Pilgrim's Pride Corp Of Georgia 10-Q 2006 Q2 Quarterly report

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

For the quarterly period ended April 1, 2006

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number: 000-50925

GOLD KIST INC.

(Exact name of registrant as specified in its charter)

DELAWARE	20-1163666
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer 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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act:

Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at May 10, 2006
Common Stock, $0.01 par value per share	51,036,806 shares

Item 1. Financial Statements

GOLD KIST INC.

CONSOLIDATED BALANCE SHEETS

(Amounts, Except Share Amounts, in Thousands)

(Unaudited)

	October 1, 2005			April 1, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	153,561		$	125,184
Receivables, net		125,389			109,714
Inventories, net		233,681			205,265
Deferred income taxes, net		11,506			12,442
Other current assets		26,873			38,365
Total current assets		551,010			490,970
Investments		10,747			11,262
Property, plant and equipment, net		286,515			317,581
Deferred income taxes, net		25,133			25,133
Other assets		52,284			60,969
	$	925,689		$	905,915
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	1,518		$	1,446
Accounts payable		87,486			83,072
Accrued compensation and related expenses		27,292			17,406
Income taxes payable		34,850			13,897
Accrued insurance costs		39,458			49,253
Other current liabilities		36,105			33,022
Total current liabilities		226,709			198,096
Long-term debt, less current maturities		143,714			142,927
Accrued pension costs		54,450			61,472
Accrued postretirement benefit costs		3,961			3,181
Accrued insurance costs		32,600			44,654
Other liabilities		13,527			15,188
Total liabilities		474,961			465,518
Commitments and contingencies (note 10)
Stockholders’ equity:
Preferred stock, authorized 100,000,000 shares		—			—
Common stock, $.01 par value and authorized 900,000,000 shares; issued and outstanding 51,082,157 and 51,052,104 shares as of October 1, 2005 and 51,095,012 and 51,036,806 shares as of April 1, 2006, respectively		511			510
Additional paid-in capital		399,619			403,384
Accumulated other comprehensive loss		(61,265	)		(61,265	)
Retained earnings		112,246			98,562
Common stock held in treasury - 30,053 and 58,206 shares as of October 1, 2005 and April 1, 2006, respectively		(383	)		(794	)
Total stockholders’ equity		450,728			440,397
	$	925,689		$	905,915

See Accompanying Notes to Consolidated Financial Statements.

GOLD KIST INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands, Except Per Share Amounts)

(Unaudited)

	Three Months Ended						Six Months Ended
	April 2, 2005			April 1, 2006			April 2, 2005			April 1, 2006
Net sales	$	570,809			532,365			1,122,767			1,077,725
Cost of sales		477,554			535,217			981,676			1,048,180
Gross profit (loss)		93,255			(2,852	)		141,091			29,545
Distribution, administrative and general expenses		33,076			24,891			58,042			51,904
Conversion expenses		—			—			1,418			—
Net operating income (loss)		60,179			(27,743	)		81,631			(22,359	)
Other income (expenses):
Interest and dividend income		1,890			1,379			2,715			2,950
Interest expense		(6,213	)		(3,878	)		(13,303	)		(8,267	)
Debt prepayment interest and write-off of related fees and discount		—			—			(10,016	)		—
Miscellaneous, net		1,284			1,446			2,986			2,601
Total other expenses, net		(3,039	)		(1,053	)		(17,618	)		(2,716	)
Income (loss) before income taxes		57,140			(28,796	)		64,013			(25,075	)
Income tax expense (benefit)		18,471			(12,569	)		21,151			(11,391	)
Net income (loss)	$	38,669			(16,227	)		42,862			(13,684	)
Net income (loss) per common share:
Basic	$	.77		$	(.32	)	$	.86		$	(.27	)
Diluted	$	.76		$	(.32	)	$	.85		$	(.27	)
Weighted average common shares outstanding:
Basic		49,972			50,116			49,972			50,079
Diluted		50,749			50,116			50,470			50,079

See Accompanying Notes to Consolidated Financial Statements.

GOLD KIST INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

	Six Months Ended
	Apr. 2, 2005			Apr. 1, 2006
Cash flows from operating activities:
Net income (loss)	$	42,862		$	(13,684	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization		21,091			22,094
Amortization of share-based compensation		7,790			3,732
Postretirement benefit plans expense in excess of (less than) funding		(6,093	)		7,643
Deferred income tax benefit		(6,342	)		(936	)
Other		691			(1,108	)
Changes in operating assets and liabilities:
Receivables		(1,537	)		15,675
Inventories		23,313			28,416
Other current assets		5,885			(4,655	)
Income taxes payable		24,991			(20,953	)
Accounts payable, accrued and other expenses		(22,461	)		(7,812	)
Net cash provided by operating activities		90,190			28,412
Cash flows from investing activities:
Acquisitions of property, plant and equipment		(41,612	)		(52,797	)
Dispositions of investments		2,304			1,035
Proceeds from termination of life insurance policies		2,790			—
Other		1,961			(2,556	)
Net cash used in investing activities		(34,557	)		(54,318	)
Cash flows from financing activities:
Principal repayments of long-term debt		(91,044	)		(958	)
Payment of deferred financing costs		—			(1,134	)
Patronage refunds and other equity paid in cash		(3,165	)		—
Proceeds from initial public offering, net of expenses		138,859			—
Cash distributions to members and equity holders		(105,963	)		—
Treasury stock acquired		(275	)		(411	)
Other		—			32
Net cash used in financing activities		(61,588	)		(2,471	)
Net change in cash and cash equivalents		(5,955	)		(28,377	)
Cash and cash equivalents at beginning of period		175,289			153,561
Cash and cash equivalents at end of period	$	169,334		$	125,184
Supplemental disclosure of cash flow information:
Cash paid during the periods for:
Interest (net of amounts capitalized)	$	20,068		$	6,636
Income taxes, net	$	2,502		$	11,396

See Accompanying Notes to Consolidated Financial Statements.

GOLD KIST INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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 April 1, 2006 and for the three and six months ended April 1, 2006. 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 Financial Condition and Results of Operations and the Notes to Consolidated Financial Statements in the previously filed Annual Report on Form 10-K for the fiscal year ended October 1, 2005.

The Company employs a 52/53-week fiscal year. Fiscal 2006 will be a 52-week year beginning October 2, 2005 and ending September 30, 2006. The three-month and six-month periods ended April 1, 2006 and the three-month and six-month periods ended April 2, 2005 each consisted of thirteen weeks and twenty-six weeks, respectively.

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, Gold Kist converted from a cooperative marketing association to a for-profit business corporation. The conversion was accounted for using historical carrying values of the assets and liabilities of Gold Kist. 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. Costs of the conversion were expensed as incurred. Also on October 13, 2004, Gold Kist completed an initial public offering of 12 million 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 1.6 million 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.

3. Receivables

Receivables, net, are principally trade and are stated net of an allowance for doubtful accounts of $1.1 million as of October 1, 2005 and April 1, 2006.

4. Comprehensive Income (Loss)

Comprehensive income (loss) was $38,827 and $(16,227) for the three months ended April 2, 2005 and April 1, 2006, respectively, and $43,020 and $(13,684) for the six months ended April 2, 2005 and April 1, 2006, respectively. Comprehensive income (loss) consists of net income (loss) and, if applicable, pension liability adjustments, net of tax.

5. Inventories

Inventories consist of the following (amounts in thousands):

	Oct. 1, 2005		Apr. 1, 2006
Live poultry and hogs	$	99,935	$	89,435
Raw materials and supplies		52,243		54,214
Marketable products		81,503		61,616
		$233,681	$	205,265

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. When market prices for inventories move below carrying value, the Company records adjustments to write down the carrying values of these inventories.

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 a portion of its 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 current period operating expenses.

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.

6. Property, Plant and Equipment

Property, plant and equipment is summarized as follows (amounts in thousands):

	Oct. 1, 2005	Apr. 1, 2006
Land and land improvements	$  35,962	$  36,010
Buildings	243,263	253,529
Machinery and equipment	467,678	470,992
Construction in progress	23,913	56,136
	770,816	816,667
Less accumulated depreciation	484,301	499,086
	$286,515	$317,581

Depreciation and amortization included in cost of sales in the accompanying consolidated statements of operations were $18.5 million and $20.4 million for the six months ended April 2, 2005 and April 1, 2006, respectively. Depreciation and amortization included in cost of sales for the three months ended April 2, 2005 and April 1, 2006 were $9.4 million and $10.1 million, respectively.

