Item 1. Business (and Properties).
Gold Kist Inc. ("Gold Kist" or the "Association") is a diversified agricultural membership cooperative association, headquartered in Atlanta, Georgia. It was incorporated without capital stock in 1936 under the Georgia Cooperative Marketing Act. The name of the Association was changed in 1970 from Cotton Producers Association to Gold Kist Inc. In April 1985, the Articles of Incorporation and By-Laws of the Association were amended to provide for a class of common stock and a class of preferred stock as authorized by the Georgia Cooperative Marketing Act. Each member is issued one share of common stock only, as evidence of membership and the right to one vote as long as the member maintains status as an active member. Only members may hold the common stock, which is nontransferable and receives no dividends.
Gold Kist serves approximately 29,000 active farmer members located principally in Alabama, Florida, Georgia, and South Carolina. In addition, other cooperative associations are members of Gold Kist. Any person engaged in the production of farm commodities and any firm or corporation whose members or stockholders are persons so engaged and any cooperative association organized under the cooperative marketing laws of any state, which enters into a marketing and/or purchasing agreement with the Association, is eligible for membership.
Gold Kist offers both cooperative marketing and cooperative purchasing services to its member patrons. Farm commodities are marketed by Gold Kist on behalf of members. Similarly, Gold Kist manufactures or processes many products purchased for its members. The standard Membership, Marketing, and/or Purchasing Agreement which is entered into between each member and Gold Kist does not require the member to market his agricultural products or to purchase farm supplies through Gold Kist. Under the agreement, Gold Kist undertakes to market for the member agricultural products delivered which are of a type marketed by Gold Kist and to purchase or manufacture and sell to the member such farm supplies as the member requires, provided it is advantageous for Gold Kist to handle such supplies in the interest of the membership. The Association also does business with non- members and engages in non-cooperative activities through subsidiaries and partnerships. AgraTrade Financing, Inc., a wholly-owned subsidiary of Gold Kist, provides financing to members and non-members doing business with Gold Kist and its subsidiaries and partnerships. Financing is extended for poultry and pork housing construction and for certain farm commodity crop production.
Agriculture is generally cyclical in nature. Commodities marketed by Gold Kist on behalf of its members are subject to wide fluctuations in price, based on supply of the farm commodities and demand for the raw or processed products.
Commodity prices are also sensitive to interest rates, with high rates generally tending to depress market prices. In addition, a portion of Gold Kist's business is dependent on the demand of farmers for the purchase of products, which is influenced by the general farm economy and the success of particular crops.
Gold Kist's business is conducted in two industry segments. See Note 10 of Notes to Consolidated Financial Statements. The Poultry segment conducts broiler and pork production operations, providing both marketing and purchasing services to its cooperative patrons. The Agri-Services segment purchases or manufactures feed, seed, fertilizers, pesticides, animal health products and other farm supply items for sale at wholesale and retail. Additionally, that segment serves as a contract procurement agent for, and storer of, farm commodities such as soybeans and grain and is engaged in the purchase, sale, processing and storage of cotton. Gold Kist is also a partner in a major peanut processing and marketing business and in a pecan processing and marketing business.
POULTRY
Broilers
Gold Kist conducts its poultry operations through six Gold Kist cooperative broiler divisions, through its 73% majority-owned public subsidiary, Golden Poultry Company, Inc. ("Golden Poultry"), and through its partnership interest in Carolina Golden Products Company ("Carolina Golden").
Gold Kist's cooperative broiler operation is organized into six broiler divisions, each encompassing one of Gold Kist's decentralized broiler complexes. Each Gold Kist decentralized broiler complex operates within a separate geographical area and includes within that area broiler flocks, pullet and breeder (hatching egg) flocks, one or more hatcheries, a feed mill, poultry processing plant(s) and management, sales and accounting office(s), and transportation facilities. The six complexes are headquartered in Boaz and Cullman, Alabama; Athens, Ellijay and Carrollton, Georgia; and Live Oak, Florida. The broiler growers for each complex are members of Gold Kist. The facilities and operations of each complex are designed to furnish the growers flocks of chicks, feed and medicines, and processing and marketing services for the broilers grown.
The principal products marketed by the broiler divisions are whole chickens, cut-up chickens, segregated chicken parts and further processed products packaged in various forms, including fresh bulk ice pack, chill pack and frozen. Ice pack chicken is packaged in ice or dry ice and sold primarily to distributors, grocery stores and fast food chains. Chill pack chicken is packaged for retail sale and kept chilled by mechanical refrigeration from the packing plant to the store counter. Frozen chicken is marketed primarily to school systems, the military services, fast food chains and in the export market. Further processed products, which include preformed breaded chicken nuggets and patties and deboned, skinless and marinated products are sold primarily to fast food and grocery store chains. Chill pack chicken is sold in certain localities under the Gold Kist Farms and Young 'n Tender labels; however, some is sold under customers' private labels. Most of the frozen chicken carries the Gold Kist or Early Bird label. Cornish game hens are marketed in frozen form primarily to hotels, restaurants and grocery stores under the Gold Kist Farms, Young 'n Tender and Medallion labels. Medallion, Big Value , Gold Kist Farms, Young 'n Tender and Early Bird are registered trademarks of Gold Kist Inc.
Broiler products are marketed directly from the processing plant in each broiler complex. Some packaged products are marketed from the Atlanta headquarters. The plants at Athens, Carrollton, Boaz, and Live Oak have special distribution facilities, and there are six separate distribution facilities located in Florida, Tennessee, Ohio and Kentucky. Cornish game hens are processed at facilities in Trussville, Alabama and marketed from the Atlanta headquarters.
Golden Poultry owns and operates integrated poultry processing complexes in Russellville, Alabama, Douglas, Georgia, and Sanford and Siler City, North Carolina. Each of these complexes contracts for poultry production with nonmembers and includes a hatchery, feed mill, processing plant and management, sales and accounting office, and transportation facilities. Golden Poultry operates two separate distribution facilities in Durham, North Carolina, and Pompano Beach, Florida.
Carolina Golden is a general partnership consisting of general partners AgriGolden, Inc., a wholly- owned subsidiary of Gold Kist, and Golden Poultry Company, Inc. Carolina Golden operates an integrated poultry processing complex located in Sumter, South Carolina, for the production of value-added and further processed poultry products. This complex contracts for poultry production with nonmembers and includes a hatchery, feed mill, processing plant and management, sales and accounting office, and transportation facilities.
Gold Kist is one of the largest poultry processors in the United States. It competes with other large processors and with smaller companies. Competition is based upon price, quality and service. While Management believes that the pricing and quality of its products are competitive with other processors, it believes that Gold Kist's service to its customers is a principal factor that has established Gold Kist as one of the largest United States poultry processors. Gold Kist's ability to deliver broilers and other poultry products cut-up or otherwise produced to order is an important service to customers.
The poultry industry, just as many other commodity industries, has historically been cyclical. Prices of perishable commodities, such as broilers, react directly to changes in supply and demand. Furthermore, broilers are typically a high volume, low margin product so that small increases in costs, such as feed ingredient costs, or small decreases in price, can produce losses. As an integral part of its feed ingredient purchasing strategy, Gold Kist attempts to limit the effects and risk of fluctuations in feed ingredient costs (i.e., corn and soy) through varying amounts of commodity trading transactions in the agricultural commodity futures and options market. Commodity trading transactions, which are a common industry practice, have inherent risk, such that changes in the commodities futures and options prices as a result of favorable or unfavorable changes in the weather, crop conditions or government policy may have an adverse effect on Gold Kist's net feed ingredient cost as compared to the cost in cash markets. Likewise, Gold Kist could benefit from reduced net feed ingredient cost as a result of these changes as compared to cost in the cash market. Gold Kist places limitations on the volume of futures and options trading positions based on projected usage of these commodities. Results of hedging and commodity options transactions are reflected as an adjustment to feed ingredient cost in the Association's consolidated financial statements. See Note l (c) of Notes to Consolidated Financial Statements.
The poultry industry has also traditionally been subject to seasonality in demand and pricing. Generally, the price and demand for poultry products peaks during the summer months and declines to lower levels during the winter months of November, December and January. Gold Kist broiler prices and sales volume follow the general seasonality of the industry.
The following table shows the amount and percentage of Gold Kist's net sales volume contributed by sales of broiler products for each of the years indicated.
Pork
Gold Kist markets hogs raised by producers in Alabama, Georgia and North Carolina. Feeder pigs are furnished to members who raise them, using Gold Kist feed and medicines, to produce hogs for marketing. Feeder pigs are either raised by Gold Kist members and marketed through Gold Kist to the market hog growers, raised for Gold Kist by non-member independent contractors or purchased by Gold Kist in the marketplace.
Live market hogs are marketed by Gold Kist in the Southeastern United States to processors of pork products, primarily on a competitive bid basis in the states of Alabama, Georgia, Mississippi, North Carolina, and South Carolina. Management believes that customers are favorably impressed by the quality of its market hogs which is principally due to superior breeding stock and management grow-out techniques employed by Gold Kist. Gold Kist competes with other major national producers and smaller individual producers, primarily on a regional basis in the Southeastern United States.
AGRI-SERVICES
Gold Kist purchases, manufactures and processes fertilizers, agricultural chemicals, seed, pet foods, feed, animal health products and other farm supply items for distribution and sale at wholesale and retail. These products are distributed through approximately 96 Gold Kist retail stores and at wholesale to national accounts and independent dealers. Gold Kist serves as a contract procurement agent for, and storer of, farm commodities such as soybeans and grain.
Retail Stores
The Gold Kist retail store operation is conducted in Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, South Carolina and Texas.
The typical Gold Kist store is a complete farm supply center offering for sale many types of feeds, animal health products, fertilizers, pesticides, seeds, farm supplies and equipment. It also offers services such as customized fertilizer spreading, field mapping, soil testing, insect scouting, and agronomic and animal nutrition advice.
The competition for retail sales faced by Gold Kist stores varies greatly from locality to locality. Some compete with other purchasing cooperatives, hardware and farm supply stores, and retail outlets owned or affiliated with major fertilizer, agricultural chemical and feed manufacturers. In some areas these competing manufacturers sell directly to farmers. Price competition is important for many items. The Gold Kist stores emphasize service to the customer.
Gold Kist purchases most of the farm supplies distributed from various manufacturers. Steel equipment, such as poultry processing equipment, storage bins, elevators and conveyor systems, are manufactured by Luker Inc., a steel fabrication company located in Augusta, Georgia, and a wholly-owned subsidiary of Gold Kist.
Gold Kist operates a system of receiving and storage facilities for handling unprocessed farm commodities such as soybeans, corn and other grains. Approximately 98% of Gold Kist's storage facilities are licensed by the federal or state government and can issue negotiable warehouse receipts. Pursuant to a five-year grain handling agreement which terminates in 2000, Gold Kist utilizes these facilities and assets exclusively as independent buying points operating on a commission basis for the Archer Daniels Midland Company.
