10-Q 1 gk10q1204edg.txt GOLD KIST INC. FORM 10-Q DECEMBER 2004 UNITED STATES 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 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended January 1, 2005 Commission File Number: 000-50925 GOLD KIST INC. (Exact name of registrant as specified in its charter) DELAWARE 20-1163666 (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) (770) 393-5000 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) 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 APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common stock, $0.01 Per Share Par Value - 50,702,312 shares outstanding as of February 15, 2005. GOLD KIST INC. INDEX Page No. Part I. Financial Information Item 1. Unaudited Consolidated Financial Statements Consolidated Balance Sheets - October 2, 2004 and January 1, 2005 1 Consolidated Statements of Operations - Three Months Ended December 27, 2003 and January 1, 2005 2 Consolidated Statement of Patrons' and Stockholders' Equity and Comprehensive Income - Three Months Ended January 1, 2005 3 Consolidated Statements of Cash Flows - Three Months Ended December 27, 2003 and January 1, 2005 4 Notes to Consolidated Financial Statements 5 - 19 Item 2. Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition 20 - 34 Item 3. Quantitative and Qualitative Disclosure About Market Risks 35 Item 4. Controls and Procedures 36 Part II. Other Information Item 2. Changes in Securities and Use of Proceeds 37 Item 6. Exhibits 38 Page 1 Item 1. Financial Statements GOLD KIST INC. CONSOLIDATED BALANCE SHEETS (Amounts, Except Share Amounts, in Thousands) (Unaudited)

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

Page 3 GOLD KIST INC. CONSOLIDATED STATEMENT OF PATRONS' AND STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME Three Months Ended January 1, 2005 (Amounts In Thousands)

Page 4 GOLD KIST INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited)

Page 5 GOLD KIST INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousands) (Unaudited) 1. Basis of Presentation The accompanying unaudited consolidated financial statements reflect the accounts of Gold Kist Inc. and its subsidiaries ("Gold Kist" or the "Company") as of January 1, 2005 and for the thirteen weeks ended January 1, 2005. These consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These 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 in the Company's previously filed Annual Report on Form 10-K for the fiscal year ended June 26, 2004. The Company employs a 52/53-week fiscal year. On October 20, 2004, the Board of Directors of the Company approved changing the fiscal year-end of the Company from the Saturday after the last Thursday in June to the Saturday after the last Thursday in September. Fiscal 2005 will be a 52-week year beginning October 3, 2004 and ending October 1, 2005. The three-month period ended January 1, 2005 and the three-month period ended December 27, 2003 each consisted of thirteen weeks. 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. Management of Gold Kist has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities as of the balance sheet date and the reporting of revenue and expenses during the period to prepare these consolidated financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ from these estimates. 2. Conversion and Initial Public Offering On October 13, 2004, after completion of required approvals and conditions, the Plan of Conversion (the "Plan") of Gold Kist Inc., a Georgia cooperative marketing association, became effective and Gold Kist converted from a cooperative marketing association to a for-profit business corporation through a merger into a wholly owned subsidiary, Gold Kist Holdings Inc., a Delaware corporation. In connection with the conversion, Gold Kist Holdings Inc. changed its name to Gold Kist Inc. Page 6 The conversion was accounted for using the historical carrying values of the assets and liabilities of Gold Kist. Immediately following the conversion and the initial public offering, Gold Kist's cooperative membership common stock and patronage reserves were reclassified to par value of common stock and additional paid in capital. On October 13, 2004, the date the conversion became effective, all patronage interests in Gold Kist were extinguished and the members and former member equity holders of Gold Kist became entitled to receive consideration in the form of Gold Kist common stock or cash, or both, as provided in the Plan. Patronage earnings from the end of the quarter ended October 2, 2004 to October 13, 2004, the date of the conversion, were not significant. Pursuant to the conversion, approximately 36.4 million shares of common stock and $106.0 million in cash were issued and distributed in December 2004 to members and former member equity holders. Also on October 13, 2004, Gold Kist completed an initial public offering of 12,000,000 shares of common stock, par value $0.01 per share, at an initial public offering price of $11.00 per share. In November 2004, the underwriters exercised their overallotment option to purchase an additional 1,600,000 shares at the offering price of $11.00 per share. After underwriting discounts and other expenses, net proceeds from the common stock offering were approximately $137.2 million. A portion of the proceeds of this offering was used to repay $70.0 million in aggregate principal amount of our 10.25% outstanding senior notes plus an additional $7.2 million of prepayment interest on November 12, 2004. The prepayment interest of $7.2 million and 35% of both the deferred financing costs and discount totaling $2.8 million were recognized in the statement of operations for the quarter ended January 1, 2005. 3. Receivables Receivables are principally trade and are stated net of an allowance for doubtful accounts of $1.5 million and $1.4 million as of October 2, 2004 and January 1, 2005, respectively. 4. Comprehensive Income Comprehensive income was $4,371 and $4,193 for the three months ended December 27, 2003 and January 1, 2005, respectively. Comprehensive income consists of net income and pension liability adjustments, net of tax, for the three months ended December 27, 2003. There were no elements of other comprehensive income for the three months ended January 1, 2005. Page 7 5. Inventories Inventories consist of the following:

Live poultry and hogs consist of broilers, market hogs and breeding stock. Broilers are stated at the lower of cost or market and breeders are stated at cost less accumulated amortization. Costs include live production costs (principally feed, chick cost, medications and other raw materials), labor and production overhead. Breeder costs include acquisition of chicks from parent stock breeders, feed, medication, labor and production costs that are accumulated up to the production stage and then amortized over their estimated useful life of thirty-six weeks. Market hogs include costs of feed, medication, feeder pigs, labor and production overhead. Pork breeder herds include cost of breeder gilts acquired from parent stock breeders, feed, medications and production costs that are accumulated up to production stage and then amortized over twenty-four months. The pork breeders are included in other assets - noncurrent in the consolidated financial statements and are not significant. If market prices for inventories move below carrying value, the Company records adjustments to write down the carrying values of these inventories. Marketable products consist primarily of dressed and further processed poultry. The Company accounts for its marketable products inventory at the lower of cost or market. Raw materials and supplies consist of feed ingredients, hatching eggs, packaging materials and operating supplies. These inventories are stated, generally, at the lower of cost (first-in, first-out or average) or market. Gold Kist engages in forward purchase contracts and commodity futures and options transactions to secure necessary feed ingredient requirements and manage the risk of adverse price fluctuations with regard to its feed ingredient purchases. Changes in the fair value of these derivatives, except for forward purchase contracts, have been recorded through net income. Page 8 6. Property, Plant and Equipment Property, plant and equipment is summarized as follows:

Depreciation and amortization included in cost of sales in the accompanying consolidated statements of operations were $8.4 million and $9.0 million for the quarters ended December 27, 2003 and January 1, 2005, respectively. Page 9 7. Long-Term Debt Long-term debt is summarized as follows:

In March 2004, the Company issued the senior notes in a private offering pursuant to Rule 144A and Regulation S of the Securities Act of 1933 in the principal amount of $200 million and subsequently exchanged the senior notes for identical registered notes. The stated interest rate on the senior notes is 10.25%, with interest payable semi-annually on March 15 and September 15. The Senior Notes were issued at a price of 98.47% and are reflected net of discount in the accompanying consolidated balance sheet at January 1, 2005. The discount amount is being amortized to interest expense over the ten-year term of the senior notes under the interest method, yielding an effective interest rate of approximately 10.50%. Page 10 The Company repaid $70.0 million of principal of the senior notes, plus $7.2 million in prepayment interest, on November 12, 2004 with a portion of the proceeds from Gold Kist's initial public offering completed on October 13, 2004 (see Note 2). In connection with this prepayment, $1.0 million of the discount was written off and recognized in the statement of operations for the three months ended January 1, 2005. Concurrent with the issuance of the senior notes, the Company amended its Senior Secured Credit Facility to provide for a revolving line of credit in an aggregate principal amount of $125 million, including a sub- facility of up to $60 million for letters of credit, for a term of three years. The interest rate on the facility ranges from 1.00% to 2.00% over the prime rate for base rate advances or 2.25% to 3.25% over the London InterBank Offered Rate (LIBOR) for Eurodollar advances, adjusted quarterly based on the Company's financial position. Borrowings under the facility will be limited to the lesser of $125 million and a borrowing base determined by reference to a percentage of the collateral value of the accounts receivable and inventories securing the facility. As of January 1, 2005, there was approximately $93.7 million available for borrowing under this facility. Approximately $31.3 million of letters of credit are outstanding under the facility. The Company's debt agreements place a limitation on capital expenditures, equity distributions, cash dividends, commodity hedging contracts and additional loans, advances or investments. The terms of debt agreements (other than the senior notes) contain financial covenants, including those that 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. At January 1, 2005, the Company believes that it is in compliance with all applicable loan covenants under its senior notes and credit facilities. 8. Employee Benefits Effective January 1, 2004, the Company'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 other changes were made. The pension benefits earned by employees through 2003 were unchanged. In October 2002, the Company substantially curtailed its postretirement life insurance plans and in April 2003, the Company substantially curtailed its postretirement medical plan for existing retirees. Retired employees eligible under the plan between the ages of 55 and 65 could continue their coverage at rates above the average cost of the medical insurance plan for active employees. At October 2, 2004 and January 1, 2005, the Company had a minimum pension liability of $42.3 million, net of the deferred tax benefit of $25.2 million. The minimum pension liability, net of deferred taxes, has been included as a component of patrons' and other equity/ stockholders' equity in accumulated other comprehensive loss. Page 11 Components of net periodic benefit cost (income) for the quarters ended December 27, 2003 and January 1, 2005 are as follows:

The Company made a qualified pension plan contribution of $15.0 million in August 2004 and another qualified pension plan contribution of $8.0 million in November 2004. The Company does not expect to make any more qualified pension plan contributions during the fiscal year ending October 1, 2005. 9. Long Term Incentive Plan In connection with the conversion of the Company into a for-profit corporation and the completion of its initial public offering, the Company implemented the Gold Kist Long-Term Incentive Plan. At the discretion of the Compensation Committee of the Board of Directors, which administers the plan, employees, consultants and non-employee directors may be granted awards in the form of stock options, stock appreciation rights, performance awards, restricted stock, stock units, dividend equivalents or other stock based awards. The Company reserved up to 4,000,000 shares for issuance upon the exercise of awards under the Long-Term Incentive Plan. A grant of restricted stock to employees was authorized by the Board of Directors and effective as of the closing of the offering on October 13, 2004. In addition, on October 20, 2004 the Board of Directors authorized the issuance of the stock portion of their fiscal 2005 annual retainers in restricted shares. Total grants of 705,197 and 24,456 shares having a fair market value of approximately $8.0 million were issued to employees and directors, respectively. The restricted stock issued to employees will vest on the third anniversary of the date of grant with the restricted stock issued to directors vesting in July 2005. The Company is recognizing the fair market value of the restricted stock granted as compensation expense in its consolidated statements of operations ratably over the vesting period. Compensation expense of $.7 million was recognized in the three months ended January 1, 2005. Page 12 10. Contingent Liabilities Four female employees of the Company's Corporate Office Information Services (I/S) Department filed an EEOC sex discrimination suit against the Company in the United States District Court for the Northern District of Georgia asserting gender based claims about employment and promotion decisions in the Corporate Office I/S Department. One of the employees continues to be employed by the Company. After its administrative consideration of the claims, the EEOC has issued "Right to Sue" letters to the four complainants in these claims, meaning that the EEOC will not sue or participate in a suit against the Company on behalf of the parties in these actions nor will it pursue a systemic discrimination charge in this matter. The letter provides that the individuals may pursue their claims and litigation on their own should they so desire. The four complainants filed an action in federal district court on March 19, 2003, seeking class certification for their claims of gender discrimination, unspecified monetary damages and injunctive relief. Discovery for the class certification phase of the litigation has ended, and a hearing on the motion for class certification is expected to be scheduled. The Company intends to defend the litigation vigorously. The Company has been named as a defendant in a purported class action lawsuit filed in the U.S. District Court for the Northern District of Alabama along with four additional chicken-processing firms. Plaintiffs allege that the defendants have conspired to prevent competition for production contracts and seek to represent a putative class of all contract farmers and sellers of hatching eggs and live broilers who produced hatching eggs or live broilers in the United States since February 23, 1998. Gold Kist moved to compel arbitration of Plaintiff's claims based on arbitration agreements contained in Gold Kist's production contracts, membership agreements, and by-laws. The Court granted Gold Kist's motion to compel arbitration between Plaintiffs and Gold Kist, and stayed Plaintiff's claims against the other defendants pending completion of arbitration between Plaintiffs and Gold Kist. Plaintiffs have not yet initiated an arbitration against Gold Kist. Gold Kist believes that the claims are without merit and intends to defend the matter vigorously, and while the Company cannot predict its outcome, the Company believes that this lawsuit will not have a material adverse effect on our financial condition. 