revolving Credit Facility from long-term debt to a current liability effective November 2003 resulted in the reduction in working capital at December 27, 2003 from June 28, 2003. At December 27, 2003, the amount outstanding under the Revolving Credit Facility was $20 million. The increase in patrons' and other equity reflects the net margins for the first half of 2004 partially offset by $2.7 million of equity redemptions. Page 13 In August 2003, the Board of Directors of the Association suspended the early cashing of notified equity at the request of the holder, but will continue to pay the full face value of notified equity to the estates of deceased equity holders, subject to a board imposed $4.0 million limitation on total equity cashings in 2004. The redemption of patrons' equity is subject to the discretion of the Board of Directors. The Association has spent approximately $9.8 million in capital expenditures in the six month period ended December 27, 2004 and expects to spend an additional $35 million in the last six months of fiscal 2004 that include expenditures for expansion of further processing capacity and technological advances in poultry production and processing. In addition, planned capital expenditures include other asset improvements and necessary replacements. Management intends to finance planned 2004 capital expenditures and related working capital needs with existing cash balances, cash expected to be provided from operations and additional borrowings, as needed. In response to adverse operating conditions in fiscal 2003, the Company instituted a cost reduction plan freezing pay levels, reducing staff and overtime, implementing employee benefit plan reductions/eliminations and selling certain non-operating assets. The Company continues to analyze all aspects of its business and may consider additional cost reductions or operational changes necessary to maintain its cost competitiveness. Effective January 1, 2004, the Association's qualified pension plan was prospectively amended. For benefits earned in calendar 2004 and future years, the basic pension formula was changed from 50% to 45% of final average earnings, early retirement benefits were reduced, and the lump sum distribution option is no longer available. The pension benefits earned by employees through 2003 were unchanged. As a result of these amendments, the projected pension plan contribution commencing in calendar 2005 was reduced from $7 million estimated at July 2003 to $4 million. The Association expects to have an estimated $10.0 million of pension settlement accounting expense in the six months ending June 26, 2004 as a result of expected lump sum distribution payments to electing retiring employees exceeding service and interest cost components of pension expense in the plan year. There was no pension settlement accounting expense in the statements of operations for any of the periods ended December 2003 and 2002. In connection with the sale of assets of its Agri-Services business to SSC during 1999, Gold Kist discontinued the sale of Subordinated Capital Certificates. The Association believes cash on hand and cash equivalents at December 27, 2003 and cash expected to be provided from operations, in addition to borrowings available under committed credit arrangements, will be sufficient to maintain cash flows adequate for the Association's operational objectives over the next twelve months and to fund the repayment of outstanding Subordinated Certificates as they mature. Due in part to the $45 million term loan and $80 million of the $95 million term loan maturing in November 2005, the Company is considering long-term debt financing alternatives. The Company is also in process of negotiating a new three-year revolving credit agreement with its bank group to replace its current credit facility maturing November 2004. Page 14 Important Considerations Related to Forward-Looking Statements The statements contained in this report regarding our future financial and operating performance and results, business strategy, market prices, future commodity price risk management activities, plans and forecasts and other statements that are not historical facts are forward-looking statements, as defined in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward- looking statements on our current assumptions, expectations and projections about future events. We use the words "may," "will," "expect," "anticipate," "estimate," "believe," "continue," "intend," "should," "would," "could", "plan," "budget" and other similar words to identify forward-looking statements. You should read statements that contain these words carefully because they discuss future expectations, contain projections of results of operations or of our financial condition and/or state other "forward-looking" information. These statements may also involve risks and uncertainties that could cause our actual results of operations or financial condition to materially differ from our expectations in this offering circular, including, but not limited to: - fluctuations in the cost and availability of raw materials, such as feed ingredients; - changes in the availability and relative costs of labor and contract growers; - market conditions for finished products, including competitive factors and the supply and pricing of alternative meat proteins; - effectiveness of our sales and marketing programs; - disease outbreaks affecting broiler production and/or marketability of our products; - contamination of products, which can lead to product liability and product recalls; - access to foreign markets together with foreign economic