Fertilizers and Chemicals
Gold Kist distributes granular, blended and liquid fertilizers and fertilizer materials. Each type is purchased or produced in varying compositions depending upon the ultimate use of the product as a plant food. The Association owns and operates five fertilizer plants in addition to other blending facilities at certain Gold Kist stores where fertilizer ingredients are physically mixed to a custom formula. Gold Kist leases or owns terminal facilities at which fertilizer materials are warehoused for resale through Gold Kist stores and private dealers. Granular fertilizers are purchased and distributed in bagged and bulk form. In addition to traditional agricultural customers, Gold Kist markets fertilizers and chemicals to, and provides application services for, forestry, turf and industrial customers.
Gold Kist is a member of CF Industries, Inc., a cooperative owned by regional cooperatives, which produces and supplies fertilizer materials to its members. For the fiscal year ended June 29, 1996, Gold Kist purchased approximately 32% of its fertilizer materials and products at market prices from CF Industries. The remaining fertilizer materials and products were purchased from more than 50 other suppliers.
Gold Kist competes for fertilizer sales with the major fertilizer manufacturers, wholesalers and brokers. Competition is largely on the basis of price and service. Gold Kist markets premium grade fertilizers under its trademarks Growers Pride , Living Lawn , and Garden Gold . Gold Kist also markets a premium growing medium composed of soil materials and fertilizer nutrients under its trademark Garden on the Spot .
Gold Kist distributes agricultural and specialty chemicals, including pesticides, growth regulators and surfactants which it purchases from approximately 50 chemical manufacturers. Competition for sales of agricultural chemicals is primarily on the basis of price and service since most retailers have access to the same inventory of products produced by the major manufacturers. Gold Kist also provides aerial application of fertilizer for forestry customers and ground application of fertilizer and chemicals for turf customers.
The following table shows the amount and percentage of Gold Kist's net sales volume contributed by sales of fertilizer and chemical products for each of the years indicated.
Pet Food and Animal Products
Gold Kist operates four major feed mills for its pet food and animal products operations. The mills produce feeds distributed at wholesale or at retail through the Gold Kist stores and independent dealers. All of the mills are batch process mills in which ingredients are weighed. This type of mill is capable of precision feed mixing, which is especially important to the poultry industry. Feeds are distributed in bagged and bulk form.
In the fiscal year ended June 29, 1996, Gold Kist's feed mills produced substantially all of the feed it distributed at wholesale or retail. Gold Kist produces and markets approximately 200 different feeds, including custom blended feeds and feeds containing various medications. Pro Balanced is a dairy feed sold through a special program which includes survey and analysis of feed ingredients needed for a particular herd. Gold Kist also markets dog food under the Pay Day , Pro Balanced and Performance Plus trademarks through independent dealers, under the Gold Kist and Pro Balanced trademarks through Gold Kist retail stores, and under the Gold Kist and Top Notch trademarks through grocery wholesalers and retail chain stores. Pro Balanced, Pay Day, Gold Kist, Top Notch, and Performance Plus are registered trademarks of Gold Kist. Aquaculture feed products, primarily feed for commercial fish farming operations, also form a significant portion of Gold Kist's feed business. Gold Kist purchases all animal health products that it distributes.
Feed ingredients are purchased in the marketplace from many sources, including major grain companies. Feed formulation is based on the cost of various alternative ingredients in a given week. Feed ingredients are normally purchased for one week's production and, accordingly, only five to seven days' ingredient storage capacity is needed at the mills.
Approximately one-half of the feed sold is delivered in bulk form directly from the feed mill to the farm; the remainder is sold in bag form. Gold Kist operates a fleet of trucks, including feed tankers, for the delivery of feed.
Competition for sales of feed is based on quality and service, as well as price. Gold Kist competes with major feed manufacturers and local feed mills. The major feed manufacturers distribute through independent retailers, owned retail stores and direct to farmers. Gold Kist sells through its own retail stores and directly to large farmers, private dealers, independent cooperatives, wholesale grocers, and retail grocery chains.
Cotton
Cotton ginning and storage facilities are operated at Statesboro, Morven, Byromville and DeSoto, Georgia, and Bishopville, South Carolina. A central storage warehouse is operated in Moultrie, Georgia. The Association provides ginning and storage services to members and markets cotton purchased from members to domestic and foreign textile mills.
Seed Marketing
AgraTech Seeds, Inc. ("AgraTech Seeds"), a wholly- owned subsidiary of Gold Kist, owns and operates a seed business, which consists of the development, contract production, processing and sale primarily of proprietary seed varieties. AgraTech Seeds distributes approximately 230 varieties of seeds. Seed is marketed by AgraTech Seeds at wholesale to seed retailers, including Gold Kist stores and independent seed retail outlets in the Southeast and the Midwest. AgraTech Seeds licenses certain seed dealers, including Golden Peanut Company, to sell its proprietary peanut varieties "GK 7", "VC 1", "AgraTech 108" and "AgraTech 127", and receives a royalty on licensed sales. AgraTech Seeds contracts with farmers for the production of seed. Careful control is required to maintain the purity of varieties. Quality and name recognition play a large role in competition for sales of seed.
AgraTech Seeds processes or contracts for the processing of approximately 95% of the seeds it distributes. AgraTech Seeds owns and operates seed processing facilities in McCordsville, Indiana, St. Joseph, Illinois, and Mason City, Illinois. A seed research farm is located at Ashburn, Georgia, which conducts research into the breeding of peanuts, soybeans and sorghum, including the development of improved seed varieties. The McCordsville and Mason City facilities conduct research into the breeding of corn. Proprietary corn, soybean, sorghum and peanut seed varieties are marketed under the trademark AgraTech .
As a function of its retail sales operations, Gold Kist operates a commodity seed procurement plant at Dublin, Georgia for the cleaning, grading, treatment and processing of commodity seeds. Seed products from its Dublin operations are marketed primarily through the Gold Kist retail stores.
Pecans
Gold Kist is a partner in Young Pecan Company, a pecan processing and marketing business headquartered in Florence, South Carolina, in which the Association holds a 25% equity interest and a 35% earnings (loss) allocation. See Note 8 of Notes to Consolidated Financial Statements.
PARTNERSHIP INTEREST
Gold Kist, Archer Daniels Midland Company and Alimenta Processing Corporation are partners in Golden Peanut Company, a partnership formed to operate a peanut procuring, processing, and marketing business. The partners lease peanut facilities, equipment and fixed assets to the partnership. Gold Kist, as a general partner, participates in all partnership allocations in proportion to its 33 1/3% partnership interest. See Note 9(b) of Notes to Consolidated Financial Statements.
The peanut facilities leased to Golden Peanut Company pursuant to the general partnership agreement include receiving stations, shelling plants, cold storage facilities and warehouses located in the three major peanut producing areas of the United States (Southeast, Southwest and Virginia/Carolinas).
Golden Peanut Company procures, processes and markets peanuts and peanut by-products in each of the three peanut producing areas of the United States. Golden Peanut Company is a major processor of edible peanuts and is active in both domestic and international markets. The principal peanut product is shelled edible peanuts. Shelled edible peanuts are marketed domestically primarily to manufacturers of peanut butter, candy and salted nuts and are sold in the export market. Golden Peanut Company also processes peanuts for sale in the shell or for processing by others into oil and meal.
EXPORT SALES
Gold Kist owns no physical facilities overseas and has no overseas employees. Product sales managers maintain sales networks overseas through contacts with independent dealers and customers. During the fiscal year ended June 29, 1996, the approximate export sales volume of the primary export product line (poultry) was $89.3 million. During that period, export sales of poultry were mainly to customers in Russia, Eastern Europe, the Far East, South Africa, Central and South America and the Caribbean area.
Export sales involve an additional element of transportation and credit risk to the shipper beyond that normally encountered in domestic sales.
Gold Kist faces competition for export sales from both domestic and foreign suppliers. In export poultry sales, Gold Kist faces competition from other major United States producers as well as companies in France, Thailand, and Brazil. Tariff and non-tariff barriers to United States poultry established by the European Economic Community (EEC) since 1962 have virtually excluded Gold Kist and other United States poultry exporters from the EEC market. In addition, EEC exporters are aided in price competition with United States exporters in certain markets by subsidies from their governments.
Gold Kist and a group of other North American and foreign farm cooperatives and agribusiness firms, acting through companies formed for this purpose, own 50% of a trading company engaged in international merchandising of grains and other agricultural commodities. Gold Kist is a minority shareholder and deals with the trading company on an arm's length basis.
PROPERTIES
Gold Kist corporate headquarters building, completed in 1975 and containing approximately 260,000 square feet of office space, is located on fifteen acres of land at 244 Perimeter Center Parkway, N.E., Atlanta, Georgia. The land and building are owned by a partnership of Gold Kist and Cotton States Mutual Insurance Company in which partnership Gold Kist owns 54% of the equity. Gold Kist leases approximately 120,000 square feet of the building from the partnership.
The Association's principal operating facilities are operated by its two industry segments, the Poultry segment and the Agri-Services segment.
Poultry
Gold Kist owns and operates seven poultry processing plants which are located at Boaz, Trussville and Guntersville, Alabama; Athens, Ellijay and Carrollton, Georgia; and Live Oak, Florida. These plants have an aggregate weekly processing capacity of approximately 8,370,000 broilers and 415,000 cornish game hens. The plants are supported by hatcheries located at Albertville, Crossville, Cullman, Curry, Ranburne and Scottsboro, Alabama; Live Oak, Florida; and Blaine, Bowdon, Calhoun, Commerce, Carrollton, and Talmo, Georgia. These hatcheries have an aggregate weekly capacity (assuming 85% hatch) of approximately 9,700,000 chicks. Additionally, Gold Kist operates seven feed mills to support its poultry operations; the mills have an aggregate annual capacity of approximately 3.3 million tons and are located in Guntersville and Jasper, Alabama; Calhoun, Cartersville, Commerce, and Waco, Georgia; and Live Oak, Florida.
The Association's majority-owned subsidiary, Golden Poultry owns and operates four poultry processing plants in Douglas, Georgia, Sanford and Siler City, North Carolina, and Russellville, Alabama. The Douglas plant has a weekly processing capacity of approximately 1,300,000 broilers on two shifts; the Sanford and Russellville plants have weekly processing capacities of approximately 850,000 broilers on two processing shifts; and the Siler City plant has a weekly processing capacity of 630,000 chickens on two shifts. These plants are supported by hatcheries in Siler City and Staley, North Carolina (with a hatch capacity of 1,505,000 chicks per week), Douglas, Georgia (with a hatch capacity of approximately 1,350,000 chicks per week), and Russellville, Alabama (approximately 875,000 chicks per week). Additionally, Golden Poultry owns and operates poultry feed mills at Ambrose, Georgia, Bonlee and Staley, North Carolina, and Pride, Alabama, which have an aggregate annual capacity of 1,268,000 tons.
Carolina Golden owns and operates a processing plant in Sumter, South Carolina with a weekly processing capacity of 1,400,000 broilers on two processing shifts. The Sumter plant is supported by a hatchery in Sumter, South Carolina with a hatch capacity of approximately 1,400,000 chicks per week. Carolina Golden operates a poultry feed mill at Sumter, South Carolina with an annual capacity of 338,000 tons.