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 Gold Kist and are either accrued or not expected to be significant. 11. Investments In October 1998, the Company completed the sale of assets of the Agri- Services segment business to Southern States Cooperative, Inc. (SSC). In connection with the transaction, the Company purchased from SSC $60 million principal amount of capital trust securities and $40 million principal amount of cumulative preferred securities for $98.6 million in October 1999. Page 13 In October 2002, SSC notified the Company that, pursuant to the provisions of the indenture under which the Company purchased the capital trust securities, SSC would defer the capital trust securities quarterly interest payment due on October 5, 2002. Quarterly interest payments for subsequent quarters were also deferred. As a result of the deferral of the interest payments, the Company reduced the carrying value of the capital trust securities by $24.1 million with a corresponding charge against the loss from continuing operations for the year ended June 28, 2003. The carrying value of the SSC securities was $57.3 million at June 28, 2003. As of December 31, 2003, SSC's total stockholders' and patrons' equity fell below the Company's carrying value of the preferred stock investment, which the Company believed was a triggering event indicating impairment. In the quarter ended December 27, 2003, the Company recorded an "other-than-temporary" impairment charge of $18.5 million included in other expenses. In June 2004, the Company notified SSC that it was abandoning the investment and returning the securities. As a result of the abandonment, the remaining investment balance of $38.8 million was written off and reflected as an other expense in the consolidated statement of operations for the year ended June 26, 2004. 12. Earnings Per Share The net income for both the basic and diluted earnings per share computations is $4.2 million. Following is a reconciliation of weighted average shares - basic to weighted average shares - diluted. Weighted average shares - basic 49,973 Deferred stock compensation - restricted shares 158 Weighted average shares - diluted 50,131 13. Subsequent Event In January 2005, the Board of Directors approved replacement employment agreements with the Chief Executive Officer and the Chief Administrative Officer and replacement change in control agreements with ten other officers. Equity grants to the Company's officers under the Company's 2004 Long- Term Incentive Plan, consisting of 355,722 shares of restricted stock, 96,558 performance share awards and stock-settled stock appreciation rights with respect to 173,860 shares, were also approved and awarded in January 2005. Page 14 The restricted stock awards vest as to 25% of the shares on each anniversary of the date of grant, beginning January 24, 2006, provided, however, that the restrictions will lapse immediately upon (i) the executive's termination of employment by reason of death, disability or retirement, or (ii) the occurrence of a change in control. The stock appreciation rights vest in two equal annual installments, beginning on January 24, 2008; provided, however, that the stock appreciation rights will vest and become immediately exercisable upon (i) the executive's termination of employment by reason of death, disability or retirement, or (ii) the occurrence of a change in control. The performance-share awards provide the holder the opportunity to earn a number of shares of common stock of the Company at the end of a three- year performance cycle, based upon the Company's profitability. Additional equity grants for other management participants, consisting of 89,304 performance share awards and stock-settled stock appreciation rights with respect to 86,954 shares, were also approved and awarded with the same vesting periods as outlined above. These grants will vest and become immediately exercisable upon the participant's termination of employment by reason of death, disability or retirement. The Company determined to account for the plans under the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payments. In early adopting the new rules, the fair value of the equity classified awards at grant date will be recognized as compensation expense over the vesting period starting in January 2005. The fair value of the stock appreciation rights was determined under the Black-Sholes valuation method. Compensation expense of these plans is estimated at approximately $0.8 million per quarter starting in the quarter ending April 2, 2005. 14. Supplemental Combining Condensed Financial Statements The Company's senior notes are jointly and severally guaranteed by the Company's domestic subsidiaries, which are 100% owned by Gold Kist (the "Parent"), except for GK Insurance Inc., a wholly owned captive insurance company domiciled in the State of Vermont. The following are the unaudited supplemental combining condensed balance sheets as of October 2, 2004 and January 1, 2005, the supplemental combining condensed statements of operations for the quarters ended December 27, 2003 and January 1, 2005, and the supplemental combining condensed statements of cash flows for the quarters ended December 27, 2003 and January 1, 2005. The only intercompany eliminations are the normal intercompany revenues, borrowings and investments in wholly owned subsidiaries. Separate complete financial statements of the guarantor subsidiaries, which are 100% owned by the Parent, are not presented because the guarantors are jointly and severally, fully and unconditionally liable under the guarantees. Page 15

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Page 20 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 approximately 49% to 60% during that period, and this trend is expected 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 sector and general economic conditions. Broiler sales prices were generally strong during most of fiscal 2002 due to an improved supply/demand balance. Strong export demand, principally from Russia, favorably impacted both foreign and domestic markets and fueled higher broiler prices through the first eight months of fiscal 2002. However, on March 10, 2002, Russia banned the import of U.S. poultry. This led to downward pressure on broiler sales prices due to excess domestic supply. Export sales industry-wide declined by approximately 20% during the fourth quarter of fiscal 2002. Although the Russian ban on U.S. imports was lifted in April 2002 and product specifications and other issues were resolved in August 2002, fiscal 2003 sales to Russia were 60% below levels prior to the embargo. Increased domestic supplies and higher supplies of competing meats continued the downward pressure on broiler sales prices through the majority of fiscal 2003. Resumption of export sales to Russia and improved domestic demand for chicken products contributed to improved broiler prices through fiscal 2004. Domestic demand was driven by new product introductions in fast food and quick service restaurants and higher overall per capita consumption of chicken. Market prices for broiler products reached their highest levels since 1999 during our 2004 fiscal year. However, broiler sales prices have declined in the quarter ended January 1, 2005 from the quarter ended October 2, 2004 due to increased supply and the