7. Long-Term Debt

Long-term debt is summarized as follows (amounts in thousands):

	Oct. 1,2005		Apr. 1, 2006
Senior notes, due 2014	$	128,307	$	128,406
Subordinated capital certificates of interest with original fixed maturities ranging from seven to fifteen years, unsecured (weighted average interest rate of 8.06% at October 1, 2005 and April 1, 2006)		14,945		14,194
Mortgage loans, due in monthly installments to January 2010, secured by an office building		1,980		1,773
		145,232		144,373
Less current maturities		1,518		1,446
Total long-term debt	$	143,714	$	142,927

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 are reflected net of discount in the accompanying consolidated balance sheets. 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%.

The Company repaid $70.0 million of principal of the senior notes, plus $7.2 million in prepayment interest, in November 2004 with a portion of the proceeds from Gold Kist’s initial public offering completed in October 2004 (see Note 2). In connection with this prepayment, $1.0 million of the discount and $1.8 million of deferred financing costs were written off and recognized in the consolidated statement of operations for the quarter ended January 1, 2005.

In December 2005, the Company amended and restated the senior credit facility to increase the revolving line of credit to an aggregate principal amount of $250.0 million and eliminate the sub-limit for letters of credit. The term of the facility is five years and is secured by a security interest in substantially all of Gold Kist’s assets.

Borrowings under the senior credit facility bear interest at Gold Kist’s option either at London Interbank Offered Rate (LIBOR) or the alternate base rate (which is equal to the greater of the rate announced by the agent bank as its base rate or its federal funds rate plus 0.5%), in each case subject to an applicable margin based upon Gold Kist’s ratio of total debt to Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA). The margin is between 1.00% and 2.00% for LIBOR loans and between 0.00% and 0.75% for alternate base rate loans.

As of April 1, 2006, there was approximately $183.2 million available for borrowing under this facility. Approximately $66.8 million of letters of credit are outstanding under the facility.

Gold Kist is subject to certain covenants contained in the senior credit facility, including, but not limited to, covenants that restrict, subject to specified exceptions, dividends and certain other restricted payments; the incurrence of additional indebtedness and other obligations and the granting of additional liens; loans; extension of credit and guarantees; mergers, acquisitions, investments, and disposition of assets or stock; capital expenditures; and use of proceeds from borrowings under the senior credit facility and excess cash flow. In addition, the credit facility contains financial covenants, including, but not limited to, a fixed charge coverage ratio (1.25 to 1.00 minimum) and a total debt coverage ratio (3.25 to 1.00 maximum), as each such ratio is defined in the senior credit facility.

On May 8, 2006, the Company amended its Fixed Charge Coverage Ratio (FCCR) through the addition of a minimum availability calculation as defined in the agreement. Under the amendment, the Company does not have to maintain the FCCR at greater than 1.25 to 1.00 so long as availability under the senior credit facility is greater than $75 million, and the amount of collateral coverage as defined in the credit agreement, less the aggregate amount of all outstanding Letter of Credit Obligations, Swing Line Advances and Revolving Loans outstanding for each day during such period under the senior credit facility, is greater than $75 million.

The terms of the Company’s senior notes and senior credit facility also include an excess cash flow provision, which under certain conditions could require the Company to deposit funds in a restricted cash account to be used for future scheduled or mandatory principal payments of senior debt.

At April 1, 2006, the Company was in compliance with all applicable loan covenants under its senior notes and senior credit facility.

8. Employee Benefits

Pension Plans

Gold Kist has noncontributory defined benefit pension plans covering substantially all of its employees, as well as former directors from the former Gold Kist Cooperative Association with ten years of service (participants). The plan provisions covering the salaried participants provide pension benefits that are based on the employees’ compensation and service before retirement or other termination of employment. The plan provisions covering the hourly participants provide pension benefits that are based on years of credited service. Gold Kist’s funding policy is to contribute within the guidelines prescribed by federal regulations. Plan assets consist principally of corporate equities and bonds, and U.S. Government and Agency obligations.

Medical and Life Insurance Plans

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.

Components of net periodic benefit cost (income) for the three months ended April 2, 2005 and April 1, 2006 are as follows (amounts in thousands):

						Postretirement
	Pension Benefits					Insurance Benefits
	4/2/2005			4/1/2006		4/2/2005		4/1/2006
Service cost	$	1,169		1,630		—		—
Interest cost		2,499		2,529		54		40
Estimated return on plan assets		(2,872	)	(2,858	)	—		—
Amortization of prior service cost (gain)		119		120		(2,587	)	(2,562	)
Amortization of net loss		1,023		2,259		1,759		2,208
Net periodic benefit cost (income)	$	1,938		3,680		(774	)	(314	)

Components of net periodic benefit cost (income) for the six months ended April 2, 2005 and April 1, 2006 are as follows:

						Postretirement
	Pension Benefits					Insurance Benefits
	4/2/2005			4/1/2006		4/2/2005		4/1/2006
Service cost	$	2,344		3,261		—		—
Interest cost		5,002		5,059		109		79
Estimated return on plan assets		(5,745	)	(5,716	)	—		—
Amortization of prior service cost (gain)		239		240		(5,174	)	(5,123	)
Amortization of net loss		2,046		4,517		3,518		4,416
Net periodic benefit cost (income)	$	3,886		7,361		(1,547	)	(628	)

During the first quarter of fiscal 2006, the Company changed its method of accounting for amortization of unrecognized net actuarial losses related to its postretirement medical plan accounted for in accordance with Statement of Financial Accounting Standards No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The Company changed from recognizing amortization over the average period during which benefits are expected to be paid to a method recognizing the cost over the next year. The Company believes that the newly adopted expense recognition method is preferable in these circumstances as the change will allow amortization of the unrecognized net actuarial losses to be recognized on an accelerated basis which will approximate the recognition period for the unrecognized prior service cost (gain). Such change results in a more systematic and rational manner of recognizing net periodic benefit cost, particularly since the plan is now closed and all benefits are expected to be paid by 2010. The effect of the change was to reduce net income by $0.6 million, or $.01 per diluted share, and $1.3 million, or $.03 per diluted share, for the three and six-month periods ended April 1, 2006, respectively.

9. Share-Based Compensation

Effective January 2, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (SFAS No. 123(r)) and utilized the modified prospective method of adoption. Prior to January 2, 2005, the Company accounted for its stock compensation grants in accordance with the SFAS No. 123 exception, which allowed it to utilize APB No. 25 to account for its stock-based compensation grants and required certain supplemental disclosures. There was no cumulative effect upon adoption of SFAS No. 123(r).

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 (“LTIP”). The Company reserved up to four million shares for issuance upon the exercise of awards under the LTIP.

A grant of nonvested stock to employees was authorized by the Board of Directors and effective as of the closing of the initial public offering (“IPO”) on October 13, 2004 (“IPO stock grants”). In addition, on October 20, 2004, the Board of Directors authorized the issuance of the stock portion of their fiscal 2005 annual retainer in nonvested shares, which vested in July 2005. Total grants of 705,197 and 24,456 shares were issued to employees and directors, respectively. The IPO stock grants issued to employees vest on the third anniversary of the date of grant. However, the shares vest immediately upon (i) the employee’s termination of employment by reason of death, disability or retirement, or (ii) the occurrence of a change in control. Retirement is defined under the LTIP as voluntarily leaving employment after attaining any normal or early retirement age specified in the Company’s benefit plans.

Prior to the adoption of SFAS No. 123(r), the Company’s policy for recognizing compensation expense was to amortize the fair value of the IPO stock grants over the stated vesting period, even though that stated vesting period may not be substantive. As a result, during the quarter ended January 1, 2005, the Company recognized compensation expense of $0.7 million for IPO stock grants made during that period. Had the Company applied SFAS No. 123(r) to the IPO stock grants, and, as a result, recognized the fair value of the grants over the requisite service period as opposed to the stated vesting period of three years, the amount expensed for the grants would have totaled approximately $5.3 million in the quarter ended January 1, 2005. The Company will continue to recognize the compensation expense for the IPO stock grants by amortizing the fair value over the stated three-year vesting period.