The Association utilizes six separate distribution facilities in its sales and distribution of poultry products: Tampa and Crestview, Florida; Chattanooga and Nashville, Tennessee; Mt. Sterling, Kentucky; and Cincinnati, Ohio. Golden Poultry operates distribution facilities in Pompano Beach, Florida, and Durham, North Carolina.
Also within its Poultry segment, Gold Kist operates five pork production centers. These production facilities include a pork production center at Cartersville, Georgia; a gilt production center in Stephens, Georgia; two gilt and pork production centers located at Kingston, Georgia; and a boar and pork production center headquartered in Hillsborough, North Carolina.
Agri-Services
In its retail store operations, Gold Kist operates Gold Kist stores at 23 locations in Alabama, one location in Arkansas, 6 locations in Florida, 44 locations in Georgia, one location in Louisiana, 5 locations in Mississippi, 14 locations in South Carolina and 4 locations in Texas.
For its fertilizer and chemicals business, the Association operates five fertilizer plants at Clyo and Cordele, Georgia, Athens and Hanceville, Alabama, and Greenville, Mississippi, and bulk chemical storage facilities at Moultrie, Georgia and Bishopville, South Carolina. Gold Kist utilizes chemical storage and distribution facilities at Alcolu, South Carolina, Lawrenceville and Sylvester, Georgia, Hanceville, Alabama, Greenville, Mississippi, and Carrollton and Buda, Texas and fertilizer distribution terminal facilities at Pine Bluff, Arkansas, Bainbridge and Brunswick, Georgia; Fayetteville, Morehead City, and Wilmington, North Carolina; Charleston, South Carolina; and Victoria, Texas. Forestry fertilizer application headquarters facilities are maintained at Tifton, Georgia.
For its pet food, feed and animal health operations, Gold Kist operates four feed mills with an aggregate annual capacity of approximately 470,000 tons. The mills are located at Guntersville, Alabama; Flowery Branch and Valdosta, Georgia; and Gaston, South Carolina.
Cotton ginning and storage facilities are operated at Statesboro, Morven, Byromville and DeSoto, Georgia, and Bishopville, South Carolina. A central storage warehouse is operated in Moultrie, Georgia.
The Association operates a seed processing plant at Dublin, Georgia, which can clean, grade and treat approximately 100,000 bags of seeds annually (when operating on one shift). AgraTech Seeds operates seed processing plants in McCordsville, Indiana, and Mason City and St. Joseph, Illinois, which can clean, grade and treat approximately 350,000 bags, 150,000 bags and 100,000 bags, respectively, of seeds annually (when operating on one shift). AgraTech Seeds also operates a 100 acre seed research farm located at Ashburn, Georgia.
For its grain procurement and storage operations, Gold Kist operated 30 owned facilities and 2 leased facilities in Alabama, Florida, Georgia and South Carolina in fiscal 1994. The facilities have an aggregate storage capacity of approximately 7 million bushels.
Gold Kist owns peanut procuring, processing and marketing facilities which are leased to Golden Peanut Company pursuant to the general partnership agreement executed by Gold Kist with ADM and Alimenta. The lease is for a 20-year term, beginning in 1988; however, the lease is subject to the terms of the partnership agreement which is terminable upon 18 months prior written notice. These facilities include 37 peanut receiving stations located in the three major peanut producing areas of the United States (Southeast, Southwest, and Virginia/Carolinas) and four peanut shelling plants located in Ashburn, Georgia; Graceville, Florida; Anadarko, Oklahoma; and Comyn, Texas. Gold Kist also owns and leases to Golden Peanut Company two cold storage facilities located at Anadarko, Oklahoma and Suffolk, Virginia with an aggregate storage capacity of 11,000 tons, and 48 warehouses located at 30 of the leased receiving stations with an aggregate storage capacity of approximately 133,000 tons.
The Association holds all of the facilities in fee except for the corporate headquarters building (lease expires June 30, 2004); poultry distribution facilities at Tampa, Florida (lease expires May 14, 2000) and Nashville (lease expires December 31, 1996) and Chattanooga (terminable upon 30 days notice) Tennessee; Crossville, Alabama, poultry hatchery facility (lease expires February 23, 2088); Athens, Georgia, poultry processing plant vehicle parking area (lease expires February 29, 2001); Anadarko, Oklahoma peanut facility (lease expires November 30, 1996; subleased to Golden Peanut Company); and retail store facilities at Athens (lease expires December 7, 1996), Byromville (lease expires March 15, 1999), Camilla (terminable upon 30 days' notice), DeSoto (lease expires March 15, 1999), and Oglethorpe (lease expires March 15, 1999), Georgia; Brundidge (terminable upon 30 days notice), Danville (lease expires January 31, 1997), Geraldine (lease expires January 31, 1998) and Jasper (lease expires May 31, 2002) Alabama; Columbia (lease expires March 31, 1997), Newberry (lease continues on a month-to-month basis) and Sumter (lease expires March 22, 1997) South Carolina; and Gainesville (lease expires December 7, 1996), Florida. Forestry fertilizer application headquarters facilities are leased at Tifton, Georgia (lease expires October 1, 1997). Chemical storage and distribution facilities are leased at Greenville, Mississippi (lease expires September 30, 1997); Buda (lease expires February 1, 1999) and Carrollton (lease expires March 31, 1999), Texas, and fertilizer storage and distribution space is also leased on a continuing as needed basis at terminals in Pine Bluff, Arkansas; Bainbridge and Brunswick, Georgia; Fayetteville, Morehead City, and Wilmington, North Carolina; Charleston, South Carolina; and Victoria, Texas.
ENVIRONMENTAL AND REGULATORY MATTERS
Processing plants such as those operated by Gold Kist are potential sources of emissions into the atmosphere and, in some cases, of effluent emissions into streams and rivers. Presently, management does not know of any material capital expenditures for environmental control facilities that will be necessary for the remainder of the current fiscal year and the next fiscal year in order to comply with current statutes and regulations. On January 29, 1992, the United States Environmental Protection Agency ("EPA") sent General Notice Letters designating Gold Kist and several other companies as potentially responsible parties (PRP's) for alleged environmental contamination at an Albany, Georgia site previously owned by Gold Kist. Gold Kist has responded to the General Notice Letter denying liability for the contamination. EPA has not indicated to Gold Kist how it intends to proceed with regard to the site. Gold Kist is unable to estimate at this time the cost of compliance, if any, to be required of Gold Kist for the location. Management believes that the potential cost of compliance for Gold Kist would not have a material effect on Gold Kist's financial condition or results of operations.
The regulatory powers of various federal and state agencies, including the federal Food and Drug Administration, apply throughout the agricultural industry, and many of Gold Kist's products and facilities are subject to the regulations of such agencies.
HUMAN RESOURCES
Gold Kist has approximately 16,500 employees during the course of a year. Gold Kist's processing facilities operate year round without significant seasonal fluctuations in manpower requirements. Gold Kist has approximately 3,100 employees who are covered by collective bargaining agreements. Employee relations are considered to be generally satisfactory.
PATRONAGE REFUNDS
The By-Laws of Gold Kist provide that Gold Kist shall operate on a cooperative basis. After the close of each fiscal year, the net taxable margins of Gold Kist for that year from business done with or for member patrons (patronage margins) are computed and, after certain adjustments, these margins are distributed to members as patronage refunds on the basis of their respective patronage (business done with or through the Association) during that year. Upon the determination of the total patronage refund for any fiscal year, this amount is allocated among the several operations of Gold Kist or one or more groups of such operations, as determined by the Board of Directors in light of each operation's or group's contribution for the year.
Patronage refunds are distributed in the form of either qualified or nonqualified written notices of allocation (as defined for purposes of Subchapter T of the Internal Revenue Code). If qualified notices are used, at least 20% of each patronage refund is distributed in cash or by qualified check (as defined in the Internal Revenue Code) with the remainder distributed in patronage dividend certificates or written notices of allocated reserves, or any combination of these forms. A distribution to a patron made in the form of a qualified notice must be included in his gross income, at its stated dollar amount, for the taxable year in which he receives the distribution. If nonqualified notices are distributed, less than 20% of the refund can be distributed in cash or by qualified check and the patron is not required to include in gross income the noncash portion of the allocation. See Notes 1(f) and 6 of Notes to Consolidated Financial Statements.
The retention of allocated reserves provides a means whereby the current and active members of Gold Kist may finance the Association's continuing operations. Each fiscal year, the members are notified by Gold Kist of the amounts, if any, by which their equity accounts have been credited to reflect their allocated, but undistributed, portion of the patronage refunds. Allocated reserves may be retired and distributed to members only at the discretion of the Board of Directors in the order of retention by years, although the Board may authorize the retirement of small aggregate amounts (not in excess of $100.00) of reserves or the retirement of reserves in individual cases without regard to how long they have been outstanding. Allocated reserves bear no interest and are subordinate in the event of insolvency of the Association to outstanding patronage dividend certificates and to all indebtedness of Gold Kist.
INCOME TAXATION
As a cooperative association entitled to the provisions of Subchapter T of the Internal Revenue Code, Gold Kist does not pay tax on net margins derived from member patronage transactions which are distributed to the members by check or in the form of qualified written notices of allocation within 8-l/2 months of the close of each fiscal year. To the extent that Gold Kist distributes nonqualified written notices of allocation, has income from transactions with nonmembers or has income from non-patronage sources, it will be taxed at the corporate rate. See Notes l (f) and 6 of Notes to Consolidated Financial Statements.
Gold Kist has subsidiaries which are not cooperatives, and all the income of these subsidiaries is subject to corporate income taxes.
Item 2.
Item 2. Properties.
The principal facilities used in the Association's business are described in Item 1. Business (and Properties). Management believes that the facilities are adequate and suitable for their respective uses and the Association's current intended operations. The properties owned by the Association are not subject to any material lien or encumbrance.
Item 3.
Item 3. Legal Proceedings.
In January 1993, certain Alabama member patrons of the Association filed a lawsuit in the Circuit Court of Jefferson County, Alabama, Tenth Judicial Circuit, against the Association and Golden Poultry and certain directors and officers of the companies. (Ronald Pete Windham and Windham Enterprises, Inc. on their behalf and on behalf of and for the use and benefit of Gold Kist, Inc. and its shareholders/members v. Harold O. Chitwood, individually in his capacity as an officer of Gold Kist and a Director of Golden Poultry; et al). The lawsuit alleges that the named defendants violated their fiduciary duties by diverting corporate opportunities from the Association to Golden Poultry and Carolina Golden Products Company in connection with the creation of Golden Poultry and Carolina Golden Products Company and by permitting their continued operations. In March 1994, the Court certified the Windham litigation as a class action. In September 1995, Golden Poultry and Carolina Golden Products Company were dismissed from the litigation. On October 25, 1995, the jury in the Windham case returned verdicts in favor of the plaintiffs in the litigation. On July 2, 1996, the Jefferson County, Alabama Circuit Court Judge entered a memorandum opinion and non-final judgment in the case directing Gold Kist to acquire the approximately 27% of Golden Poultry shares currently owned by investors so that all of the issued and outstanding stock of Golden Poultry becomes owned by Gold Kist or a wholly owned subsidiary, either through a merger or a tender offer for the minority shares of Golden Poultry stock outstanding. The Court denied the plaintiffs' demands for additional allocations and cash distributions to the class members. Upon motions for reconsideration filed by both parties to the action, the Court modified its memorandum opinion in a Final Judgment and Decree entered upon September 13, 1996, under which Gold Kist was relieved of the Court's requirement to acquire all of the shares of Golden Poultry common stock not owned by Gold Kist and was directed to acquire only that Golden Poultry stock held by any current officers or directors of Gold Kist and their spouses and minor children. The Court also ordered Gold Kist to cause the surrender of all Golden Poultry stock options held by Gold Kist officers and directors or the exercise of such options and purchase by Gold Kist of the resultant stock, to redeem from eligible members approximately $21.2 million of notified equity of Gold Kist, to pay $4.2 million in attorney's fees to the plaintiffs attorneys and to establish a policy prohibiting officers and directors of Gold Kist from future ownership of Golden Poultry stock. An appeal of the Final Judgment may be filed on or before October 25, 1996, and could have the effect of staying the Final Judgment pending the outcome of any appeal.