seasonal drop in demand. According to the USDA World Agricultural Outlook Board (WAOB), the forecast for calendar 2004 U.S. broiler meat production is 33.72 billion pounds, ready- to-cook weight, 4.1% above the 32.40 billion pounds produced in calendar 2003. The WAOB October estimate for calendar 2005 broiler meat production is 34.75 billion pounds, which is a 3.1% increase from the calendar 2004 estimate. Page 21 Our export sales, which we define as sales other than to customers in the United States or Canada, for fiscal 2002, 2003, 2004 and for the quarters ending October 2, 2004 and January 1, 2005 were $74.2 million, $56.4 million, $99.2 million, $25.8 million and $30.7 million, respectively. The U.S. poultry industry historically has exported 15% to 20% of domestic production, principally dark meat products, however our export sales have historically been less than 10% of net sales. Any disruption in the export markets can significantly impact domestic broiler sales prices by creating excess domestic supply. Starting in fiscal 2000, poultry export markets strengthened as demand from Russia increased due to changes in import tariffs and improved economic conditions due to the rise in world oil prices, which led to increased consumption. Increased demand continued through fiscal 2001 due in part to the ban on red meat imports from the European Union. Strong export sales continued through our first half of fiscal 2002, increasing 49% over the same period in fiscal 2001. However, due to the Russian ban, our export sales for the last quarter of fiscal 2002 decreased 32.6% from export sales in the same period in fiscal 2001. The drop in export sales continued in fiscal 2003, decreasing 24% from fiscal 2002. Due to the resumption of sales to Russia, our export sales in fiscal 2004 and for the quarters ending October 2, 2004 and January 1, 2005 were significantly higher than for the same periods in 2003. In December 2003, Russia implemented a quota system that has reduced U.S. poultry imports by an estimated 30% from levels prior to the embargo. This quota could negatively affect our exports in future periods. During several months in 2004, China, Japan and several smaller chicken importing countries banned all imports of certain broiler products from the United States due to chickens in several states testing positive for avian influenza. Also, as a result of this event, Russia and Hong Kong banned the import of broiler products from the affected states. Although our broiler production operations are not located in the states that were affected, any implementation of similar bans in the future could negatively affect our results of operations. The cost of feed grains, primarily corn and soybean meal, represents approximately 60% of total live broiler production costs or approximately 35% of the Company's cost of sales. Prices of feed grains fluctuate in response to worldwide supply and demand. Corn and soybean meal prices increased significantly in fiscal 2003 with soybean meal prices further increasing significantly in fiscal 2004, due to stronger worldwide demand and reduced U.S. crops due to weather problems in grain producing areas. Barring widespread weather or other problems, worldwide soybean and corn production is expected to increase, which may favorably impact feed ingredient costs in fiscal 2005. The U.S. grain harvest is complete, and both cash and futures market prices for soybean meal and corn have declined. The Company's cost of sales was negatively impacted in the quarters ended October 2, 2004 and January 1, 2005 due to grain forward contracts priced in the summer of 2004. These positions resulted in ingredient costs in excess of cash market prices during those periods. The majority of deliveries under these contracts have been completed and the Company expects to benefit from lower feed ingredient costs during the remainder of fiscal 2005 as compared to the quarter ended January 1, 2005 and the transition period ended October 2, 2004. Page 22 We believe that we can reduce the impact of industry volatility on our results by increasing our value-added product lines, continuing to improve our cost structure and continuing our commitment to a strategy to grow private label sales. 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 profitability and growth both for Gold Kist and the broiler industry. References in this report to "fiscal 2005," "fiscal 2004," "fiscal 2003," "fiscal 2002," "fiscal 2001," and "fiscal 2000" refer to the Company's fiscal years ending or ended October 1, 2005, June 26, 2004, June 28, 2003, June 29, 2002, June 30, 2001 and July 1, 2000, respectively. RESULTS OF OPERATIONS The following table presents certain statement of operations items as a percentage of net sales for the periods indicated:

Net Sales Gold Kist's net sales for the quarter ended January 1, 2005 increased 2.8% compared to the quarter ended December 27, 2003. The increase in net sales was due primarily to an approximate 5.4% increase in broiler pounds produced and sold for the quarter ended January 1, 2005, partially offset by a decline of 2.9% in average broiler sales prices. Average broiler sales prices for the quarter ended January 1, 2005 were 11.3% below prices for the quarter ended October 2, 2004. Increased supply and the seasonal drop in demand were the principal factors leading to the decline of prices from the September 2004 and December 2003 quarters. Our export sales of $30.7 million for the quarter ended January 1, 2005 were 1.3% higher than the December 2003 quarter, due to increased shipments to Russia and increased demand from other countries, partially offset by a 12.0% reduction in average sales price. Our export sales to Russia Page 23 increased 35.7% in pounds shipped and 28.9% in dollar value from $12.9 million for the quarter ended December 27, 2003 to $16.6 million for the quarter ended January 1, 2005. Net Operating Income The Company had net operating income of $21.5 million for the quarter ended January 1, 2005 compared to net operating income of $39.2 million in the comparable period last year. The decrease in net operating income in the January 1, 2005 period as compared to the December 27, 2003 period was due primarily to lower broiler selling prices and higher feed ingredient costs, principally soybean meal. Feed costs for the quarter ended January 1, 2005 were 6.6% higher than the quarter ended December 27, 2003. This increase was due primarily to a 5.3% increase in the Company's average per ton price of soybean meal compared to prices in the comparable period in the prior year. Although cash market prices for both soybean meal and corn declined in the quarter ended January 1, 2005, the Company's ability to benefit from the price declines was mitigated by priced forward purchase contracts that were executed in order to secure a portion of the Company's feed ingredient requirements. The 14.0% year-to-date decrease in distribution, administrative and general expenses was principally due to decreased incentive compensation accruals associated with the lower net income before income taxes for the quarter ended January 1, 2005 compared to the December 2003 quarter. Expenses of $1.4 million, principally advisory fees related to the conversion of the Company from a cooperative marketing association to a for-profit corporation, were deducted in determining net operating income. Other Expenses Other expenses, including interest and miscellaneous, net totaled $14.6 million for the quarter ended January 1, 2005, compared to $24.8 million for the comparable period last year. Interest expense was $7.1 million for the quarter ended January 1, 2005, compared to $6.8 million for the comparable period last year. The increase in interest expense was principally due to the higher interest rate on the senior notes as compared to the average rates on other indebtedness outstanding at December 27, 2003 that was repaid with the proceeds from the offering of senior notes in March 2004. In