The compensation expense recorded in the three and six-month periods ended April 1, 2006 that would not have been recognized had SFAS No. 123(r) been applied to the IPO stock grants issued in the quarter ended January 1, 2005 was approximately $0.4 million and $0.8 million, respectively.

In January 2005, the Board of Directors approved replacement employment agreements with the Chief Executive Officer and the Senior Vice President, Planning and Administration and replacement change in control (“CIC”) agreements with the other officers. Equity grants to the Company’s officers under the Company’s LTIP, consisting of 355,722 shares of nonvested stock (“CIC stock grants”), stock-settled stock appreciation rights with respect to 173,860 shares (“stock-settled SARS”) and 96,558 performance share awards (“performance shares”), were approved and awarded in January 2005. The CIC stock grants vest as to 25% of the shares on each anniversary of the date of grant, beginning January 24, 2006, provided, however, that the shares will vest 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. Additional equity grants for other management participants, consisting of stock-settled SARS with respect to 86,954 shares and 88,553 performance shares, were also approved and awarded with the same vesting periods as discussed below.

The stock-settled SARS vest 50% in the third year and 50% in the fourth year after the grant date; provided, however, that the stock-settled SARS vest and become immediately exercisable upon (i) the participant’s termination of employment by reason of death, disability or retirement, or (ii) the occurrence of a change in control.

The performance shares provide the participant the opportunity to earn a number of shares of common stock of the Company at the end of a three-year performance cycle. The performance condition is based upon the Company’s profitability in relation to a defined peer group within the broiler industry as measured by an independent benchmarking company. The performance cycle will be shortened and a pro rata number of shares issued if a participant’s employment is terminated by reason of the participant’s death, disability or retirement prior to the end of the three-year period and the performance conditions have been met. If there is a change in control, then the performance conditions shall be deemed to have been met at the 100% level and the participant will receive a pro rata number of shares depending on the amount of time that has lapsed in the performance period.

Stock-settled SARS and performance share grants of 240,778 and 166,721 shares, respectively, were awarded to plan participants in November 2005 as part of the Company’s incentive compensation payments for fiscal 2005.

Deferred stock units are issued to directors who elect to receive the quarterly cash portion of their retainer in stock units in lieu of cash. The stock units shall be converted to shares of stock on the earlier of six months after the director’s service on the Board is terminated or at a date as designated by the participating director. In February 2006, the stock portion of directors’ fiscal 2006 annual retainer was paid in vested shares.

The equity grants and awards are summarized as follows (share and dollar amounts in thousands):

	Grant Date	Shares	Fair Value		Vesting Period
IPO stock grants	October 2004
Employees		705	$	7,757	36 months
Directors		25		280	9 months
CIC stock grants	January 2005	356		4,863	48 months
Stock-settled SARS	January 2005	261		1,795	48 months
	November 2005	241		2,003	48 months
Performance shares	January 2005	185		2,288	33 months
	November 2005	167		2,654	35 months
Director stock units	Quarterly	5		88	Various
Directors’ stock annual retainer	February 2006	19		280	—
Total		1,964	$	22,008

The Company determined that all of the above grants were equity-classified awards under SFAS No. 123(r). As a result, the fair value of the awards has been measured at grant date and is being recognized as compensation expense over the vesting periods, except as noted below. The fair value of the IPO stock grants, CIC stock grants and performance shares was the quoted public market price of the shares on the date of the grant. The fair value of the stock-settled SARS was determined under the Black-Scholes-Merton valuation method. The SARS issued January 2005 had a calculated term of 6.75 years, as determined under the simplified method, a risk free rate of 3.93% and a volatility of 45%, based on data from a peer group of similar profile companies. The SARS issued in November 2005 were valued with the same assumptions, except the risk free rate used was 4.47%. The contractual term of the stock-settled SARS is ten years.

The grants previously described, with the exception of the performance shares, vest fully at retirement, which is defined as attaining any normal or early retirement age (fifty-five) specified in the Company’s benefit plans. A significant number of grant recipients were fifty-five or older at the time of the grant and therefore have the option to retire early under the Company’s benefit plans, at which time the grants would vest. In accordance with SFAS No. 123(r), because the employee is eligible to retire at the grant date, the awards’ explicit service condition is nonsubstantive and the entire amount of compensation cost was recognized at the grant date except for the IPO stock grants as previously discussed.

The amount of the share-based compensation expense under the stock-settled SARS granted in November 2005 related to those recipients aged 55 or over was $1.3 million at the grant date and represented 139,683 shares.

Total share-based compensation expense was $7.1 million and $7.8 million for the three and six-month periods ended April 2, 2005, respectively, and $1.4 million and $3.7 million for the three and six- month periods ended April 1, 2006, respectively, and is reflected within distribution, general and administrative expense in the accompanying consolidated statements of operations.

A summary of the status of the Company’s nonvested stock grants is as follows (shares in thousands):

	Shares		Weighted Average Grant Date Fair Value Per Share
Outstanding at October��1, 2005	1,460		$	11.11
Changes during period:
Granted	428			11.61
Vested	(107	)		13.25
Forfeited	(18	)		11.59
Outstanding at April 1, 2006	1,763		$	11.10

At April 1, 2006, the total share-based compensation cost related to nonvested grants and awards not yet recognized is approximately $8.4 million. The weighted average period over which the remaining share-based compensation expense is to be recognized is approximately twenty-two months.

10. Contingent Liabilities

Four female employees of the Company’s Corporate Office Information Services (I/S) Department filed an Equal Employment Opportunity Commission (“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 issued “Right to Sue” letters to the four complainants in these claims, meaning that the EEOC would not sue or participate in a suit against the Company on behalf of the parties in these actions nor would it pursue a systemic discrimination charge in this matter. The letter provided that the individuals could 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. The U.S. District Court, in an Order entered June 13, 2005, denied the motion of the plaintiffs to certify the litigation as a class action. The Court’s ruling, for which the plaintiffs did not seek an interlocutory appeal, means that the litigation will not proceed as a class action and will be litigated as individual claims of the four named plaintiffs. The Company intends to defend the litigation vigorously. The Company believes that this lawsuit will not have a material adverse effect on its financial condition or results of operations.

The Company was sued by one of the Company’s hourly workers in the U.S. District Court for the Northern District of Alabama. The complaint sought injunctive relief and damages under the Fair Labor Standards Act (“FLSA”) and contended that the employee was not compensated appropriately for time spent donning and doffing certain clothing for his job. The case was settled on March 30, 2006 for an insignificant amount.

The Department of Labor has recently contacted many members of the U.S. poultry industry, including Gold Kist, who were included in a wage and hour audit initiated by the U.S. Department of Labor in 2000. The Department of Labor has been of the opinion that many poultry companies have not been accurately compensating employees for the time spent on such activities as donning and doffing work equipment. Following the recent Supreme Court decision in the IBP/Alvarez case, the Department of Labor has reasserted its audit concerns in this area. The Company has been reviewing its operations and pay practices to determine the appropriate response to the Department of Labor. Prior to being contacted by the Department of Labor, the Company designed plans which were implemented on May 1st to modify practices at its facilities to address concerns described in the IBP/Alvarez case and the Department of Labor audit. As of April 1, 2006, the Company has not reserved any amounts in this matter because a loss is not considered probable or estimable.

Gold Kist is a party to various other legal, environmental and administrative proceedings, which management believes constitute ordinary routine litigation incidental to the business conducted by Gold Kist. Potential liability with respect to such proceedings is either accrued or not expected to be significant.

11. Income (Loss) Per Share

The net income for both the basic and diluted income per share computations was $38.7 million and $42.9 million for the three and six months ended April 2, 2005, respectively, and a net loss of $16.2 million and $13.7 million for the three and six months ended April 1, 2006, respectively. Following is a reconciliation of weighted average common shares – basic to weighted average common shares – diluted (share amounts in thousands).