conditions; - acquisition activities and the effect of completed acquisitions; - pending or future litigation; - the ability to obtain additional financing or make payments on our debt; - regulatory developments, industry conditions and market conditions; and general economic conditions. Any forward-looking statements in this report are based on certain assumptions and analysis made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the current circumstances. However, events may occur in the future that we are unable to accurately predict, or over which we have no control. Forward-looking statements are not a guarantee of future performance and actual results or developments may differ materially from expectations. You are therefore cautioned not to place undue reliance on such forward-looking statements. We do not intend to update any forward-looking statements contained in this document. When considering our forward-looking statements, also keep in mind the risk factors and other cautionary statements in reports that we file with the SEC. Page 15 Effects of Inflation The major factors affecting the Association's net sales volume and cost of sales are the commodity market prices for broilers, hogs and feed grains. The prices of these commodities are affected by world market conditions and are volatile in response to supply and demand, as well as political and economic events. The price fluctuations of these commodities do not necessarily correlate with the general inflation rate. Inflation has, however, affected operating costs such as labor, energy and material costs. New Accounting Pronouncements In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of Liabilities and Equity," which is effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 establishes standards for the classification of financial instruments in financial statements that have characteristics of both liabilities and equity. Any redemption of the Company's patrons' equity is subject to the discretion of the Board of Directors and is not mandatorily redeemable. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51" (FIN 46), as amended in December 2003. This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. Generally, the provisions of the Interpretation are effective in the first interim period ending after March 15, 2004. The Company is in process of evaluating the impact of this interpretation and does not expect a significant impact on the Company's consolidated financial statements. In May 2003, the Emerging Issues Task Force ("EITF") of the FASB reached a consensus on Issue 01-08, "Determining Whether an Arrangement Contains a Lease." If an arrangement contains a lease in accordance with the EITF guidance, the timing of the expense and recognition in the balance sheet (if a capital lease) and disclosures could be affected. The EITF is applicable to all arrangements agreed to or modified in fiscal periods after May 28, 2003. The effect of this EITF is not material to the Company for those arrangements entered into or modified in the first six months ended December 27, 2003. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement does not have a material impact on the Company's consolidated financial statements. Critical Accounting Policies The preparation of the Company's Consolidated Financial Statements requires the use of estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the fiscal years presented. The following is a summary of certain accounting policies considered to be critical by the Company. Page 16 Valuation of Investments - The Company has an investment in the preferred and capital trust securities of Southern States Cooperative, Inc. (SSC). The Company has accounted for the capital trust securities as "available for sale" securities under the provisions of Statement of Financial Accounting Standards No. 115 "Accounting for Certain Debt and Equity Securities" (SFAS 115). The capital trust securities are reflected at an approximate fair value based on discounted cash flows using interest rates for similar securities. As a result, changes in interest rates or credit worthiness of SSC would impact the approximate fair value. The preferred stock is an equity security that does not have a readily determinable market value and is carried at cost and periodically assessed for "other-than-temporary" impairments. As interest rates and market conditions change, the carrying values of the securities could be reduced. Also, the proceeds from any future sale of these securities could differ from these estimates. These events could have a material impact on results of operations and financial position of the Company. Allowance for Doubtful Accounts - The Company's management estimates the allowance for doubtful accounts based on an analysis of the status of individual accounts. Factors such as current overall economic and industry conditions, historical customer performance and current financial condition, collateral position and delinquency trends are used in evaluating the adequacy of the allowance for doubtful accounts. Changes in the economy, industry and specific customer conditions may require adjustment to the allowance amount recorded by the Company. Accrued Self-Insurance Costs - The Company is self-insured for certain losses related to property, fleet, product and general liability, worker's compensation and employee medical benefits. Stop loss coverage is maintained with third party insurers to limit the total exposure to the Company. Estimates of the ultimate cost of claims incurred as of the balance sheet date are accrued based on historical data and estimated future