connection with the repayment of $70 million principal amount of the senior notes with a portion of the proceeds from Gold Kist's initial public offering completed on October 13, 2004, the Company incurred a $7.2 million prepayment interest. In addition, deferred financing costs of $1.8 million and 35% of the unamortized discount on the issuance of the senior notes of $1.0 million were written off and recognized as interest expense. Page 24 Miscellaneous, net was income of $1.7 million for the quarter ended January 1, 2005, compared to $0.3 million for the comparable period last year. Income from a hog production joint venture was $0.9 million for the quarter ended January 1, 2005 as compared to $0.1 million for the quarter ended December 27, 2003 due to improved hog market prices brought about by increased demand. Interest and dividend income was $0.8 million in the quarter ended January 1, 2005 as compared to $0.1 million for the quarter ended December 27, 2003, principally due to interest income from cash invested in short-term interest bearing instruments. Income Tax Expense For the quarter ended January 1, 2005, our combined federal and state effective income tax rate used for purposes of calculating the tax expense on income before income taxes was 39.0%, as compared to 35.6% for the quarter ended October 2, 2004. The rate at October 2, 2004 reflects the deduction for cash patronage refunds and equity redemptions no longer applicable to the Company after the conversion from a cooperative marketing association to a for-profit corporation. Income tax expense for the quarter ended January 1, 2005 reflects income taxes at statutory rates adjusted principally for available tax credits and the deductibility of state income taxes for federal tax purposes. For the three months ended December 27, 2003, the Company's combined federal and state effective income tax rate was 76.3%. The increased effective tax rate over the federal and state statutory rates for the three months ended December 27, 2003 was due to the deferred income tax valuation allowance established for the unrealized loss resulting from the write down of the SSC preferred stock investment. LIQUIDITY AND CAPITAL RESOURCES Our liquidity is dependent upon cash flow from operations and external sources of financing. In March 2004, the Company issued $200.0 million aggregate principal amount of senior notes. The interest rate on the senior notes is 10.25%, with interest payable semi-annually on March 15 and September 15. The senior notes were issued at a price of 98.47% and are reflected net of the unamortized discount in the accompanying consolidated balance sheet at January 1, 2005. We repaid approximately $70.0 million of these notes, plus the payment of $7.2 million in prepayment interest, on November 12, 2004 with a portion of the proceeds from the Company's initial public offering completed on October 13, 2004. In connection with the offering of our senior notes, we amended the terms of our senior credit facility to provide for a revolving line of credit in an aggregate principal amount of $125.0 million, including a sub-facility of up to $60.0 million for letters of credit, for a term of three years. The facility is secured by a security interest in substantially all of our assets, including all of our present and future accounts receivable and inventory, property, plant and equipment and the stock of certain of our subsidiaries. Borrowings under the facility are limited to the lesser of $125.0 million and a borrowing base determined by reference to a percentage of the collateral value of the accounts receivable and inventories, including our broiler and breeder flocks, securing the facility. As of Page 25 January 1, 2005, we had approximately $93.7 million available for borrowing under this facility. Approximately $31.3 million of letters of credit are outstanding under the facility. Our debt agreements place a limitation on capital expenditures, equity distributions, cash patronage refunds, cash dividends, commodity hedging contracts and additional loans, advances or investments. The terms of our debt agreements (other than the senior notes) contain financial covenants, including those that 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 agreements also include other financial covenants. These covenants are described in more detail in the Annual Report on Form 10-K for the fiscal year ended June 26, 2004 for Gold Kist Inc. (the Georgia cooperative marketing association). At January 1, 2005, we believe we were in compliance with all applicable loan covenants under our senior notes and credit facilities. For the quarter ended January 1, 2005, cash provided by operating activities was $14.4 million compared to cash provided from operating activities of $43.6 million for the quarter ended December 27, 2003. The lower cash flow was due principally to the reduction in net operating income and the pension plan contribution in excess of benefit plan expenses in the quarter ended January 1, 2005. Cash used in financing activities for the quarter ended January 1, 2005 was $43.7 million compared to $36.1 million for the comparable December 2003 period. Pursuant to the conversion, approximately 36.4 million shares of common stock and $106.0 million in cash were issued and distributed in December 2004 to members and former member equity holders. We issued 12,000,000 shares of our common stock in our initial public offering at a price of $11.00 per share and converted to a for-profit corporation on October 13, 2004. Including proceeds from the exercise, in November 2004, of the underwriters' overallotment option to purchase an additional 1.6 million shares at the offering price of $11.00 per share, total proceeds, net of expenses, were $137.2 million. Part of the proceeds was used for the repayment of 35% of the principal amount of senior notes in the amount of $70.0 million. The payment of the $2.4 million cash portion of the nonqualified patronage refund for the period from June 27, 2004 up to the conversion of October 12, 2004 and patronage equity cashings of $.8 million are also reflected in the net cash used in financing activities for the quarter ended January 1, 2005. At January 1, 2005, the Company had cash of $119.0 million invested in short term interest bearing instruments. Working capital and patrons' and other equity/stockholders' equity were $307.3 million and $352.6 million, respectively, at January 1, 2005 as compared to $347.9 million and $317.5 million, respectively, at October 2, 2004. The reduction in cash for the distribution to members and equity holders, partially offset by cash provided by operations and other changes in current assets and liabilities, was the principal factor for the lower working capital level. The increase in total equity resulted from the additional paid in capital in excess of the cash distributions to members and equity holders from the initial public offering in October 2004 and to a lesser extent, net income for the quarter. Page 26 We spent $17.7 million in capital expenditures for the quarter ended January 1, 2005 and expect to spend a total of approximately $80 million in the fiscal year ending October 1, 2005. This includes expenditures for expansion of further processing capacity and technological advances in our poultry production and processing. In addition, capital expenditures included other asset improvements and necessary replacements. Management plans to fund fiscal 2005 capital expenditures, including a planned $47.0 million expansion of our Live Oak, Florida facility over the next two years, and related working capital needs with existing cash balances and cash expected to be provided from operations. Effective January 1, 2004, we prospectively amended our qualified pension plan. For benefits earned in 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. We made a pension plan contribution of $15.0 million in August 2004 and made an additional contribution of $8.0 million in November 2004. We believe cash on hand, cash equivalents and cash expected to be provided from operations, in addition to borrowings available under our amended senior credit facility, will be sufficient to maintain cash flows adequate for our operational objectives during fiscal 2005. 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, 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; Page 27 - 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 this report and in other reports that we file with the Securities and Exchange Commission. Contractual Obligations Obligations under long-term debt, non-cancelable operating leases and feed ingredient purchase commitments at January 1, 2005 are as follows (in millions):