In February 1994, other Alabama member patrons of Gold Kist filed a lawsuit in the Circuit Court of Walker County, Alabama, against the Association alleging short-weight deliveries of feed from the Gold Kist Guntersville, Alabama feed mill. (Garry Rowland on behalf of himself and a class of others similarly situated v. Gold Kist Inc.) In June 1994, the Court certified the litigation as a class action. The Association intends to defend the litigation vigorously.
The Association is also party to various legal and administrative proceedings, all of which management believes constitute ordinary routine litigation incident to the business conducted by the Association, or are not material in amount.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There is no market for Gold Kist equity.
Item 6.
Item 6. Selected Financial Data.
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below under the captions "Consolidated Statement of Operations Data" for each of the years in the five-year period ended June 29, 1996 and "Consolidated Balance Sheet Data" as of June 27, 1992, June 26, 1993, June 25, 1994, July 1, 1995 and June 29, 1996 are derived from the consolidated financial statements of Gold Kist Inc. and subsidiaries, which consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. The consolidated financial statements as of July 1, 1995 and June 29, 1996 and for each of the years in the three-year period ended June 29, 1996, and the report thereon of KPMG Peat Marwick LLP, which is based partially upon the report of other auditors, are included elsewhere herein. The information set forth below should be read in conjunction with Management's Discussion and Analysis of Consolidated Results of Operations and Financial Condition and the aforementioned consolidated financial statements, the related notes and the audit report, which refers to changes in accounting for income taxes and for certain investments in debt and equity securities, included elsewhere herein.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The nature of the poultry industry and the agriculture (agribusiness) industry in general is such that supply and demand market forces exert a significant amount of influence over the operations of firms engaged in these businesses. Prices of commodities react directly to supply and demand. Additionally, demand for poultry and other agricultural products produced, processed and marketed by Gold Kist is often influenced by supplies and prices of alternative products.
As with other perishable commodity businesses, the integrated poultry industry has demonstrated a cyclical nature with varying levels of profits, and to a lesser extent, losses over its thirty-six year history. Although the industry has been profitable since 1983 with the exception of a brief period during 1992 and 1996, net margins have varied from year to year in response to market fundamentals. The following addresses the various factors that have influenced poultry industry profitability during the past five years. Low broiler market prices were experienced throughout 1992 as a result of the economic recession affecting the United States, the decline in poultry exports and excess industry supply. Improved market prices in 1993 and 1994 were the result of a general economic recovery in the United States and increased demand for poultry products. During 1995, broiler market prices declined due to the large supply of competing meats, such as beef and pork, and the continuation of broiler industry expansion. During 1996, broiler market prices increased approximately 10% as compared to 1995 as a result of hot, dry weather conditions that reduced meat production in the summer of 1995, as well as lower than expected industry expansion and increased exports. According to USDA estimates, the supply of broilers is expected to increase at a 5.5% rate in 1996 and a 5.7% rate in 1997 as compared to the 6.7% average annual increase between 1992 and 1995. In 1992, market prices increased for corn and soybean meal as supplies came in balance with world demand. The record 1992 domestic corn harvest brought lower feed ingredient prices in 1993. In 1994, feed ingredient prices increased substantially as a result of the reduced corn harvest in 1993. As a result of the increase in planted corn and soybean acreage and favorable growing conditions in the summer of 1994, market prices for feed ingredients declined in 1995. Average cash market prices for corn and soybean meal increased 59% and 30%, respectively, during 1996 as compared to 1995 due to the weather reduced 1995 harvest and strong export demand. Historically, weather has had a significant impact on the farm economy and the operating results of the Association. Generally, favorable weather conditions throughout 1992 provided for a near perfect planting season in the Southeast, which contributed to improved 1992 operating results in the Agri- Services segment. Wet weather conditions in the Southeast during the 1993 spring planting season reduced corn and peanut acreage and were followed by early summer drought conditions. These inclement weather factors had a negative impact on 1993 Agri-Services operating results. Flooding in the Midwestern United States during the summer of 1993 severely impacted the domestic grain harvest and boosted feed ingredient prices to near record levels. Hot, dry weather conditions in the late summer of 1993 damaged pastures in the Southeast, which resulted in increased sales of agricultural products in 1994. In addition, favorable spring weather conditions contributed to increased planting activity in 1994. In 1995, generally favorable spring weather conditions in the Southeast contributed to increased sales of agricultural inputs in the Association's primary retail sales area. However, wet weather conditions in the Delta and Midwest regions of the U.S. negatively impacted market prices for corn, seed and certain fertilizers in areas where these products are sold through independent dealers and four of the Association's retail stores. Inclement weather conditions in the summer of 1995 reduced the Southeastern cotton, peanut and corn harvest, which impacted farm income. The weather reduced 1995 grain harvest in the Midwestern U.S. boosted farm commodity prices; thus contributing to increased spring 1996 plantings in the Southeast and Delta regions. Also, favorable spring weather contributed to the increase in sales of agricultural inputs in 1996.
Export sales for 1994, 1995 and 1996 were $37.7 million, $70.1 million and $100.1 million, respectively. In 1995 and 1996, export sales increased primarily as a result of the demand for poultry from Russia and the Far East. Export sales of poultry products will be influenced by credit availability to foreign countries, political and economic stability, particularly in Russia, Eastern European nations and Mexico, and the United States government's willingness to support the industry through export enhancements.
The Association's operations are classified into two reportable business segments. See Note 10 of Notes to Consolidated Financial Statements. The discussion of results of operations relates the effects of these significant economic factors on those segments for each of the years in the three-year period ended June 29, 1996.
Results of Operations
Fiscal 1995 Compared to Fiscal 1994
The Association's accounting cycle resulted in 53 weeks of operations in 1995 and 52 weeks in 1994.
Net sales volume for 1995 was $1.7 billion, which represented an 8.2% increase over the prior fiscal year. Net margins from operations, before general corporate expenses and other deductions, were $42.5 million as compared to $60.6 million for 1994. The decline in net margins from operations was due primarily to lower market prices for poultry products.
The Poultry segment's net sales volume of $1.3 billion was up 6.0% from 1994 as a result of increased pounds of poultry sold, which was partially offset by lower average selling prices. The decline in average selling prices contributed to a 35% decline in net margins from operations to $34.1 million. The 4.9% decline in average selling prices for 1995 was due to excessive supplies of competing meats and increased broiler industry production. The impact of the decline in selling prices on net sales was offset by an 11.0% increase in poultry pounds sold. The decline in poultry net margins from operations was partially offset by an 8.6% decline in feed ingredient costs. Due to lower pork market prices, the poultry segment's Pork Division incurred a net loss of $3.7 million as compared to a net margin of $775,000 for 1994.
In the Agri-Services segment, net sales volume for 1995 of $433.4 million increased 14.9% as compared to 1994 due to increased sales of agricultural production inputs, including fertilizer, chemicals and farm supplies sold through the Association's farm supply stores and independent dealers. The net sales increase for 1995 was due to increased sales prices for fertilizer, increased application in the Southeast related to the increase in cotton acreage and the addition of five retail outlets primarily in the Mississippi Delta region. Net margins from operations for 1995 were $8.4 million. Net margins from operations for 1995 were negatively affected by lower margins on seed corn sold in the Midwest, reduced gross margins on retail fertilizer sales and expenses related to the closing of four suburban retail stores. However, the impact of these items on 1995 net margins from operations was partially offset by $3.9 million in patronage refunds from other cooperatives.
Distribution, administrative and general expenses for 1995 and 1994 were $131.4 million and $121.4 million, respectively, which represent 7.8% of net sales volume. The $10.0 million increase reflects the growth in the Agri- Services operations, which was partially offset by lower incentive compensation expenses related to the decrease in net operating margins.
The various components included in other income (deductions) represented a deduction of $9.5 million for 1995 as compared to $4.3 million for 1994. Interest income of $8.8 million for 1995 increased $2.0 million as a result of increased crop financing for patrons and other customers. Interest expense for 1995 was $17.5 million as compared to $13.9 million in 1994 due to increased average borrowings of approximately 10.0% and higher interest rates on short-term borrowings. In 1995, interest expense includes $1.6 million related to income tax litigation. The Association's $9.6 million pro rata share of the Golden Peanut Company's 1995 loss (equity in loss of partnership) represented a significant portion of other income (deductions) for 1995. The decline in Golden Peanut Company's 1995 operating results was primarily the result of low peanut selling prices resulting from the general oversupply situation that exists for domestic and export peanuts, reduced U.S. consumption of peanut products and the increase of peanut based foods imported into the United States. See Note 9(b) of Notes to Consolidated Financial Statements. The $3.1 million gain on sale of investments represents the sale of common stock in two agricultural related entities. Miscellaneous, net for 1995 includes the Association's $1.7 million pro rata share in the loss of a partially-owned foreign affiliate whose principal business activities include the marketing, purchasing and resale of edible peanuts. In 1994, the Association recognized income of $250,000 on this investment. Miscellaneous, net for 1995 includes $1.7 million representing the Association's equity in the earnings of a pecan processing and marketing enterprise in South Carolina. Net rental income of approximately $2.0 million and $1.8 million, respectively, was included in miscellaneous, net for 1995 and 1994.
In 1995 and 1994, the Association's combined federal and state effective tax rates were 51% and 30%, respectively. The effective tax rate for 1995 reflects $5.5 million of additional tax related to an adverse tax court decision. See Note 6 of Notes to Consolidated Financial Statements.
Fiscal 1996 Compared to Fiscal 1995
Net sales volume of approximately $2.0 billion for 1996 represented a 15.8% or $267.0 million increase as compared to 1995. Net margins from operations, before general corporate expenses and other deductions, were $80.3 million in 1996 as compared to $42.5 million in 1995. The increase in net margins from operations was due primarily to increased margins in the Poultry segment.