	Three Months Ended		Six Months Ended
	April 2, 2005	April 1, 2006	April 2, 2005	April 1, 2006
Weighted average common shares – basic	49,972	50,116	49,972	50,079
Dilutive impact of share-based compensation grants	777	—	498	—
Weighted average common shares – diluted	50,749	50,116	50,470	50,079

Due to the net loss for the three and six months ended April 1, 2006, the basic shares are used for calculating both basic and diluted loss per share.

12. Supplemental Combining Condensed Financial Statements (amounts in thousands)

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 1, 2005 and April 1, 2006, the supplemental combining condensed statements of operations for the three and six-month periods ended April 2, 2005 and April 1, 2006 and the supplemental combining condensed statements of cash flows for the six-month periods ended April 2, 2005 and April 1, 2006. 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.

	As of October 1, 2005
	Parent Only		Guarantor Subsidiaries			Non-Guarantor Subsidiary		Eliminations			Consolidated
Balance Sheet:
ASSETS
Current assets:
Cash and cash equivalents	$	150,331	$	672		$	2,558		—		$	153,561
Receivables, net		125,200		13,147			36,161	$	(49,119	)		125,389
Inventories, net		233,415		266			—		—			233,681
Deferred income taxes, net, and other current assets		15,738		(683	)		23,324		—			38,379
Total current assets		524,684		13,402			62,043		(49,119	)		551,010
Investments		34,278		—			—		(23,531	)		10,747
Property, plant and equipment, net		286,259		256			—		—			286,515
Deferred income taxes, net, and other assets		65,877		2,860			8,680		—			77,417
	$	911,098	$	16,518		$	70,723	$	(72,650	)	$	925,689
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	1,518		—			—		—		$	1,518
Accounts payable		135,482	$	282		$	841	$	(49,119	)		87,486
Accrued compensation and related expenses		27,277		15			—		—			27,292
Accrued insurance costs		10,248		—			29,210		—			39,458
Other current liabilities		70,518		(782	)		1,219		—			70,955
Total current liabilities		245,043		(485	)		31,270		(49,119	)		226,709
Long-term debt, less current maturities		143,714		—			—		—			143,714
Accrued pension costs		54,450		—			—		—			54,450
Accrued postretirement benefit costs		3,961		—			—		—			3,961
Accrued insurance costs		—		—			32,600		—			32,600
Other liabilities		13,202		325			—		—			13,527
Total liabilities		460,370		(160	)		63,870		(49,119	)		474,961
Stockholders’ equity		450,728		16,678			6,853		(23,531	)		450,728
	$	911,098	$	16,518		$	70,723	$	(72,650	)	$	925,689

	As of April 1, 2006
	Parent Only		Guarantor Subsidiaries			Non-Guarantor Subsidiary		Eliminations			Consolidated
Balance Sheet:
ASSETS
Current assets:
Cash and cash equivalents	$	122,400	$	243		$	2,541		—		$	125,184
Receivables, net		112,156		14,058			51,073	$	(67,573	)		109,714
Inventories, net		204,335		930			—		—			205,265
Deferred income taxes, net, and other current assets		20,389		(679	)		31,097		—			50,807
Total current assets		459,280		14,552			84,711		(67,573	)		490,970
Investments		38,405		—			—		(27,143	)		11,262
Property, plant and equipment, net		317,332		249			—		—			317,581
Deferred income taxes, net, and other assets		68,575		2,747			14,780		—			86,102
	$	883,592	$	17,548		$	99,491	$	(94,716	)	$	905,915
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Notes payable and current maturities of long-term debt	$	1,446		—			—		—		$	1,446
Accounts payable		146,620	$	592		$	3,433	$	(67,573	)		83,072
Accrued compensation and related expenses		17,386		20			—		—			17,406
Accrued insurance costs		10,512		—			38,741		—			49,253
Other current liabilities		44,788		(511	)		2,642		—			46,919
Total current liabilities		220,752		101			44,816		(67,573	)		198,096
Long-term debt, less current maturities		142,927		—			—		—			142,927
Accrued pension costs		61,472		—			—		—			61,472
Accrued postretirement benefit costs		3,181		—			—		—			3,181
Accrued insurance costs		—		—			44,654		—			44,654
Other liabilities		14,863		325			—		—			15,188
Total liabilities		443,195		426			89,470		(67,573	)		465,518
Stockholders’ equity		440,397		17,122			10,021		(27,143	)		440,397
	$	883,592	$	17,548		$	99,491	$	(94,716	)	$	905,915

	Three Months (13 Weeks) Ended April 2, 2005
	Parent Only			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Statement of Operations:
Net sales	$	571,026		$	824		$	3,519		$	(4,560	)	$	570,809
Cost of sales		478,169			850			3,095			(4,560	)		477,554
Gross profit (loss)		92,857			(26	)		424			—			93,255
Distribution, administrative and general expenses		32,840			217			19			—			33,076
Net operating income (loss)		60,017			(243	)		405			—			60,179
Interest, income taxes and other, net		(21,348	)		247			219			(628	)		(21,510	)
Net income (loss)	$	38,669		$	4		$	624		$	(628	)	$	38,669
	Three Months (13 Weeks) Ended April 1, 2006
	Parent Only			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Statement of Operations:
Net sales	$	528,505		$	854		$	7,723		$	(4,717	)	$	532,365
Cost of sales		533,278			757			5,899			(4,717	)		535,217
Gross profit (loss)		(4,773	)		97			1,824			—			(2,852	)
Distribution, administrative and general expenses		24,881			(12	)		22			—			24,891
Net operating income (loss)		(29,654	)		109			1,802			—			(27,743	)
Interest, income taxes and other, net		13,427			135			3			(2,049	)		11,516
Net income (loss)	$	(16,227	)	$	244		$	1,805		$	(2,049	)	$	(16,227	)
	Six Months (26 Weeks) Ended April 2, 2005
	Parent Only			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Statement of Operations:
Net sales	$	1,122,155		$	1,619		$	7,045		$	(8,052	)	$	1,122,767
Cost of sales		980,988			1,680			7,060			(8,052	)		981,676
Gross profit (loss)		141,167			(61	)		(15	)		—			141,091
Distribution, administrative and general expenses		59,079			339			42			—			59,460
Net operating income (loss)		82,088			(400	)		(57	)		—			81,631
Interest, income taxes and other, net		(39,226	)		429			708			(680	)		(38,769	)
Net income (loss)	$	42,862		$	29		$	651		$	(680	)	$	42,862
	Six Months (26 Weeks) Ended April 1, 2006
	Parent Only			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations			Consolidated
Statement of Operations:
Net sales	$	1,071,990		$	2,356		$	12,696		$	(9,317	)		1,077,725
Cost of sales		1,045,680			2,103			9,714			(9,317	)		1,048,180
Gross profit		26,310			253			2,982			—			29,545
Distribution, administrative and general expenses		51,803			59			42			—			51,904
Net operating income (loss)		(25,493	)		194			2,940			—			(22,359	)
Interest, income taxes and other, net		11,809			250			228			(3,612	)		8,675
Net income (loss)	$	(13,684	)	$	444		$	3,168		$	(3,612	)		(13,684	)

	Six Months (26 Weeks) Ended April 2, 2005
	Parent Only			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations	Consolidated
Statement of Cash Flows:
Net cash provided by (used in) operating activities	$	97,407		$	(1,194	)	$	(6,023	)	—	$	90,190
Cash flows from investing activities:
Acquisitions of property, plant and equipment		(41,607	)		(5	)		—		—		(41,612	)
Other		5,783			1,272			—		—		7,055
Net cash provided by (used in) investing activities		(35,824	)		1,267			—		—		(34,557	)
Cash flows from financing activities:
Principal repayments of long-term debt		(91,044	)		—			—		—		(91,044	)
Patronage refunds and other equity paid in cash		(3,165	)		—			—		—		(3,165	)
Proceeds from initial public offering, net of expenses		138,859			—			—		—		138,859
Cash distributions to members and equity holders		(105,963	)		—			—		—		(105,963	)
Treasury stock acquired		(275	)		—			—		—		(275	)
Net cash used in financing activities		(61,588	)		—			—		—		(61,588	)
Net change in cash and cash equivalents		(5	)		73			(6,023	)	—		(5,955	)
Cash and cash equivalents, beginning of period		166,430			313			8,546		—		175,289
Cash and cash equivalents, end of period	$	166,425		$	386		$	2,523		—	$	169,334