(a) Excludes $31.3 million in total letters of credit outstanding related to normal business transactions. (b) Operating lease commitments as of June 26, 2004. There have not been any significant changes in the three months ended January 1, 2005. Page 28 (c) Feed ingredient purchase commitments include both priced and unpriced contracts in the ordinary course of business. Unpriced feed ingredient commitments are priced at market as of January 1, 2005 for the month of delivery. (d) We contract with broiler, breeder, pullet, layer, hog and nursery pig producers. Although these contracts are subject to acceptable grower performance on a flock-to-flock or herd-to-herd basis, we expect the grow out activity to continue through the periods covered by the grower contracts. Annual grower pay has averaged approximately $240.0 million per year over the past two years with the actual amounts determined by relative performance and other factors. Grower payments have not been included in the contractual obligations table due to the inherent uncertainty of the future amounts. Critical Accounting Policies There were no material changes in the Company's critical accounting policies during the quarter ended January 1, 2005. Effects of Inflation The major factor affecting our net sales and cost of sales is the change in 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 can, however, adversely affect our operating costs such as labor, energy and material costs. New Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs," effective for fiscal years beginning after June 15, 2005. The Company does not expect that SFAS No. 151 will have a significant impact on our consolidated financial statements. In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payments." The Statement is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. Effective in January 2005, the Company early adopted the provisions of SFAS 123R. See Notes 9 and 13 of Notes to Consolidated Financial Statements. In October 2004, the American Jobs Creation Act (AJCA) was signed into law. The AJCA allows for a federal income tax deduction for a percentage of income generated from certain domestic production activities. The Company's production activities will qualify for the deduction. Based on the effective date of the AJCA, the Company will be eligible for this deduction in the first quarter of fiscal 2006. Additionally, in December 2004, the Page 29 FASB issued FASB Staff Position 109-1, "Application of SFAS No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004" (FSP 109-1). FSP 109-1, which was effective upon issuance, states the deduction under this provision of the AJCA should be accounted for as a special deduction in accordance with SFAS 109. The Company has not yet determined the benefit that may be realized from this provision. Risks Relating to Our Business Industry cyclicality, especially fluctuations in the supply of broiler products, affects the prevailing market price of broiler products, our sales and our earnings. Profitability in the broiler industry is materially affected by the prevailing price of broiler products, which is primarily determined by supply and demand factors in the market. In recent years, the profitability of companies in the broiler industry has been adversely affected from time to time by excess supplies of broiler products in the market. As a result of the efficiencies in the U.S. broiler market, even modest increases in the broiler supply in the United States can significantly decrease the market prices at which we can sell our broiler products. Such increases in domestic supply can arise as a result of unanticipated decreases in export demand, among other reasons. Given the perishable nature of broiler products, we are unable to manage inventories to address any short-term changes in market prices. As a result, from time to time we are forced to sell our broiler products at a loss. Because we sell a relatively small percentage of our products under fixed-price contracts, increases in the overall supply of broiler products and any related decrease in broiler prices adversely affect our operating results. This has resulted and will continue to result in fluctuations in our earnings. Market prices for broiler products reached their highest levels since 1999 during our 2004 fiscal year, but have declined through December 2004. Fluctuations in commodity prices of feed ingredients materially affect our earnings. A significant portion of the cost of producing our broiler products consists of amounts spent in connection with purchasing corn and soybean meal, our primary feed ingredients. As a result, fluctuations in feed ingredient prices materially affect our earnings. While prices of these items increase from time to time, we may not be able to pass through any increase in the cost of feed ingredients to our customers. High feed ingredient prices have had a material adverse effect on our operating results in the past. We periodically seek, to the extent available, to enter into advance purchase commitments or commodity futures contracts for the purchase of a portion of our feed ingredients in an effort to manage our feed ingredient costs. However, the use of such instruments may not be successful in limiting our exposure to market fluctuations in the cost of feed and may limit our ability to benefit from favorable price movements. Furthermore, the production of feed ingredients is positively or negatively affected by weather patterns throughout the world, the global level of supply inventories and demand for feed ingredients, as well as the agricultural policies of the United States and foreign governments. In Page 30 particular, weather patterns often change agricultural conditions in an unpredictable manner. A sudden and significant change in weather patterns could affect the supply of feed ingredients, as well as both the industry's and our ability to obtain feed ingredients, grow broilers and deliver products. Any such change would have a material negative impact on our business and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Significant competition in the broiler industry with other vertically integrated broiler companies, especially companies with greater resources, may make us unable to compete successfully in this industry, which would adversely affect our business. The broiler industry is highly competitive. Some of our competitors have greater financial and marketing resources than we do. In general, the competitive factors in the U.S. broiler industry include price, product quality, brand identification, breadth of product line and customer service. Competitive factors vary by major market. In the foodservice market, we believe competition is based on consistent quality, product development, customer service and price. In the U.S. retail market, we believe that competition is based on product quality, brand awareness, customer service and price. We also face competition from non-vertically integrated further processors with regard to our further-processed products. The highly competitive conditions in the broiler industry could force us to reduce prices for our products, which would adversely affect our results of operations and financial condition. The loss of one of our large customers