The Poultry segment had net sales of $1.4 billion for 1996, an increase of 12.5% or $157.0 million as compared to 1995. The increase in net sales was due primarily to a 5.0% increase in average selling prices and a 7.5% increase in pounds of poultry sold. Market prices for poultry products strengthened in 1996 as a result of lower-than-expected U.S. broiler production and strong export demand for poultry products. The increase in pounds sold was due to changes in product mix requiring larger broilers for the production of deboned poultry products. Poultry segment's net margins from operations for 1996 were $70.2 million as compared to $34.1 million for 1995. The increase in net margins was due primarily to higher selling prices for poultry products, which was partially offset by increased feed ingredient costs. Although average cash commodity prices for feed grains, such as corn and soybean meal increased 59% and 30%, respectively, from a year ago, the Association's forward purchasing and hedging strategies resulted in a relatively modest 8% increase in feed ingredient costs for 1996. The Pork Division had a net operating margin of $240,000 for 1996 as compared to a $3.7 million net loss for 1995.
The Agri-Services segment's 1996 net sales volume of $543.5 million increased 25.4% or $110.0 million as compared to 1995. The increase in net sales volume was due primarily to the marketing of Southeast cotton, as well as increased sales of fertilizers, chemicals and seeds through the Association's retail stores. A substantial portion of the agricultural sales increase was attributed to facilities acquired in the Mississippi-Delta region in 1995. The Agri-Services segment's net margins from operations for 1996 were $10.1 million as compared to $8.4 million for 1995. The increase was due primarily to patronage refunds from other cooperatives that totaled $9.3 million for 1996 as compared to $3.9 million in 1995. A substantial portion of the patronage refunds were distributed by a major fertilizer cooperative. The Retail Store Division had lower net operating margins in 1996 as a result of losses in the Mississippi-Delta operations acquired in 1995. The Agri- Services segment's net margins from operations reflects a $2.1 million net loss from an agricultural equipment manufacturing operation that was sold in 1996.
Distribution, administrative and general expenses for 1996 and 1995 were $155.7 million and $131.4 million, respectively. The $24.3 million increase reflects the growth in operations, as well as increased incentive compensation expenses related to the increase in margins before income taxes. Increased litigation related expenses also contributed to the overall increase in distribution, administrative and general expenses.
The various components included in other income (deductions) represented a deduction of $6.3 million for 1996 as compared to $9.5 million for 1995. Interest income of $9.9 million for 1996 increased $1.2 million as a result of increased crop financing for patrons and other customers. Interest expense for 1996 was $21.1 million as compared to $17.5 million in 1995. The increase was due to a 55% increase in average borrowings, which was partially offset by lower interest rates on short-term borrowings. Interest expense for 1995 included $1.6 million related to income tax litigation. Equity in loss of partnership represents the Association's 33 1/3% pro rata share of the Golden Peanut Company's 1996 loss. See Note 9(b) of Notes to Consolidated Financial Statements. Miscellaneous, net for 1996 includes the Association's $422,000 pro rata share in the earnings of a partially-owned foreign affiliate whose principal business activities include the marketing, purchasing and resale of edible peanuts. In 1995, the Association recognized a loss of $1.7 million on this investment. Miscellaneous, net for 1996 and 1995 includes $1.0 million and $1.7 million, respectively, representing the Association's equity in the earnings of a pecan processing and marketing enterprise in South Carolina. Net rental income of approximately $1.8 million and $2.0 million, respectively, was included in miscellaneous, net for 1996 and 1995.
In 1996 and 1995, the Association's combined federal and state effective income tax rates were 33% and 51%, respectively. The effective tax rate for 1995 reflects $5.5 million of additional income tax related to an adverse tax court decision. See Note 6 of Notes to Consolidated Financial Statements.
Financial Condition
Liquidity and Capital Resources
The Association's liquidity is dependent upon funds from operations and external sources of financing. The principal sources of external short-term financing are proceeds from the continuous offering of Subordinated Loan Certificates, an unsecured committed credit facility with a group of banks and uncommitted letters and lines of credit. In August 1996, the Association entered into a $250 million unsecured committed credit facility with nine commercial banks. The new facility includes a five-year $125 million revolving credit commitment and a $125 million 364-day line of credit commitment. Subsequently, the Association had unused loan commitments of $140.0 million and additional unused uncommitted facilities to provide loans and letters of credit from banks aggregating approximately $83.1 million. The primary sources of external long-term financing are a note agreement with an insurance company, proceeds from the continuous offering of Subordinated Capital Certificates of Interest and revolving credit agreements. See Note 4 of Notes to Consolidated Financial Statements.
Covenants under the terms of the loan agreements with lenders include conditions that could limit short-term and long-term financing available from various external sources. The terms require a ratio of current assets to current liabilities of not less than 1.20:1, the ratio of senior funded debt to total capitalization not to exceed 40% and total funded debt to total capitalization not to exceed 50%. At June 29, 1996, Gold Kist's current ratio, senior funded debt to total capitalization and total funded debt to capitalization, determined under the loan agreements, were 1.40:1, 31% and 44%, respectively. The loan agreements apply to the Association and its subsidiaries, excluding Golden Poultry. At June 29, 1996, the Association was in compliance with the agreements. See Note 4 of Notes to Consolidated Financial Statements.
In 1994, existing cash balances, proceeds from long-term debt and short- term borrowings, and net cash provided by operations of $36.8 million were used for capital expenditures, repayments of long-term debt, patronage refunds and other equity payments. Capital expenditures in 1994 included $32.7 million related to expansion and improvements in poultry operations, as well as $3.8 million for improvements to retail stores and other agricultural operations. During 1994, the Association had cash payments of approximately $22.7 million for patronage refunds and other equity payments. These payments included $10.2 million representing the redemption of Revolving Fund Certificates and Cumulative Preferred Capital Certificates of Interest with no fixed maturities. Accounts receivable increased during 1994 primarily as a result of increased crop loans to patrons and financing provided to independent agricultural products distributors, as well as increased poultry sales. Inventories during 1994 increased as a result of increased broiler production, higher poultry selling prices and increased cotton production in the Southeast.
During 1995, uses of cash included capital expenditures of $61.8 million, $36.7 million for repayments of long-term debt and patronage refunds and other equity distributions of $19.5 million. The funds for these investing and financing activities were provided primarily by borrowings of approximately $110.0 million and to a lesser extent, cash provided by operating activities of $7.2 million and the sale of investments in marketable securities totaling $8.9 million. Capital expenditures for 1995 included $43.4 million related to expansion and improvements in poultry operations, as well as $18.0 million for the acquisition of Agri-Services operations, improvements to retail stores and the construction of cotton facilities. Increases in accounts receivable and inventories during 1995 reflected the growth in poultry production and sales, the expansion of Agri-Services retail operations in the Mississippi Delta and the increase in Southeast cotton production.
During 1996, the uses of cash included capital expenditures of $74.3 million and $28.6 million for repayments of long-term debt, as well as increases in operating assets. Increases in inventories reflected the impact of higher feed ingredient prices on raw materials and live poultry and hog inventories and the increase in poultry prices on marketable products inventories. Increased receivables were primarily the result of increases in crop financing provided to producers and the growth in retail store sales. The Association's expansion into cotton procurement and marketing contributed to the increase in operating assets. The funds for these activities were provided by borrowings of $131.5 million. Capital expenditures for 1996 included $54.9 million for expansion and improvements in the poultry operations and $18.6 million in expenditures to acquire retail operations and construct cotton ginning and warehousing facilities.
The Association, including its non-cooperative subsidiaries, plans capital expenditures of approximately $140.0 million in 1997 that primarily include expenditures for expansion and technological advances in poultry production and processing and to a lesser extent, Agri-Services segment improvements. In addition, planned capital expenditures include other asset improvements and necessary replacements. Management intends to finance the planned 1997 capital expenditures with existing cash balances and net margins adjusted for non-cash items and additional long-term borrowings, as needed. In 1997, management expects cash expenditures to approximate $28.0 million for equity distributions. The Association believes cash on hand and cash equivalents at June 29, 1996 and cash expected to be provided from operations, in addition to borrowings available under existing credit arrangements and proceeds from the sale of Subordinated Capital Certificates of Interest, will be sufficient to maintain cash flows adequate for the Association's projected growth and operational objectives during 1997.
Effects of Inflation
The major factor affecting the Association's net sales volume and cost of sales is the change in commodity market prices for broilers, hogs, feed grains, fertilizers and cotton. The prices of these commodities are affected by world market conditions and are volatile in response to supply and demand, as well as political and economic events. The price fluctuations of these commodities do not necessarily correlate with the general inflation rate. Inflation has, however, affected operating costs such as labor, energy and material costs.
Future Accounting Requirements
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which must be applied by fiscal 1997. Management believes SFAS 121 will not have a significant impact upon adoption.
Item 8.
Item 8. Financial Statements and Supplementary Data.
INDEX
Page GOLD KIST INC. CONSOLIDATED FINANCIAL STATEMENTS: Independent Auditors' Reports . . . . . . . . . . . . . . . . . . 19
Consolidated Balance Sheets as of July 1, 1995 and June 29, 1996 21 Consolidated Statements of Operations for the years ended June 25, 1994, July 1, 1995 and June 29, 1996 . . . . . . . . . 22 Consolidated Statements of Patrons' and Other Equity for the years ended June 25, 1994, July 1, 1995 and June 29, 1996 . . . 23 Consolidated Statements of Cash Flows for the years ended June 25, 1994, July 1, 1995 and June 29, 1996 . . . . . . . . . 24 Notes to Consolidated Financial Statements. . . . . . . . . . . . 25
FINANCIAL STATEMENT SCHEDULES (Included in Part IV of this Report):
FINANCIAL STATEMENT SCHEDULE:
Valuation Reserves for the years ended June 25, 1994, July 1, 1995 and June 29, 1996 . . . . . . . . . . . . . . . . . . . . . . . 44
INDEPENDENT AUDITORS' REPORT
The Board of Directors Gold Kist Inc.:
We have audited the consolidated financial statements of Gold Kist Inc. and subsidiaries as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We did not audit the combined consolidated financial statements of Golden Peanut Company and Subsidiaries, a partnership investment, and Alimenta Commodities, LLC, a limited liability corporation, investments accounted for using the equity method of accounting, as described in Note 9(b) to the consolidated financial statements. The combined consolidated financial statements of Golden Peanut Company and Subsidiaries and Alimenta Commodities, LLC were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Golden Peanut Company and Subsidiaries and Alimenta Commodities, LLC, is based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Gold Kist Inc. and subsidiaries as of July 1, 1995 and June 29, 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended June 29, 1996, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in notes 1, 6 and 9(a) to the consolidated financial statements, the Company changed its method of accounting for income taxes in 1994 and for certain investments in debt and equity securities in 1995.
KPMG Peat Marwick LLP
Atlanta, Georgia September 6, 1996, except for the first paragraph of note 8 as to which the date is September 13, 1996
REPORT OF INDEPENDENT AUDITORS
Partnership Committee Golden Peanut Company and Alimenta Commodities, LLC
We have audited the combined consolidated balance sheets of Golden Peanut Company and Subsidiaries (the "Partnership") and Alimenta Commodities, LLC ("LLC"), (since April 1, 1996, date of inception) (collectively, the "Companies"), as of June 30, 1996 and 1995, and the related combined consolidated statements of operations, partners' equity, and cash flows for each of the three years in the period ended June 30, 1996 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined consolidated financial position of Golden Peanut Company and Subsidiaries and Alimenta Commodities, LLC at June 30, 1996 and 1995, and the combined consolidated results of their operations and their cash flows for each of the three years in the period ended June 30, 1996, in conformity with generally accepted accounting principles.