	Six Months (26 Weeks) Ended April 1, 2006
	Parent Only			Guarantor Subsidiaries			Non-Guarantor Subsidiary			Eliminations	Consolidated
Statement of Cash Flows:
Net cash provided by (used in) operating activities	$	28,966		$	(537	)	$	(17	)	—	$	28,412
Cash flows from investing activities:
Acquisitions of property, plant and equipment		(52,788	)		(9	)		—		—		(52,797	)
Other		(1,638	)		117			—		—		(1,521	)
Net cash provided by (used in) investing activities		(54,426	)		108			—		—		(54,318	)
Cash flows from financing activities:
Principal repayments of long-term debt		(958	)		—			—		—		(958	)
Payment of deferred financing costs		(1,134	)		—			—		—		(1,134	)
Treasury stock acquired		(411	)		—			—		—		(411	)
Other		32			—			—		—		32
Net cash used in financing activities		(2,471	)		—			—		—		(2,471	)
Net change in cash and cash equivalents		(27,931	)		(429	)		(17	)	—		(28,377	)
Cash and cash equivalents, beginning of period		150,331			672			2,558		—		153,561
Cash and cash equivalents, end of period	$	122,400		$	243		$	2,541		—	$	125,184

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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% in 1997 to approximately 57% in 2005 and this trend is expected to continue.

Gold Kist is the third largest producer of broilers and related products in the United States accounting for approximately 9% of the industry’s production. The industry has experienced volatility in results of operations over the last five years, and we expect 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, supplies and prices of competing meats and proteins, animal health factors in the global meat sector and general economic conditions.

We are focusing our growth efforts on value added products. The contracts for the sales of these products typically have longer terms than contracts for the sales of our minimally processed products and typically include elements of fixed pricing. As a result, we believe that increased sales of further-processed products will result in less volatility in the prices at which we sell our products. Sales of our value added products represented approximately 57.7% of our sales for the six months ended April 1, 2006 as compared to approximately 52.0% for the fiscal year ended October 1, 2005.

According to the USDA World Agricultural Supply and Demand Estimates (“WASDE”), calendar 2005 U.S. broiler meat production was approximately 35.0 billion pounds, ready-to-cook weight, 3.8% above the 33.7 billion pounds produced in calendar 2004. The WASDE April estimate for calendar 2006 broiler meat production is 35.8 billion pounds, which is a 2.3% increase from calendar 2005. This increase is principally due to heavier bird weights. The number of broilers to be produced is not projected to increase significantly in calendar 2006.

The Company announced in March 2006 that it was reducing broiler placements on a per head basis by 3.25%. The reduction will be fully in place in May 2006.

Our export sales, which we define as sales other than to customers in the United States or Canada, were $59.5 million for the six months ended April 1, 2006. The U.S. poultry industry historically has exported 15% to 20% of domestic production, principally dark meat products to Russia and other former Soviet Republics, Mexico, Japan and countries in Asia. The Company’s poultry export sales have historically been less than 10% of net sales. However, any disruption in the export markets can significantly impact domestic broiler sales prices by creating excess domestic supply. Incidences of

avian influenza in Asia, the Middle East and Eastern Europe have adversely impacted export demand. In addition, the Russian Agriculture Minister on April 27, 2006 cancelled all poultry import licenses. Even though the Russian Agriculture Minister said he expects to begin issuing new licenses within two weeks, there is uncertainty regarding how quickly new licenses will be issued and whether there will be any long-term impact on the amount of poultry exported from the U.S. to Russia. The recent adverse conditions affecting export sales and sales prices and their consequences on domestic prices are expected to continue for at least the near term.

The cost of feed grains, primarily corn and soybean meal, averages approximately 55% to 60% of total live broiler production costs or approximately 30% to 35% of the Company’s cost of sales. Prices of feed grains fluctuate in response to worldwide supply and demand. Increased worldwide corn and soybean production favorably impacted feed ingredient costs in fiscal 2005. We expect feed ingredient costs in fiscal 2006 to be comparable to fiscal 2005 levels.

Energy costs represent a significant component of product and delivery costs as such costs affect transportation costs, costs to operate poultry facilities and packaging costs. Although the spikes in energy prices during the fourth quarter of fiscal 2005 due to the effects of Hurricanes Katrina and Rita have moderated, energy costs in the six months ended April 1, 2006 were 27.9% higher than the six months ended April 1, 2005. Energy costs in fiscal 2006 are expected to remain above fiscal 2005 levels.

General issues such as increased domestic and global competition in the meat industry, heightened concerns over the security of the U.S. food supply, volatility in feed grain commodity prices and export markets, increasing government regulation over animal production, animal welfare activism and animal disease (including additional outbreaks of avian influenza) continue as significant risks and challenges to profitability and growth, both for Gold Kist and the broiler industry in general.

Avian Influenza

Gold Kist chickens are raised in enclosed poultry houses that protect our chickens from contact with wild birds and other animals. As part of comprehensive biosecurity and disease prevention measures, poultry producers do not permit unauthorized visitors on their farms and take other appropriate precautions designed to prevent cross contamination between farms. In addition, we participate in the National Chicken Council’s enhanced avian influenza (“AI”) testing program, which requires testing of every flock of chickens prior to processing. If a confirmed case of any strain of AI were to occur, additional biosecurity measures would be implemented immediately as directed by USDA and by federal and state public health officials. To prevent these chickens from entering the food markets, Gold Kist would dispose of any infected flocks humanely and in an environmentally safe manner in total compliance with all governmental regulations. Although there are currently no reported AI cases in commercial chicken in the United States and there has never been an outbreak of the H5N1 high pathogenic Asian strain of AI, confirmed cases in the U.S. commercial poultry industry could have an adverse effect on the supply of chicken, domestic and foreign product demand and sales prices for chicken products and our results of operations and financial position. See “Risk

Factors – Outbreaks of livestock diseases, particularly an outbreak of avian influenza among humans, could adversely affect our business.” References in this report to “fiscal 2006,” “fiscal 2005” and “fiscal 2004” refer to the Company’s fiscal years ending or ended September 30, 2006, October 1, 2005 and June 26, 2004, respectively. The second quarter of fiscal 2005 was from January 2, 2005 to April 2, 2005 and the second quarter of fiscal 2006 was from January 1, 2006 to April 1, 2006.

RESULTS OF OPERATIONS

The following table presents certain statements of operations items as a percentage of net sales for the periods indicated:

	Three Months Ended				Six Months Ended				Fiscal Year Ended
	Apr. 2, 2005		Apr. 1, 2006		Apr. 2, 2005		Apr. 1, 2006		Oct. 1, 2005
Net sales	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	83.7		100.5		87.4		97.3		86.1
Gross profit (loss)	16.3		(.5	)	12.6		2.7		13.9
Distribution, administrative and general expenses	5.8		4.7		5.2		4.8		4.9
Other expenses	—		—		.1		—		.1
Net operating income (loss)	10.5		(5.2	)	7.3		(2.1	)	8.9
Interest expense	(1.1	)	(.7	)	(1.2	)	(.8	)	(1.0	)
Other (expenses) income, net (including income taxes)	(2.6	)	2.9		(2.3	)	1.6		(3.0	)
Net income (loss)	6.8	%	(3.0	)%	3.8	%	(1.3	)%	4.9	%

Net Sales

Our net sales of $532.4 million for the quarter ended April 1, 2006 decreased 6.7% from $570.8 million for the quarter ended April 2, 2005. For the six months ended April 1, 2006, net sales decreased 4.0% from $1.12 billion in the comparable period last year to $1.08 billion in the current year. The decrease in net sales was due primarily to a decline of 9.4% and 5.7% in average broiler sales prices for the quarter and six months ended April 1, 2006, respectively, compared to the quarter and six months ended April 2, 2005. The sales price decline was partially offset by a slight increase in pounds sold. Increased supply was the principal factor leading to the decline of sales prices in the second fiscal quarter and six months ended April 1, 2006 compared to the second fiscal quarter and six months ended April 2, 2005. Average broiler sales prices for the second fiscal quarter ended April 1, 2006 were 3.2% lower than prices for the first fiscal quarter ended December 31, 2005. We believe concerns in export markets about avian influenza was the primary cause for reduced consumption in those markets, contributing to increased domestic supply and lower sales prices in the quarter and six months ended April 1, 2006.