could have a material adverse effect on our results of operations. Sales to our top ten customers represented approximately 32.9% of our net sales during the quarter ended January 1, 2005 and during such period, approximately 11.8% of our net sales were to our largest customer. We do not have long-term contracts with any of our major customers and, as a result, any of our major customers could significantly decrease or cease their business with us with limited or no notice. If we lost one or more of our major customers, or if one or more of our major customers significantly decreased its orders from us, our business, sales and results of operations could be materially and adversely affected. Foreign embargos, decreased export demand, oversupply of broiler products and competing products and bans on exported chicken and livestock would have an adverse effect on our business. We are an exporter to Russia and other former Soviet republics, China, the Pacific Rim, the Middle East, South and Central America and the Caribbean Islands. Any decrease in exports to foreign countries based on embargos, decreased demand, oversupply of broiler products or competing products or bans on exported chicken may have an adverse effect on our ability to export chicken and other products. Such occurrences would also likely increase the supply of broilers and competing products in the United States, which would likely result in lower prices for broiler products and could adversely affect our business. For example, in 2002 and 2003, export sales to Russia declined due to an embargo on certain imported meats, leading to a domestic oversupply and a decrease in the market price of chicken. Russia has Page 31 implemented import quotas on chicken and other meats that reduce U.S. broiler imports to approximately 70% of 2002 levels. In addition, for several months in 2004, China, Japan and several smaller chicken importing countries banned all imports of broiler products from the United States due to several chickens in Delaware and Texas testing positive for avian influenza. Also as a result of this event, Russia and Hong Kong banned the import of broiler products from Delaware and Texas for a period of time. Any implementation of similar bans in the future or the implementation of quotas or other import restrictions would adversely affect our domestic and export sales and our results of operations. We have been, and may in the future be, subject to claims and liabilities under environmental, health, safety and other laws and regulations, which could be significant. Our operations are subject to various federal, state, local and foreign environmental, health, safety and other laws and regulations, including those governing air emissions, wastewater discharges and the use, storage, treatment and disposal of hazardous materials. The applicable requirements under these laws are subject to amendment, to the imposition of new or additional requirements and to changing interpretations by governmental agencies or courts. In addition, we anticipate increased regulation by various governmental agencies concerning food safety, the use of medication in feed formulations, the disposal of animal by-products and wastewater discharges. Furthermore, business operations currently conducted by us or previously conducted by others at real property owned or operated by us, business operations of others at real property formerly owned or operated by us and the disposal of waste at third party sites expose us to the risk of claims under environmental, health and safety laws and regulations. For example, we have received notice letters designating us as a potentially responsible party for alleged environmental contamination at a site that we previously owned. Other properties we own or owned in the past have been designated for cleanup under federal and state environmental remediation statutes, which could result in further liabilities to us. In addition, we are subject to potential claims for residual environmental liabilities arising out of our sale of our Agri-Services business in 1998. The agreements related to our disposition of certain properties require that we indemnify the buyer of such properties with regard to any associated environmental liabilities. We could incur material costs or liabilities in connection with claims related to any of the foregoing. The discovery of presently unknown environmental conditions, changes in environmental, health, safety and other laws and regulations, enforcement of existing or new laws and regulations and other unanticipated events could give rise to expenditures and liabilities, including fines or penalties, that could have a material adverse effect on our business, operating results and financial condition. If our products become contaminated, we may be subject to product liability claims and product recalls. Our products may be subject to contamination by disease producing organisms, or pathogens, such as Listeria monocytogenes, Salmonella and generic E. coli. These pathogens are found generally in the environment and, therefore, there is a risk that they, as a result of food processing, could be present in our processed products. These pathogens can also be introduced to our products as a result of improper handling at the further processing, Page 32 foodservice or consumer level. These risks may be controlled, but may not be eliminated, by adherence to good manufacturing practices and finished product testing. We have little, if any, control over proper handling procedures once our products have been shipped for distribution. Even if a product is not contaminated when it leaves our facility, illness and death may result if the pathogens are not also eliminated at the further processing, foodservice or consumer level. Increased sales of further- processed products could lead to increased risks in this area. Even an inadvertent shipment of contaminated products is a violation of law and may lead to increased risk of exposure to product liability claims, product recalls (which may not entirely mitigate the risk of product liability claims) and increased scrutiny by federal and state regulatory agencies and may have a material adverse effect on our business, reputation and prospects. Outbreaks of livestock diseases in general, and broiler diseases in particular, could significantly restrict our ability to conduct our operations. Events beyond our control, such as the outbreak of disease, could significantly restrict our ability to conduct our operations. Furthermore, an outbreak of disease could result in governmental restrictions on the import and export of our fresh broiler products, pork or other products to or from our suppliers, facilities or customers, or require us to destroy one or more of our flocks. This could result in the cancellation of orders by our customers and create adverse publicity that may have a material adverse effect on our ability to market our products successfully and on our business, reputation and prospects. For example, because several chickens in Delaware and Texas tested positive for avian influenza earlier this year, several countries imposed import bans and the infected flocks were destroyed. See "--Foreign embargos, decreased export demand, oversupply of broiler products and competing products and bans on exported chicken and livestock would have an adverse effect on our business." Increased water, energy and gas costs would increase our expenses and reduce our profitability. We require a substantial amount, and as we expand our business we will require additional amounts, of water, electricity and natural gas to produce and process our broiler products. The prices of water, electricity and natural gas fluctuate significantly over time. One of the primary competitive factors in the U.S. broiler market is price, and we may not be able to pass on increased costs of production to our customers. As a result, increases in the cost of water, electricity or natural gas would