As discussed in Note 8 to the combined consolidated financial statements, in 1994 the Partnership changed its method of accounting for postretirement benefits other than pensions.
Ernst & Young LLP
Atlanta, Georgia September 6, 1996
GOLD KIST INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 25, 1994, July 1, 1995 and June 29, 1996 (Dollar Amounts in Thousands)
(1) Summary of Significant Accounting Policies
Gold Kist Inc. ("Gold Kist" or "Association") is a diversified agricultural membership cooperative association, headquartered in Atlanta, Georgia. Gold Kist serves approximately 29,000 active farmer members and other cooperative associations located principally in the southeastern United States. Gold Kist operates broiler and pork production facilities providing both marketing and purchasing services to producers. Gold Kist also purchases or manufactures feed, seed, fertilizers, pesticides, animal health products and other farm supply items for sale at wholesale and retail. Additionally, the Association is engaged in the processing, storage and marketing of cotton, serves as a contract procurement agent for, and stores, farm commodities such as soybeans and grain, and is a partner in a major peanut processing and marketing business and in a pecan processing and marketing business.
The accounting and reporting policies of Gold Kist Inc. and subsidiaries conform to generally accepted accounting principles and to general practices among agricultural cooperatives. The following is a summary of the significant accounting policies.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts of Gold Kist Inc. and its wholly and majority owned subsidiaries (Gold Kist or Association). All significant intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to the 1995 consolidated financial statements to conform to the presentation in the 1996 consolidated financial statements.
(b) Cash and Cash Equivalents
Gold Kist's policy is to invest cash in excess of operating requirements in highly liquid interest bearing debt instruments, which include commercial paper and reverse repurchase agreements. These investments are stated at cost which approximates market. For purposes of the consolidated statements of cash flows, Gold Kist considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.
(c) Inventories
Merchandise for sale includes feed, fertilizer, seed, pesticides, equipment and general farm supplies purchased or manufactured by Gold Kist for sale to agricultural producers and consumers. These inventories are stated, generally, on the basis of the lower of cost (first-in, first-out or average) or market.
Live poultry and hogs consist of broilers, breeding stock and market hogs. The broilers and market hogs are stated at the lower of average cost or market. The breeding stock is stated at average cost, less accumulated amortization.
Raw materials and supplies consist of feed and fertilizer ingredients, uncleaned seed, hatching eggs, packaging materials and operating supplies. These inventories are stated, generally, on the basis of the lower of cost (first-in, first-out or average) or market. Gold Kist hedges varying amounts of its feed ingredient purchases to minimize the risk of adverse price fluctuations. Futures contracts are accounted for as hedges and option contracts are accounted for at market. Gains or losses on futures and options transactions are included as a part of product cost.
GOLD KIST INC. Notes to Consolidated Financial Statements, Continued (Dollar Amounts in Thousands)
Marketable products consist primarily of dressed and further processed poultry and cotton. These inventories are stated, principally, on the basis of selling prices, less estimated brokerage, freight and certain other selling costs where applicable (estimated net realizable value).
(d) Property, Plant and Equipment
Property, plant and equipment is recorded at cost. Depreciation of plant and equipment is calculated by the straight-line method over the estimated useful lives of the respective assets.
(e) Investments
Investments in other cooperatives are recorded at cost and include the amount of patronage refund certificates and patrons' equities allocated, less distributions received. These investments are not readily marketable and quoted market prices are not available. The equity method of accounting is used for investments in other companies in which Gold Kist's voting interest is 20 to 50 percent. Investments in less than 20 percent owned companies which are not readily marketable are stated at cost. For years prior to fiscal 1995, the investment in the marketable equity security was stated at the lower of cost or market.
Effective June 26, 1994, Gold Kist adopted the provisions of Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in Debt and Equity Securities." Pursuant to the provisions of SFAS 115, the Association has classified its marketable equity security and collateralized loans as "available- for-sale." "Available-for-sale" securities are those the Association intends to hold for a period of time and are not acquired with the intent of selling them in the near term. Unrealized gains and losses on "available-for-sale" securities are included as a separate component of patrons' and other equity in the accompanying 1995 and 1996 financial statements, net of deferred income taxes. Upon initial application of SFAS 115, Gold Kist recorded an increase to investments of $20.5 million and to patrons' and other equity of $12.9 million (net of deferred income taxes of $7.6 million) related to the marketable equity security (see note 9(a)). Management believes the carrying value of the collateralized loans approximate market value and, accordingly, no adjustment has been recognized in the accompanying financial statements.
Gold Kist's investment in the Golden Peanut Company partnership is accounted for using the equity method (see note 9(b)). Other investments accounted for under the equity method are not significant.
(f) Income Taxes
Gold Kist operates as an agricultural cooperative not exempt from Federal income taxes. Aggregate margins not refunded in cash to members or allocated in the form of qualified written notices are subject to income taxes.
The bylaws of Gold Kist provide for the issuance of either qualified or nonqualified patronage refunds (as defined for purposes of Subchapter T of the Internal Revenue Code). Gold Kist utilized nonqualified patronage refunds in 1994, 1995 and 1996, which are deductible for income tax purposes only to the extent paid or redeemed in cash.
Effective June 27, 1993, Gold Kist adopted the provisions of Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes" and reported the cumulative effect of that change in the method of accounting for income taxes in the 1994 consolidated statement of operations. SFAS 109 requires an asset and liability approach in accounting for income taxes and, therefore, required a change from the deferred method Gold Kist previously used. Under the asset and liability method,
GOLD KIST INC. Notes to Consolidated Financial Statements, Continued (Dollar Amounts in Thousands)
deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.
(g) Fair Value of Financial Instruments
Gold Kist's financial instruments include cash and cash equivalents, accounts receivables and payables and accrued expenses, notes receivable and debt. Because of the short maturity of cash equivalents, accounts receivables and payables and accrued expenses, certain short-term debt which matures in less than one year and long- term debt with variable interest rates, the carrying value approximates fair value. All financial instruments are considered to have an estimated fair value which approximates carrying value at July 1, 1995 and June 29, 1996 unless otherwise specified (see notes 1(e) and 4).
(h) Fiscal Year
Gold Kist employs a 52/53 week fiscal year. The consolidated financial statements for 1994, 1995 and 1996 reflect 52, 53 and 52 weeks, respectively. Fiscal 1997 will be a 52 week year.
(i) Use of Estimates
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 to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from these estimates.
(2) Inventories
Inventories are summarized as follows:
(3) Property, Plant and Equipment
Property, plant and equipment is summarized as follows:
GOLD KIST INC. Notes to Consolidated Financial Statements, Continued (Dollar Amounts in Thousands)
(4) Notes Payable and Long-Term Debt
At June 29, 1996, Gold Kist had a $150 million unsecured committed credit facility with five commercial banks. The facility included a five-year $50 million revolving credit commitment, a $50 million 364-day line of credit commitment, and a $50 million seasonal line of credit commitment. As of June 29, 1996, borrowings of $50 million and $40 million, respectively, were outstanding under the revolving credit and 364-day line-of-credit commitments. At June 29, 1996, Gold Kist had other borrowings of $112.8 million outstanding under uncommitted loans and letters of credit facilities. At June 29, 1996, the Company classified $50 million of borrowings under the $50 million revolving credit and borrowings of $40 million under the uncommitted loan facilities as long- term debt. On August 9, 1996, Gold Kist refinanced these loans under a five- year $125 million revolving credit commitment.
On August 9, 1996, the Association entered into a $250 million unsecured committed credit facility with nine commercial banks. The new facility includes a five-year $125 million revolving credit commitment and a $125 million 364-day line of credit commitment. The five-year revolving credit agreement expires on August 9, 2001, but may be extended twice for successive one-year periods with the consent of the banks. The revolving credit facility fee and the commitment fees on the unused portion of the revolving credit will be computed quarterly based on the Association's ratio of funded debt to total capital and will not exceed .20% per annum. The 364-day line of credit provides short-term financing that will expire in August 1997 and may be extended with the consent of the banks. The 364-day line of credit is subject to a .16% per annum facility fee. Borrowings under the $250 million facility will bear variable interest rates at or below prime. Also, the facility permits competitive bid interest rates by the participating banks.
At June 29, 1996, Gold Kist had other unused long-term loan commitments of $20 million and additional uncommitted facilities to provide loans and letters of credit from banks aggregating approximately $94 million. These unsecured borrowings bear interest at rates below prime.
Subordinated loan certificates of $27.4 million at July 1, 1995 bore interest at rates of 3.5% to 6.7% with terms of one year and were unsecured. At June 29, 1996, subordinated loan certificates outstanding were $30.6 million bearing interest at rates of 5.5% to 6.4%.
Interest left on deposit represents amounts of interest payable, which at the option of the holders of various classes of certificates, is left on deposit with Gold Kist. Additional interest on these amounts accrues at the same rates as the related certificates.
GOLD KIST INC. Notes to Consolidated Financial Statements, Continued (Dollar Amounts in Thousands)
Long-term debt is summarized as follows:
Based upon discounted cash flows of future payments, assuming interest rates available to Gold Kist for issuance of debt with similar terms and remaining maturities, the estimated fair value of the unsecured senior notes payable at July 1, 1995 and June 29, 1996 was approximately $51.7 million and $43.0 million, respectively.
The terms of debt agreements specify minimum working capital, net worth and current ratio requirements. The debt agreements also place a limitation on equity distribution, cash patronage refunds and additional loans, advances or investments. The limitation provides for a carryover to 1997 of unused amounts, $4.6 million as of June 29, 1996, and is increased by 50% of Gold Kist's net margins (or minus 100% of a net loss) before any gains or losses on disposals of capital assets or equity in unremitted earnings of any affiliate.
Annual required principal repayments on long-term debt for the five fiscal years subsequent to June 29, 1996 are as follows:
GOLD KIST INC. Notes to Consolidated Financial Statements, Continued (Dollar Amounts in Thousands)
(5) Patrons' and Other Equity
Gold Kist's Articles of Incorporation provide for a class of common stock and a class of preferred stock pursuant to the provisions of the Georgia Cooperative Marketing Act. Each member is allocated one share of common stock, $1.00 par value. The common shares are not marketable or transferable and no dividends will be declared on these common shares. No issuance of preferred stock has been authorized by Gold Kist.
Patronage reserves represent allocated undistributed member margins less taxes paid on nonqualified equity. Patronage reserves do not bear interest and are subordinated to all certificates outstanding and indebtedness of Gold Kist. Patronage reserves may be revolved and paid at the discretion of the Board of Directors.
Retained earnings include the cumulative net margins (losses) resulting from nonmember and nonpatronage transactions, including noncooperative subsidiaries. Also included are amounts related to the early redemption of notified equity, representing the difference between the face value and the redemption amounts.
(6) Income Taxes
As discussed in Note 1(f), Gold Kist adopted SFAS 109 as of June 27, 1993. The cumulative effect of this change in accounting for income taxes, which resulted in a tax benefit of $5.3 million, was determined as of June 27, 1993 and was reflected in the consolidated statement of operations for the year ended June 25, 1994.