Our export sales of $59.5 million for the six months ended April 1, 2006 were 3.3% higher than the fiscal 2005 comparable period, due to higher average prices for dark meat products. The increase in average prices was partially offset by a reduction in the pounds of export sales. Export sales

were $27.9 million for the quarter ended April 1, 2006, a 3.9% increase over the $26.8 million for the quarter ended April 2, 2005 due principally to increased pounds sold to several countries in Asia, which more than offset a reduction in pounds sold to Russia. Our export sales to Russia decreased 35.7% in pounds sold and 27.9% in dollar value from $26.9 million in the six month period ended April 2, 2005 to $19.4 million in the six month period ended April 1, 2006. A drop in consumption in export markets due to AI concerns and resistance to the higher prices during calendar 2005 have driven these reductions in pounds sold in the year-to-date fiscal 2006 period. Selling prices of the principal export product, leg quarters, have dropped over 40% during the quarter ended April 1, 2006 as compared to the quarter ended December 31, 2005. Leg quarter sales prices have improved in recent weeks; however, it is not known whether this trend will continue.

Net Operating Income

We had a net operating loss of $27.7 million and $22.4 million for the three and six months ended April 1, 2006, respectively, compared to net operating income of $60.2 million and $81.6 million in the comparable periods in 2005. The decrease in net operating income in the six month period ended April 1, 2006 as compared to the six month period ended April 2, 2005 was due primarily to lower broiler selling prices and higher processing, energy and other production costs. Processing costs increased in total due to additional pounds processed and on a per pound basis due to higher utilities, freight and packaging costs in the six months ended April 1, 2006. In addition, grower pay increased 9.5% due to higher seasonal energy supplemental payments. Total feed costs for the six months ended April 1, 2006 were slightly higher than the six months ended April 2, 2005 due to the additional pounds produced, partially offset by lower soybean meal ingredient costs. Average prices for corn and soybean meal for the six months ended April 1, 2006 were 1.3% higher and 5.8% lower, respectively, than the comparable period in 2005.

The 10.6% decrease in distribution, administrative and general expenses during the six months ended April 1, 2006 was due principally to the absence of cash incentive compensation accruals due to the net loss as compared to amounts accrued on the net income during the six months ended April 2, 2005. In addition, noncash share-based compensation expense decreased from $7.8 million for the six months ended April 2, 2005 to $3.7 million for the six months ended April 1, 2006. This was due principally to the recognition of expense with respect to grants issued in January 2005 to recipients aged 55 or older and eligible for early retirement (see Note 9 of Notes to Consolidated Financial Statements).

Expenses of $1.4 million, principally advisory fees related to our conversion from a cooperative marketing association to a for-profit corporation, were incurred in the first quarter of fiscal 2005.

Other Income (Expenses)

Other expenses, net, totaled $1.1 million and $2.7 million for the three and six months ended April 1, 2006, respectively, compared to $3.0 million and $17.6 million of expense for the comparable periods in 2005.

Interest and dividend income was $1.4 million and $3.0 million for the three and six months ended April 1, 2006, respectively, compared to $1.9 million and $2.7 million for the comparable periods in 2005. These amounts were principally interest income from cash balances invested in short-term interest bearing instruments. Lower average cash balances invested during the second fiscal quarter of 2006 resulted in the decrease from the comparable quarter in fiscal 2005.

Interest expense was $3.9 million and $8.3 million for the three and six months ended April 1, 2006, respectively, compared to $6.2 million and $13.3 million for the comparable periods in 2005, a decrease of 37.6% and 37.9%, respectively. Significantly lower average long-term debt balances in the three and six months ended April 1, 2006 were the principal factor leading to the decrease in interest expense.

In connection with the repayment of $70 million principal amount of the senior notes with a portion of the proceeds from our initial public offering completed on October 13, 2004, the Company incurred a $7.2 million prepayment interest charge in the first quarter of fiscal 2005. 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 in the first quarter of fiscal 2005.

Miscellaneous, net was income of $1.4 million and $2.6 million for the three and six months ended April 1, 2006, respectively, compared to $1.3 million and $3.0 million for the comparable periods in 2005. These amounts resulted principally from the income from a hog production joint venture of $1.4 million for the six months ended April 1, 2006 as compared to $1.9 million for the six months ended April 2, 2005. Lower hog market prices due to oversupply in the animal protein industry caused this decline.

Income Tax Expense

For the three and six months ended April 1, 2006, our combined federal and state effective income tax rate used for purposes of calculating the tax benefit on the loss before income taxes were 43.6% and 45.4%, respectively. The income tax rates reflect income taxes at statutory rates adjusted principally for available tax credits, exempt interest income and the deductibility of state income taxes for federal tax purposes. Due to the net loss, these items resulted in a higher benefit rate as compared to the statutory rates. The income tax benefit for the three and six months ended April 1, 2006 was also favorably impacted by the release of a tax contingency reserve of $0.9 million.

Other

The Company has initiated the implementation of a new Enterprise Resource Planning (“ERP”) system in order to better manage the growth and increasing complexity of our business and to enhance the effectiveness and efficiency of our accounting and manufacturing processes. Certain costs that are incurred in the procurement and development of this ERP system will be capitalized in accordance with SOP 98-1 (“Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”). Capitalized costs to date include fees paid for the purchase of software, fees paid to third parties to customize the software during the application development stage, and payroll and payroll related costs for employees who are directly associated with and devote time to the software project and who are working on software development tasks such as design requirements, development,

infrastructure and testing. General and administrative costs and overhead costs are not capitalized. As of April 1, 2006, total capitalized software project costs for the ERP system were approximately $2.2 million. The total project is projected to cost approximately $5.0 million. Amortization will be recorded on a straight-line basis over its estimated useful life once the project is substantially complete and ready for its intended use, which is planned for the first quarter of fiscal year 2007.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash flow provided from our operations and our senior credit facility. In fiscal 2005, the Company repaid $158.3 million in long-term debt and achieved a “negative net debt” position whereby our cash and cash equivalent balances exceeded outstanding long-term debt ($153.6 million in cash and cash equivalent vs. $145.2 million in total long-term debt, including current maturities, as of October 1, 2005). We repaid approximately $70 million of the $200 million principal amount of our senior notes with a portion of the proceeds from the Company’s initial public offering completed in October 2004 with the other debt payments made from cash provided by operating activities in fiscal 2005. During the second quarter of fiscal 2006, operating losses and capital expenditures reduced cash and cash equivalents from $153.6 million to $125.2 million resulting in a net debt position of $19.2 million ($144.4 million in total long-term debt, including current maturities, less the $125.2 million in cash and cash equivalents). This compares to a net debt position of $43.1 million as of the end of the second quarter in fiscal 2005. Also, as of April 1, 2006, we had $183.2 million available for borrowing under our credit facility compared to $93.7 million as of April 2, 2005.

In December 2005, we amended our senior credit facility to increase its revolving line of credit to an aggregate principal amount of $250.0 million, eliminate the sub-limit on the aggregate stated amount of letters of credit that may be issued under the senior credit facility, decrease the interest rates and fees, reduce the number of financial covenants and ratios and relax the affirmative and negative covenants. The term of the senior credit facility is five years. The senior credit facility is secured by a security interest in substantially all of Gold Kist’s assets, including all present and future accounts receivable and inventory, property, plant and equipment, intangible assets and the stock of certain subsidiaries. Borrowings under the senior credit facility are limited to the lesser of $250.0 million and an amount determined by reference to a collateral coverage ratio that is a function of a percentage of the book value of our accounts receivable, inventory and property, plant and equipment.

Borrowings under the senior credit facility bear interest at our option either at LIBOR or an alternate base rate (which is equal to the greater of the rate announced by the agent bank as its base rate or its federal funds rate plus 0.5%), in each case subject to an applicable margin based upon our ratio of total debt to earnings before interest, taxes, depreciation and amortization, or EBITDA. The margin is between 1.00% and 2.00% for LIBOR loans and between 0.00% and 0.75% for alternate base rate loans.