costs. While the Company believes these estimates are reasonable based on the information available, actual costs could differ and materially impact the results of operations and financial position. Employee Benefits - The Company incurs various employment-related benefit costs with respect to qualified and nonqualified pensions and deferred compensation plans. Assumptions are made related to discount rates used to value certain liabilities, assumed rates of return on assets in the plans, compensation increases, employee turnover and mortality rates. The Company utilizes third party actuarial firms to assist management in determining these assumptions. Different assumptions could result in the recognition of differing amounts of expense over different periods of time. Income Taxes - The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes," which requires that deferred tax assets and liabilities be recognized for the tax effect of temporary differences between the financial statement and tax basis of recorded assets and liabilities at current tax rates. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The recoverability of the tax assets recorded on the balance sheet is based on both historical and anticipated earnings levels of the Association and is reviewed to determine if any additional valuation allowance is necessary when it is more likely than not that amounts will not be recovered. Page 17 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Market Risk The principal market risks affecting the Association are exposure to changes in broiler and commodity prices and interest rates on borrowings. Although the Company has international sales and related accounts receivable from foreign customers, there is no foreign currency exchange risk as all sales are denominated in United States dollars. Commodities Risk The Association is a purchaser of certain agricultural commodities used for the manufacture of poultry feeds. The Association uses commodity futures and options for economic hedging purposes to reduce the effect of changing commodity prices on operations and to ensure supply of a portion of its commodity inventories and related purchase and sales contracts. Feed ingredients futures and option contracts, primarily corn and soybean meal, are accounted for at fair value. Changes in fair value on these commodity futures and options are recorded as a component of product cost in the consolidated statements of operations. Terms of the Association's secured credit facility limit the use of forward purchase contracts and commodities futures and options transactions. At December 27, 2003, the notional amounts and fair value of the Association's outstanding commodity futures and options positions were not material. Feed ingredient purchase commitments for corn and soybean meal in the ordinary course of business were $270.8 million at December 27, 2003. These commitments include both priced and unpriced contracts. Unpriced feed ingredient commitments are valued at market for the month of delivery as of December 27, 2003. Based on estimated annual feed usage, a 10% increase in the weighted average cost of feed ingredients would increase annualized cost of sales by an estimated $60 million. Interest Rate Risk The Association has exposure to changes in interest rates on certain debt obligations. The interest rates on the Senior Secured Credit facilities fluctuate based on the London Interbank Offered Rate (LIBOR), as well as the Association's financial condition. A 1% change in LIBOR would increase annual interest expense by an estimated $2.0 million. ITEM 4. CONTROLS AND PROCEDURES An evaluation was performed under the supervision and with the participation of the Company's management, including the President and Chief Executive Officer ("CEO"), and the Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Company's management, including the CEO and the CFO, concluded that the Company's disclosure controls and procedures as of the end of the period covered by this report, were effective in timely bringing to their attention material information related to the Company required to be included in the Company's periodic Securities and Exchange Commission filings. There has not been any change in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Page 18 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Designation of Exhibit in this Report Description of Exhibit B-31 Section 302, Sarbanes- Oxley Act, Certifications B-32 Section 906, Sarbanes- Oxley Act, Certifications (b) Reports on Form 8-K. Gold Kist has not filed any reports on Form 8-K during the three months ended December 27, 2003. SIGNATURES 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. GOLD KIST INC. (Registrant) Date February 10, 2004 John Bekkers Chief Executive Officer (Principal Executive Officer) Date February 10, 2004 Stephen O. West Treasurer and Chief Financial Officer (Principal Financial Officer) Page 18 PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Designation of Exhibit in this Report Description of Exhibit B-31 Section 302, Sarbanes- Oxley Act, Certifications B-32 Section 906, Sarbanes- Oxley Act, Certifications (b) Reports on Form 8-K. Gold Kist has not filed any reports on Form 8-K during the three months ended December 27, 2003. SIGNATURES 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. GOLD KIST INC. (Registrant) Date February 10, 2004 /s/ John Bekkers John Bekkers Chief Executive Officer (Principal Executive Officer) Date February 10, 2004 /s/ Stephen O. West Stephen O. West Treasurer and Chief Financial Officer (Principal Financial Officer)

GOLD KIST INC 10-Q