substantially harm our business and results of operations. Increased costs of transportation would negatively affect our profitability. Our transportation costs are a material portion of the cost of our products. We primarily ship our products and receive our inputs via truck and rail and rely on third party transportation companies for the delivery of most of our products and inputs. The costs associated with the transportation of our products and inputs fluctuate with the price of fuel, the costs to our transportation providers of labor and the capacity of our transportation sources. Increases in costs of transportation would negatively affect our profitability. Page 33 We are exposed to risks relating to product liability, product recalls, property damage and injury to persons for which insurance coverage is expensive, limited and potentially inadequate. Our business operations entail a number of risks, including risks relating to product liability claims, product recalls, property damage and injury to persons. Insurance for these risks is expensive and difficult to obtain, and we may not be able to maintain this insurance in the future on acceptable terms, in amounts sufficient to protect us against losses due to any such events or at all. Moreover, our insurance coverage may not adequately protect us from all of the liabilities and expenses that we incur in connection with such events. If we were to suffer a loss that is not adequately covered by insurance, our results of operations and financial condition would be adversely affected. Any acquisition we make could disrupt our business and harm our financial condition. We may seek to expand our business through the acquisition of companies, technologies, products and services from others. Acquisitions may involve a number of problems, including: - difficulty integrating acquired technologies, operations and personnel with our existing business; - diversion of management attention in connection with negotiating acquisitions and integrating the businesses acquired; - exposure to unforeseen liabilities of acquired companies; and - the need to obtain additional debt financing for any acquisition. We may not be able to address these problems and successfully develop these acquired companies or businesses into profitable units of our company. The loss of key members of our management may adversely affect our business. We believe our continued success depends on the collective abilities and efforts of our senior management. We do not maintain key person life insurance policies on any of our employees. The loss of one or more key personnel could have a material adverse effect on our results of operations. Additionally, if we are unable to find, hire and retain needed key personnel in the future, our results of operations could be materially and adversely affected. The inability to maintain good relations with our employees could adversely affect our business. Page 34 We have approximately 17,000 employees, approximately 3,000 of which are covered by collective bargaining agreements and approximately 575 of which are members of labor unions. We may be unable to maintain good relationships with these labor unions or to successfully negotiate new collective bargaining agreements on satisfactory terms in the future. If we fail to maintain good relationships with our employees generally or with such labor unions or fail to negotiate satisfactory collective bargaining agreements, or if non-unionized operations were to become unionized, we could face labor strikes or work stoppages or other activity that could adversely affect our business and operations. Page 35 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Market Risk Our principal market risks are exposure to changes in broiler and commodity prices and interest rates on borrowings. Although we have international sales and related accounts receivable from foreign customers, there is no foreign currency exchange risk, as all sales are denominated in U.S. dollars. Commodities Risk We are a purchaser of certain agricultural commodities used for the manufacture of poultry feeds. We use commodity futures and options for economic hedging purposes to reduce the effect of changing commodity prices and to ensure supply of a portion of our feed ingredient inventories. Feed ingredient 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 our senior credit facility limit the use of forward purchase contracts and commodities futures and options transactions. As of January 1, 2005, the notional amounts and fair value of our 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 $129.0 million at January 1, 2005. These commitments include both priced and unpriced contracts. Unpriced feed ingredient commitments are valued at market for the month of delivery as of January 1, 2005. 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 $70.0 million. Interest Rate Risk We have exposure to changes in interest rates on certain debt obligations. The interest rates on our amended senior credit facilities fluctuate based on the London Interbank Offered Rate (LIBOR). Assuming the $125.0 million revolver was fully drawn, a 1% increase in LIBOR would increase annual interest expense by approximately $1.4 million. Page 36 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 pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Company's management, including the CEO and the CFO, concluded that as of the end of the period covered by this report the Company maintained disclosure controls and procedures that were effective in ensuring that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. 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 37 PART II: OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds. In connection with the Company's conversion from a cooperative marketing association to a for-profit corporation and the distribution of cash and shares of common stock to Gold Kist's members and former member equity holders in December 2004, Gold Kist repurchased 19,146 shares of common stock issuable to members and former member equity holders who owed past-due indebtedness to Gold Kist of $210,606 in exchange for the cancellation of such indebtedness. In addition, Gold Kist also repurchased 4,977 shares of common stock for $54,747 from certain other members in connection with administrative errors relating to the redemption election in the conversion. To calculate the number of shares to be repurchased, Gold Kist's stock was assigned a value equal to the initial public offering price of $11.00 per share. Gold Kist does not expect to make any additional repurchases of this type in the future. Page 38 Item 6. Exhibits. Exhibits Designation of Exhibit in This Report Description of Exhibit 10.1 Form of Deferred Stock Unit Award for Directors Under the 2004 Non-Employee Director Compensation Plan 31 Section 302, Sarbanes- Oxley Act, Certifications 32 * Section 906, Sarbanes- Oxley Act, Certifications * This exhibit is furnished to the Securities and Exchange Commission and is not deemed to be filed. 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 15, 2005 John Bekkers Chief Executive Officer (Principal Executive Officer) Date February 15, 2005 Stephen O. West Chief Financial Officer, Vice President (Principal Financial Officer) Page 38 Item 6. Exhibits. Exhibits Designation of Exhibit in This Report Description of Exhibit 10.1 Form of Deferred Stock Unit Award for Directors Under the 2004 Non-Employee Director Compensation Plan 31 Section 302, Sarbanes- Oxley Act, Certifications 32 * Section 906, Sarbanes- Oxley Act, Certifications * This exhibit is furnished to the Securities and Exchange Commission and is not deemed to be filed. 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 15, 2005 /s/ John Bekkers John Bekkers Chief Executive Officer (Principal Executive Officer) Date February 15, 2005 /s/ Stephen O. West Stephen O. West Chief Financial Officer, Vice President (Principal Financial Officer)

Gold Kist Inc. 10-Q