We are subject to certain affirmative and negative covenants contained in the senior credit facility, including, but not limited to, covenants that restrict, subject to specified exceptions, dividends and certain other restricted payments; the incurrence of additional indebtedness and other

obligations and the granting of additional liens; loans; extension of credit and guarantees; mergers, acquisitions, investments, and disposition of assets or stock; capital expenditures; and use of proceeds from borrowings under the senior credit facility and excess cash flow. The senior credit facility also includes covenants relating to compliance with certain laws, payments of taxes, maintenance of insurance and financial reporting.

On May 8, 2006, the Company amended its Fixed Charge Coverage Ratio (“FCCR”) to provide additional flexibility through the addition of a minimum availability calculation. Under the amendment, the Company does not have to maintain the FCCR at greater than 1.25 to 1.00 so long as availability under the senior credit facility is greater than $75 million and the amount of collateral coverage as defined in the credit agreement, less aggregate amounts outstanding under the senior credit facility, including letter of credit obligations, is greater than $75 million.

As of April 1, 2006, we had approximately $183.2 million available for borrowing and $66.8 million of letters of credit outstanding under the facility. We were in compliance with all applicable loan covenants under our senior notes and senior credit facility at April 1, 2006.

For the first six months ended April 1, 2006, cash provided by operating activities was $28.4 million, compared to cash provided by operating activities of $90.2 million for the six months ended April 2, 2005. The net loss of $13.7 million for the six months ended April 1, 2006 as compared to the net income of $42.9 million was the principal factor for the $61.8 million decrease in cash provided by operating activities. Noncash expenses, such as depreciation, amortization and the postretirement benefit plans expense, in combination with reduced levels of receivables and inventories due to lower values, improved turnover and inventory management provided $77.6 million in operating cash flow for the six months ended April 1, 2006. This more than offset the fiscal 2006 net loss for such six-month period, the reduction in income taxes payable due to tax payments on fiscal 2005 earnings and the tax benefit of the loss for the first six months of fiscal 2006, and other changes totaling $49.2 million resulting in the positive cash flow from operating activities of $28.4 million for the six months ended April 1, 2006.

Net cash used in investing activities for the first six months of fiscal 2006 was $54.3 million compared to $34.6 million for the comparable period in 2005. The $19.7 million increase in net cash used in investing activities was due to higher capital expenditures for the six months ended April 1, 2006 as compared to the comparable period in 2005. We expect capital expenditures to approximate $90.0 million during fiscal 2006. This includes expenditures for expansion of further processing capacity, technological advances in our poultry production and processing operations and expanded chill pack capacity. In addition, capital expenditures include other asset improvements and necessary replacements. Management plans to fund fiscal 2006 capital expenditures and related working capital needs with existing cash balances and cash expected to be provided from operations or borrowings from our senior credit facility.

Cash used in financing activities for the six months ended April 1, 2006 was $2.5 million compared to $61.6 million for the comparable period in 2005. The cash used in financing activities in the six months ended April 2, 2005 reflects the initial public offering transaction, the disbursement of

proceeds to former members and equity holders and the repayment of debt, principally repayment of $70.0 million of the senior notes. At April 1, 2006, the Company had cash of $112.3 million invested in short term interest-bearing instruments out of the total cash and cash equivalents of $125.2 million.

Working capital and stockholders’ equity were $292.9 million and $440.4 million, respectively, at April 1, 2006 as compared to $324.3 million and $450.7 million, respectively, at October 1, 2005.

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 2006.

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:

• market conditions for finished products (including further processed products), including competitive factors and the supply and pricing of alternative meat proteins;

• disease outbreaks, including AI, affecting broiler production and/or marketability of our products;

• fluctuations in the cost and availability of raw materials, such as feed ingredients;

• access to foreign markets together with foreign economic conditions;

• changes in the availability and relative costs of labor and contract growers;

• immigration legislation that could increase the costs of our doing business or cause us to change the way in which we do business;

• problems caused by the implementation of our new ERP software;

• effectiveness of our sales and marketing programs;

• effectiveness of our capital expenditures and other cost-saving measures;

• contamination of products, which can lead to product liability and product recalls;

• 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.

A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in Part II, Item 1A, of this report.

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, feed ingredient purchase commitments and construction contracts at April 1, 2006 are as follows (in millions):

	Payments Due by Period
			Less than 1 year						After 5 years
	Total				1-3 years		3-5 years
Debt obligations:
Principal payments(a)	$	144.4	$	1.5	$	6.8	$	2.5	$	133.6
Interest payments(b)		121.9		15.2		29.8		29.0		47.9
Operating leases (c)		57.1		16.2		26.5		12.6		1.8
Feed ingredient purchase commitments(d)		105.6		105.6		—		—		—
Construction contracts(e)		24.4		24.4		—		—		—
Investments(f)		5.1		5.1		—		—		—
Total(g)	$	458.5	$	168.0	$	63.1	$	44.1	$	183.3

(a) Excludes $66.8 million in total letters of credit outstanding related to normal business transactions.

(b) Interest payments include amounts for fixed rate debt as outlined in Note 7 of Notes to Consolidated Financial Statements based on the expected payment dates.

(c) Operating lease commitments as of October 1, 2005. There have not been any significant changes during the six months ended April 1, 2006.

(d) 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 April 1, 2006 for the month of delivery.

(e) Represents unexpended amounts on construction and related contracts.

(f) We have committed to invest in a joint venture with Archer-Daniels-Midland Company (ADM) for the ownership and operation of certain grain elevators. Our initial investment for a fifty percent (50%) interest in the joint venture will be approximately $5.1 million in the fourth quarter of fiscal 2006 when the joint venture is expected to begin operations. We expect to make capital expenditures in fiscal 2007 to upgrade certain of our facilities in connection with the joint venture.

(g) 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, the contracts contemplate 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 fiscal 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 April 1, 2006.

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 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 was eligible for this deduction in the first quarter of fiscal 2006. Additionally, in December 2004, the 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’s benefit is not significant for the first six months of fiscal 2006 due to the net loss for the period.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This Statement applies to all voluntary changes in accounting principle and requires retrospective application to previously issued financial statements as if that principle had always been used, unless it is impracticable to do so. The requirements are effective for accounting changes made in fiscal years beginning after December 15, 2005.

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. In addition, we enter into forward purchase contracts to ensure a sufficient supply 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 April 1, 2006, 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 $105.6 million at April 1, 2006. These commitments include both priced and unpriced contracts. Unpriced feed ingredient commitments are valued at market for the month of delivery as of April 1, 2006.

Based on estimated annual feed usage, a 10% increase in the weighted average cost of feed ingredients would increase our annualized cost of sales by an estimated $60.0 million to $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 $250.0 million revolver was fully drawn, a 1% increase in LIBOR would increase annual interest expense by approximately $2.5 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 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 are effective in providing reasonable assurance 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.

We do not expect that our disclosure controls and procedures will prevent all errors and all fraud. A system of controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. Because of the limitations in all such systems, no evaluation can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Furthermore, the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how unlikely. Because of these inherent limitations in a cost-effective system of controls and procedures, misstatements or omissions due to error or fraud may occur and not be detected.

Part II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In addition to the matters set forth below, we are subject to various other legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect our financial position or results of operations.

Cody, et al v. Gold Kist et al.Four female employees of our Corporate Office Information Services Department, or Corporate I/S Department, filed a sex discrimination suit against Gold Kist in the United States District Court for the Northern District of Georgia asserting gender based claims about employment and promotion decisions in the Corporate I/S Department. The four complainants sought class certification for their claims of gender discrimination, unspecified monetary damages and injunctive relief. The U.S. District Court, in an order entered June 13, 2005, denied the motion of

the plaintiffs to certify the litigation as a class action. The court’s ruling, for which the plaintiffs did not seek an interlocutory appeal, means that the litigation will not proceed as a class action and will be litigated as individual claims of the four named plaintiffs. We continue to intend to defend the litigation vigorously and believe that this lawsuit will not have a material adverse effect on our financial condition or results of operations.