The provisions for income tax expense, principally Federal, consist of the following:
The deferred income tax effect of the unrealized gain on marketable equity security has been charged as a component of patrons' and other equity for 1995 and 1996.
Gold Kist's combined federal and state effective tax rates from operations for 1994, 1995 and 1996 were 30%, 51% and 33%, respectively. A reconciliation of income tax expense from operations computed by applying the Federal corporate income tax rate of 35% in 1994, 1995 and 1996 to margins before income taxes, minority interest and cumulative effect of accounting changes for the applicable year follows:
GOLD KIST INC. Notes to Consolidated Financial Statements, Continued (Dollar Amounts in Thousands)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at July 1, 1995 and June 29, 1996 are as follows:
The net change in the total valuation allowance for the years ended 1995 and 1996 was an increase of $71 and a decrease of $578, respectively. The Association's management believes the existing net deductible temporary differences comprising the total net deferred tax assets will reverse during periods in which the Association generates net taxable income.
During 1993, the Internal Revenue Service (IRS) concluded its examination of Gold Kist's 1987 through 1989 Federal income tax returns and issued a notice of deficiency. In April 1994, the remaining issue, whether Gold Kist must recognize taxable income related to the redemption of its qualified notified equity at less than face amount, was litigated before the United States Tax Court. An adverse decision was received from the Tax Court on June 26, 1995. The Association has appealed the decision to the Eleventh Circuit Court of Appeals. The accompanying financial statements reflect the impact of the Tax Court decision through June 29, 1996.
(7) Employee Benefits
(a) Pension Plans
Gold Kist has noncontributory defined benefit pension plans covering substantially all of its employees and directors and an affiliate's employees (participants). The plan covering the salaried participants provides pension benefits that are based on the employees' compensation during the years before retirement or other termination of employment. The plan covering the hourly participants provides pension benefits that are based on years of 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 United States Government and Agency obligations.
GOLD KIST INC. Notes to Consolidated Financial Statements, Continued (Dollar Amounts in Thousands)
Net periodic pension expense for 1994, 1995 and 1996 included the following components:
The following table sets forth the plans' funded status, amounts recognized in the consolidated balance sheets at July 1, 1995 and June 29, 1996 and economic assumptions:
The unrecognized net asset existing at the date of adoption of Statement of Financial Accounting Standards No. 87 is being amortized over the remaining service lives of the participants.
GOLD KIST INC. Notes to Consolidated Financial Statements, Continued (Dollar Amounts in Thousands)
(b) Other Postretirement Benefits
Gold Kist provides health care and death benefits to substantially all retired employees, covered dependents and their beneficiaries. Generally, employees who have attained age 55 and who have 10 years of service are eligible for these benefits. In addition, employees with less than 10 years of service who retired before July 1, 1992 are eligible for these benefits. The health care and death benefit plans are contributory and coverages increase with increased years of service.
Postretirement health and death benefit expense for 1994, 1995 and 1996 included the following components:
Gold Kist's postretirement benefit plans are not funded. The status of the plans at July 1, 1995 and June 29, 1996 was as follows:
The health care cost trend rate used to determine the accumulated postretirement benefit obligation at July 1, 1995 was 9%, declining ratably to 5% by the year 2001 and remaining at that level thereafter. The health care cost trend rate used to determine the accumulated postretirement benefit obligation at June 29, 1996 was 8%, declining ratably to 5% by the year 2001 and remaining at that level thereafter. The discount rate used to determine the accumulated postretirement benefit obligation was 8.00% at July 1, 1995 and June 29, 1996, respectively. A 1% increase in the health care cost trend rate for each year would increase the accumulated postretirement benefit obligation for health care benefits at June 29, 1996 by approximately 12% and net postretirement health care cost by 14%.
(8) Contingent Liabilities and Commitments
In January 1993, certain Alabama member patrons of the Association filed a lawsuit in the Circuit Court of Jefferson County, Alabama, Tenth Judicial Circuit against the Association and Golden Poultry and certain directors and officers of the companies. (Ronald Pete Windham and Windham Enterprises, Inc. on their behalf and on behalf of and for the use and benefit of Gold Kist, Inc. and its shareholders/members v. Harold O. Chitwood, individually in his capacity as an officer of Gold Kist and a Director of Golden Poultry; et al). The lawsuit alleged that the named defendants violated their fiduciary duties by diverting corporate opportunities from the Association to Golden Poultry and Carolina Golden Products Company in connection with the creation of Golden Poultry and Carolina
GOLD KIST INC. Notes to Consolidated Financial Statements, Continued (Dollar Amounts in Thousands)
Golden Products Company and by permitting their continued operations. In March 1994, the Court certified the Windham litigation as a class action. In September 1995, Golden Poultry and Carolina Golden Products Company were dismissed from the litigation. On October 25, 1995, the jury in the Windham case returned verdicts in favor of the plaintiffs in the litigation. On July 2, 1996, the Jefferson County, Alabama Circuit Court Judge entered an Order in the case directing Gold Kist to acquire the approximately 27% of Company shares currently owned by investors so that all of the issued and outstanding stock of the Company would be owned by Gold Kist. The Court denied the plaintiffs' demands for additional allocations and cash distributions to the class members. On September 13, 1996, subsequent to Motions for Reconsideration filed by the plaintiffs and Gold Kist, the Court entered a Final Judgment and Decree amending its July 2, 1996 Order. The Final Judgment and Decree relieves Gold Kist of the requirement to acquire the 27% of Golden Poultry common stock not already owned by Gold Kist. This Final Judgment and Decree requires Gold Kist to acquire or redeem all Golden Poultry common stock and/or stock options held or issued to Gold Kist officers and directors. Gold Kist is further ordered, with its consent, to revolve $21.2 million of notified equity for the years 1976 through 1983 within four calendar months of the date of the Order and requires Gold Kist to pay $4.2 million in fees and expenses to the plaintiffs' attorneys. An appeal of the Final Judgment may be filed on or before October 25, 1996, and could have the effect of staying the Final Judgment pending the outcome of any appeal. The redemption of notified equity and the fees and expenses awarded to plaintiffs' attorneys have been reflected in the accompanying consolidated financial statements.
Gold Kist is also party to other various legal and administrative proceedings, all of which management believes constitute ordinary routine litigation incident to the business conducted by Gold Kist, or are not material in amount.
Gold Kist received proceeds of $20.0 million, $5.0 million, $4.9 million and $10.2 million during 1993, 1994, 1995 and 1996, respectively, for collateralized loans sold with recourse to an insurance company, of which $26.4 million was outstanding at June 29, 1996. No gain or loss was recognized on the sale of these loans. A $264 thousand allowance has been recognized in the accompanying consolidated financial statements for potential losses that may occur. As of June 29, 1996, there have been no credit losses related to the loans guaranteed under this agreement.
Gold Kist is a guarantor of amounts outstanding under a $65.0 million secured loan agreement between a commercial bank and Young Pecan Company, a pecan processing and marketing partnership in which Gold Kist holds a 25% equity interest and 35% earnings (loss) allocation. At June 29, 1996, the amounts outstanding under this facility were $60.6 million.
(9) Investments
(a) Marketable Equity Security
As discussed in Note 1(e), Gold Kist adopted SFAS 115 at June 26, 1994, changing the method of accounting for its marketable equity security from a historical cost basis to a fair value approach. Pursuant to the provisions of SFAS 115, the Association has classified its marketable equity security as "available-for-sale." At June 29, 1996, the Association's marketable equity security was carried at its fair value of $54.8 million, which represents a gross unrealized gain of $34.1 million. The 1996 gross unrealized gain, net of deferred income taxes of $13.1 million, has been reflected as a separate component of patrons' and other equity. At July 1, 1995, the marketable equity security was carried at its fair value of $50.1 million, which represents a gross unrealized gain of $30.1 million. The 1995 gross unrealized gain, net of deferred income taxes of $11.6 million, has been reflected as a separate component of patrons' and other equity.
Gains realized on sales and dividends totaled $170 thousand, $1.3 million and $494 thousand and are included in miscellaneous, net for the years ended June 25, 1994, July 1, 1995 and June 29, 1996, respectively.
(b) Golden Peanut Company
Gold Kist has a 33 1/3% interest in Golden Peanut Company, a Georgia general partnership. Gold Kist's investment in the partnership amounted to $15.5 million and $17.2 million at July 1, 1995 and June
GOLD KIST INC. Notes to Consolidated Financial Statements, Continued (Dollar Amounts in Thousands)
29, 1996, respectively. In July 1995, Gold Kist made an additional investment of $2.8 million. The partnership has a $450.0 million commercial paper facility supported by lines of credit with various banks totaling $220.0 million. At June 30, 1996, borrowings of $105.0 million were outstanding under the commercial paper facility. Summarized financial information of Golden Peanut Company, excluding Alimenta Commodities, LLC, is shown below:
Golden Peanut Company's 1994 net loss includes a $3.9 million charge resulting from the adoption of SFAS 106. Gold Kist has included its proportionate share of Golden Peanut Company's adoption of SFAS 106 in equity in loss of partnership in the accompanying 1994 consolidated statement of operations since the amount is not significant.
In 1994, 1995 and 1996, Gold Kist received $2.1 million in rental income from Golden Peanut Company under an operating lease agreement for peanut shelling and procurement facilities. Gold Kist received procurement commissions, royalties and administrative service fees of $2.7 million, $3.9 million and $3.1 million in 1994, 1995 and 1996, respectively. In addition, Gold Kist purchased $5.4 million, $3.1 million and $2.6 million of inventory from Golden Peanut Company in 1994, 1995 and 1996, respectively.
(10) Major Business Segments
Gold Kist is an agricultural cooperative, with operations located primarily in the southeastern United States, engaged in marketing products and purchasing supplies and equipment for its patrons. Gold Kist also operates non-cooperative businesses engaged in broiler operations, farm and home retailing, and crop and equipment financing. Gold Kist's operations are classified into industry segments as follows:
The Poultry segment includes cooperative integrated broiler production, processing and marketing operations, as well as subsidiary broiler operations. This segment has decentralized broiler, pork production and cornish game hen facilities.
The Agri-Services segment purchases or manufactures feed, seed, fertilizers, agricultural chemicals, animal health products, and other farm supply and equipment items for sale through Gold Kist retail outlets and independent dealers. The segment conducts cotton procurement, ginning, storage and marketing operations, as well as other crop procurement services.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not Applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The Directors of Gold Kist are:
* Member of Board of Directors Executive Committee.
The Directors of Gold Kist are elected on a district representation basis. The districts are redrawn from time to time by the Board of Directors, under provisions of the By-Laws of Gold Kist, to provide for equitable representation of members in the territory served by Gold Kist. During the past five years, each of the Directors has owned and managed substantial farming operations, producing such agricultural products as peanuts, cotton, soybeans, corn, other grains, peaches, vegetable crops, cattle, poultry and dairy products. While the size of products produced on, and personnel employed at, each of the Director's farms varies, each Director's business activities have been related primarily to small agribusiness enterprises. There are no family relationships among any of the Directors and executive officers.
The Executive Officers of Gold Kist are:
*Member of Management Executive Committee
The officers serve for terms of one year and until their successors are elected by the Board of Directors. During the past five years the principal occupation of each of the above named executive officers, with exception of Michael A. Stimpert, has been as an officer or employee of Gold Kist. Mr. Michael A. Stimpert was elected Senior Vice President, Planning and Administration, effective April 1, 1996. He previously served as Vice President from January 1, 1996 until election to his current position. From December 19, 1986 until January 1996, Mr. Stimpert served as Executive Vice President of Golden Peanut Company, a peanut processing and marketing company headquartered in Atlanta, Georgia. Mr. Stimpert was employed by Gold Kist Inc. from June 1974 until December 1986 in a variety of positions, including Group Vice President, Agricommodities Group and Group Vice President, AgriProducts Group.
Item 11.
Item 11. Executive Compensation.
Summary Compensation Table. The following table sets forth information concerning the compensation received by the Chief Executive Officer and for each of the four other most highly compensated executive officers: ______________________________ (1) The amounts shown for the fiscal year ended June 29, 1996 set forth that portion of interest earned on voluntary salary and bonus deferrals under non-qualified deferred compensation plans above 120% of the applicable federal rate. Other than such amounts, for the fiscal years ended June 29, 1996, July 1, 1995, and June 25, 1994, no amounts of "Other Annual Compensation" were paid to any of the above named executive officers, except for perquisites and other personal benefits which for each executive officer did not exceed the lesser of $50,000 or 10% of such individual's salary plus annual bonus. (2) The amounts set forth include the following amounts that were contributed by the Association for fiscal years 1996 and 1995 on behalf of the named executive officers pursuant to the Gold Kist Profit Sharing and Investment Plan, a qualified defined contribution plan (401(K)): Mr. Coan - $4,500 and $5,418 respectively, Mr. Bekkers - $4,946 and $4,206 respectively; Mr. Whitmire - $4,656 and $4,438 respectively; Mr. Stewart - $4,617 and $4,193 respectively; Mr. Gibbons - $4,500 and $4,304 respectively; and Mr. Chitwood - $0 and $4,676 respectively. In addition, the amounts set forth include for fiscal years 1995 and 1996 the following amounts which represent the value of the named executive officer's benefit from premiums paid by the Association under a split dollar life insurance plan for the named executive officers: Mr. Coan - $7,530 and $7,543 respectively; Mr. Bekkers - $4,479 and $4,497 respectively; Mr. Whitmire - $5,309 and $5,320 respectively; Mr. Stewart - $4,952 and $4,965 respectively; Mr. Gibbons - $5,482 and $5,471 respectively; and Mr. Chitwood - $8,404 and $8,404 respectively. The Association uses the modified premium method in determining the portion of each premium dollar attributable to the named executive officers. The Association will recover the cost of premium payments from the cash value of the policies. (3) The amounts set forth include amounts that were contributed by the Association for the indicated fiscal years on behalf of the named executive officers pursuant to the Gold Kist Profit Sharing and Investment Plan, a qualified defined contribution plan (401(K) plan). (4) Mr. Chitwood retired from Gold Kist, effective October 27, 1995.
Retirement Plans. Gold Kist maintains two noncontributory retirement plans, one for salaried employees and the other for hourly employees, which together cover substantially all employees who have served at least one year with Gold Kist, including those employees subject to collective bargaining agreements. The plan for salaried employees was amended in 1984 to delete the one year waiting period for credited service. For salaried employees, the plan provides a retirement benefit after 30 years of credited service at age 65, which, when combined with the portion of the employee's primary Social Security benefit attributable to his/her employer's contributions, will equal 45% of his/her average earnings during the period of five years in which he/she had the highest earnings in the last ten years of employment immediately preceding attainment of age 65, or if retired before age 65, in the last ten years immediately preceding early retirement. This plan also provides an early retirement benefit after age 55, with no reduction in benefit entitlement due to age, when the sum of the employee's age and years of service equal or exceed 90. The benefit entitlement is reduced in either case for each year of credited service less than 30 years. For hourly employees who work for Gold Kist until age 65, the plan provides a monthly pension benefit equal to $9.00 for each year of plan participation, payable at age 65; early retirement is permitted after age 55 at reduced benefit levels. The plans contain a death benefit for the surviving spouse of an active employee (who had at least five years credited service or was at least 55 years old at the time of death) which equals 50% of the deceased employee's accrued retirement income benefit. Accrued benefits under the plans vest after the employee attains five years of service or at age 55, and the minimum pension benefit at age 65 is $9.00 per month for each year of credited service. Amounts contributed for specific individuals under Gold Kist's retirement income plan for salaried employees cannot be readily determined. For the plan year ended December 31, 1995, the Association made a contribution of $1,412,000 to the pension plan for hourly employees. Due to the full funding limitation of the Internal Revenue Service, the Association was not permitted to make a tax-deductible contribution to the retirement income plan for salaried employees for the plan year ended December 31, 1995. Estimated annual benefits payable upon retirement at normal retirement age (65 years) to persons in specified years of service and remuneration classifications, before offset of Social Security benefits, are illustrated in the following table:
For years after 1993, the maximum annual amount of compensation that can be used for determining an individual's benefit under a qualified plan is $150,000. The plan covers the compensation set forth in the columns entitled "Salary" and "Bonus" in the Summary Compensation Table. The credited years of service as of December 31, 1994, under the retirement income plan for the five executive officers listed in the summary compensation table are as follows: Mr. Chitwood (30); Mr. Coan (30); Mr. Bekkers (11); Mr. Whitmire (30); Mr. Stewart (30); and Mr. Gibbons (20).
A Supplemental Executive Retirement Plan has been adopted by the Association whereby Gold Kist makes supplemental payments to certain employees under a non-qualified deferred compensation plan to make up for any reduction in such employees' retirement income under the Gold Kist salary retirement plan resulting from restrictions placed on qualified retirement plans under Section 415 of the Internal Revenue Code of 1986, as amended. Such restrictions limit the amount of benefits payable in qualified retirement plans with respect to the percentage of final pay to which such employees would be otherwise entitled upon retirement. All vested amounts accrued under the Plan have been funded in a trust which is secure against all contingencies except a bankruptcy of the Association. The following table shows the estimated annual benefits payable upon retirement at normal retirement age (65) to persons in specified years of service and remuneration classifications, before offset of Social Security benefits and without restriction imposed by the Internal Revenue Code. The amounts shown in the table would be reduced by the amounts payable pursuant to the Gold Kist Retirement Plan for Salaried Employees.
Covered compensation, computation of the average final compensation, and credited years of service for the five executive officers listed in the summary compensation table are the same as that set forth in the foregoing description of the Gold Kist Retirement Plan for Salaried Employees.
In addition to the retirement benefits provided by its qualified and nonqualified retirement plans, Gold Kist has contracted to provide certain key employees with compensation benefits after normal retirement. These benefits, known as the Management Deferred Compensation Plan, are paid monthly following retirement in an annual amount equal to 25% of the average annual salary for the ten year period immediately prior to retirement. These benefits are payable, depending on the contract, for a 10 or 15 year period following retirement to a former key employee or his designated beneficiary. All vested amounts accrued under the plan have been funded in a trust which is secure against all contingencies except a bankruptcy of the Association. Estimated annual benefits payable under the Management Deferred Compensation Plan would be based upon the following average annual salary of the eligible named executives for the ten year period ended as of June 29, 1999: Mr. Coan - $213,789; Mr. Bekkers - $104,208; Mr. Whitmire - $140,954; and Mr. Chitwood - $268,560.
Change in Control Plans. Under the Gold Kist officers contingency plan, the Association has entered into identical change in control agreements with each officer, including the five executive officers named in the cash compensation table. Each change in control agreement provides that following a change in the control of the Association (as defined in the agreements), if the officer's employment with the Association terminates within two years after the change in control (but prior to the officer's reaching age 65), the officer will be entitled to receive a severance payment calculated by determining the "Base Severance Amount" as follows:
(1) if the officer is age 60 or younger at the time of termination of his employment, the amount equal to the officer's compensation paid by the Association for the five full calendar years ending before the date of the change in control, or (2) if the officer is older than age 60 at the time of his termination of employment, the amount equal to the officer's average annual compensation paid by the Association for the lesser of five full calendar years or the full calendar years of service with the Association ending before the change in control, multiplied by the number of years and fractions thereof remaining until the officer's 65th birthday.
The Base Severance Amount is to be adjusted for those officers with less than 15 years of service by prorating the Base Severance Amount with the numerator being the number of completed calendar years of service and the denominator being 15. However, the minimum any terminated officer would receive would be one and one-half times the average annual compensation paid by the Association for the actual number of full calendar years worked, if less than five, or the annual salary amount for an officer who has worked less than one calendar year. The severance payment will include an additional amount equal to any excise tax under Section 4999 of the Internal Revenue Code of 1986 incurred by the officer, plus all federal, state and local income taxes incurred by the officer with respect to receipt of the additional amount. Additionally, under such contracts, medical benefits would remain available to current and retired officers on the same basis as is provided at the time of a change in control. The Association has agreed to pay all legal fees and expenses incurred by an officer in the pursuit of the rights and benefits provided by the change in control agreement. The Association has entered into similar change in control agreements with each director of Gold Kist. As of June 29, 1996, no contingencies have occurred which would require the implementation of the provisions of the changes in control plans, and no payments or other benefits have been provided to the five executive officers named in the summary compensation table or to the directors.
Director Compensation. The By-Laws of Gold Kist provide that the Directors shall be compensated for their services and reimbursed for their expenses, as determined by the Board of Directors. Currently the Directors receive no compensation other than an annual retainer paid at the rate of $20,000 per year, with the Chairman receiving $21,500. Directors and Directors Emeriti receive a per diem of $250 with a $500 minimum, plus expenses incurred while traveling to and from and attending meetings of the Board of Directors or other official meetings or conferences. Pursuant to separate agreements, Gold Kist has arranged to provide life benefits to qualifying directors emeriti and to make available health insurance and other medical benefits for Gold Kist directors and directors emeriti as are available to employees of Gold Kist from time to time pursuant to the Association group insurance program.
Compensation Committee Interlocks and Insider Participation. Director W. P. Smith, Jr., Fred K. Norris, Jr. and Dan Smalley serve as members of the Association's Compensation Committee.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Not Applicable.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The Directors of Gold Kist are members of the Association and, during the fiscal year ended June 29, 1996, have had dealings in the ordinary course of business with Gold Kist as purchasing or marketing patrons. See Business (and Properties) -- Patronage Refunds.
(a)3. Exhibits - Index of Exhibits
Exhibits designated as previously filed with the Commission in the Index of Exhibits, below, are incorporated by reference into this Report.
*Plans and arrangements pursuant to which executive officers and directors of the Association receive compensation.
(b) Reports on Form 8-K. - No reports on Form 8-K have been filed during the last quarter of the fiscal year ended June 29, 1996.
SIGNATURES - Pursuant to the requirements of Section 13 or 15(d) 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.
Date: September 19, 1996 By:/s/ G. O. Coan G. O. Coan, Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS
Sequentially Exhibit Numbered Number Description Page
B-27 -Financial Data Schedule