Nicholas Leech v. Gold Kist Inc.On November 3, 2005, an employee of the Company filed the case ofNicholas Leech v. Gold Kist Inc., in the United States District Court for the Northern District of Alabama claiming that we had violated certain provisions of the Fair Labor Standards Act, or FLSA. The suit alleged that we failed to pay the Plaintiff for time he spent (i) waiting in line before each shift to receive certain clothing and equipment that he wears while working, (ii) putting on that clothing and equipment, and (iii) taking off the clothing and equipment, and turning it back in, after each shift ends. This matter was settled with the plaintiff in April 2006.

The Department of Labor has recently contacted many members of the U.S. poultry industry, including Gold Kist, who were included in a wage and hour audit initiated by the U.S. Department of Labor in 2000. The Department of Labor has been of the opinion that many poultry companies have not been accurately compensating employees for the time spent on such activities as donning and doffing work equipment. Following the recent Supreme Court decision in the IBP/Alvarez case, the Department of Labor has reasserted its audit concerns in this area. We have been reviewing our operations and pay practices to determine the appropriate response to the Department of Labor. Prior to being contacted by the Department of Labor, we designed plans which were implemented on May 1st to modify practices at our facilities to address concerns described in the IBP/Alvarez case and the Department of Labor audit. As of April 1, 2006, we have not reserved any amounts in this matter because we do not believe a loss is considered probable or estimable.

ITEM 1A. RISK FACTORS

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, and have occurred in late fiscal 2005 and in fiscal 2006 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 declined during fiscal 2005 and the six months ended April 1, 2006.

Outbreaks of livestock diseases, particularly an outbreak of avian influenza among humans, could adversely affect our business.

Events beyond our control, such as the outbreak of disease, could significantly restrict our ability to conduct our operations and adversely affect our business. 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 in 2004, several countries imposed import bans and the infected flocks were destroyed. If a similar outbreak were to occur in areas where our contract growers are located, we may be forced to destroy our flocks, even if those flocks were not infected. 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.”

These risks are particularly acute if an outbreak of a livestock disease, such as avian influenza, were to occur among humans. Although avian influenza is not spread through the consumption of chicken, increased media attention regarding the risks of avian influenza or consumer panic in the event of a serious outbreak of avian influenza among humans could result in reduced demand for our products. In fact, avian influenza that has occurred internationally in 2005 and the first two quarters of 2006 has caused demand for exports to affected countries to decrease. In addition, the risk of an avian influenza outbreak or pandemic flu among humans or the perceived risk of such an outbreak could result in aggressive action by the governments of the United States and the countries to which we export our products to limit the spread of such an outbreak. Government action in response to an avian influenza outbreak among humans could adversely affect our ability to export our products and impose burdensome regulations on our operations or those of our contract growers, which would in turn increase our costs of doing business.

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, the availability and cost of transportation, as well as the agricultural policies of the United States and foreign governments. In 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. Additionally, we believe that large scale speculators in the futures markets can influence prices for feed ingredients. Any such change or influence could have a material negative impact on our business and results of operations.

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, Eastern Europe, Commonwealth of Independent States, Asia, the Pacific Rim, the Middle East, Africa, South and Central America, Mexico 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 implemented import quotas on chicken and other meats that reduce U.S. broiler imports to approximately 70% of 2002 levels. In addition, the Russian Agriculture Minister on April 27, 2006 cancelled all poultry import licenses. Even though the Russian Agriculture Minister said he expects to begin issuing new licenses within two weeks, there is uncertainty regarding how quickly new licenses will be issued and whether there will be any long-term impact on the amount of poultry exported from the U.S. to Russia. 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. In 2005 and the first two quarters of 2006, concerns regarding avian influenza have decreased export demand in many of the countries to which we export our products. 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.

Immigration legislation could cause our costs of doing business to increase or cause us to change the way in which we do business.

Legislation regarding immigration is currently being considered by the United States Congress. The legislation currently being considered by the U.S. Senate differs substantially from the legislation that was passed by the U.S. House of Representatives. In addition to the federal legislation, some states are considering, and the State of Georgia, where we have

operations, has passed, immigration legislation. While we believe the new Georgia legislation will not alter the way we conduct our business, the details of the regulations that will implement the law have not been finalized, including the documentation required for an employee to prove he or she is eligible for employment. We currently participate in the United States government Basic Pilot Program for verifying a person’s employment eligibility, but that government program may not be the approved method for employment eligibility verification under the Georgia law. If proposed federal immigration legislation becomes law or if states in which we do business enact and enforce immigration laws, such laws may contain provisions that could make it more difficult or costly for Gold Kist to hire legal immigrant workers. In such case, we may incur additional costs to run our business or may have to change the way we conduct our operations, either of which could have a material adverse effect on our business, operating results and financial condition.

We may experience difficulties with the implementation of our Enterprise Resource Planning (“ERP”) software and related manufacturing process changes.

We are implementing a new ERP system during calendar 2006 that includes accounting, material resource planning (MRP), production planning, inventory management and certain other functions. This is a complex, multi-step implementation. If there are problems with the implementation, there could be significant disruption in plant processes causing inefficient production, delays in financial reporting and Sarbanes-Oxley 404 compliance issues, which could adversely affect our operating results.

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 42.9% of our net sales during the second fiscal quarter ended April 1, 2006 and during such period, approximately 13.8% 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 purchases from us, our business, sales and results of operations could be materially and adversely affected.

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.

The Department of Labor has recently contacted many members of the U.S. poultry industry, including Gold Kist, who were included in a wage and hour audit initiated by the U.S. Department of Labor in 2000. The Department of Labor has been of the opinion that many poultry companies have not been accurately compensating employees for the time spent on such activities as donning and doffing work equipment. Following the recent Supreme Court decision in the IBP/Alvarez case, the Department of Labor has reasserted its audit concerns in this area. We have been reviewing our operations and pay practices to determine the appropriate response to the Department of Labor. Prior to being contacted by the Department of Labor, we designed plans which were implemented on May 1st to modify practices at our facilities to address concerns described in the IBP/Alvarez case and the Department of Labor audit. As of April 1, 2006, we have not reserved any amounts in this matter because we do not believe a loss is considered probable or estimable.

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, 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.

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, and prices for natural gas have recently been at historically high levels, partially due to supply disruptions caused by Hurricanes Katrina and Rita. 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 could 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.

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 Gold Kist.

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.

As of April 1, 2006, we had approximately 16,500 employees, approximately 2,500 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.

The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 could increase our costs of doing business.

The Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which we refer to as the Bioterrorism Act, includes a number of provisions designed to help guard against the threat of bioterrorism, including new authority for the Secretary of Health and Human Services to

take action to protect the nation’s food supply against intentional contamination. The U.S. Food and Drug Administration, or FDA, is responsible for developing and implementing these food safety measures. The FDA has been in the process of issuing new rules, and it is difficult for us to predict what impact they might have on our business. Compliance with these rules may increase our costs of doing business by increasing the amounts that we spend on plant security and product safety. If we are unable to pass these higher costs on to our customers, our results of operations and financial condition may be adversely affected.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On January 24, 2006, a portion of the restricted stock issued to certain of the officers of the Company in January 2005 vested. Upon the vesting event, a total of 28,153 of such shares were surrendered to the Company to satisfy minimum tax withholding obligations of all but one of such officers arising out of the vesting event. The value per share of the shares surrendered to the Company was $14.61, the closing price of the Company’s common stock on January 23, 2006.

ITEM 5. OTHER INFORMATION

On May 8, 2006, the Company amended its Fifth Amended and Restated Credit Agreement to provide additional flexibility to the fixed charge coverage ratio. The amendment is described in more detail in the Liquidity and Capital Resources section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 6. EXHIBITS

Exhibits

Designation of Exhibit in This Report	Description of Exhibit
10.1	First Amendment to Fifth Amended and Restated Credit Agreement dated as of February 9, 2006.
10.2	Second Amendment to Fifth Amended and Restated Credit Agreement dated as of May 8, 2006.
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 May 10, 2006	/s/ John Bekkers
	John Bekkers Chief Executive Officer (Principal Executive Officer)
Date May 10, 2006	/s/ Stephen O. West
	Stephen O. West Chief Financial Officer, Vice President (Principal Financial Officer)