SANFILIPPO JOHN B & SON INC - Annual Report: 2006 (Form 10-K)

 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended June 29, 2006

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

For the transition period from                      to

JOHN B. SANFILIPPO & SON, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		36-2419677
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)

2299 Busse Road
Elk Grove Village, Illinois 60007
(Address of Principal Executive Offices, Zip Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value per share

(Title of Class)

     Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes o No þ.

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes o No þ.

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o.

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K þ.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

Large accelerated filer o            Accelerated filer þ            Non-accelerated filer o

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

     The aggregate market value of the voting Common Stock held by non-affiliates was $103,123,862 as of December 29, 2005 (7,975,550 shares at $12.93 per share).

     As of September 27, 2006, 8,112,099 shares of the Company’s Common Stock, $.01 par value (“Common Stock”), including 117,900 treasury shares, and 2,597,426 shares of the Company’s Class A Common Stock, $.01 par value (“Class A Stock”), were outstanding.

Documents Incorporated by Reference:

Portions of the Company’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held November 6, 2006 are incorporated by reference into Part III of this Report.

 

 

PART I

Item 1 — Business

a.

General Development of Business

(i)

Background

John B. Sanfilippo & Son, Inc. (the “Company”) was incorporated under the laws of the State of Delaware in 1979 as the successor by merger to an Illinois corporation that was incorporated in 1959. As used throughout this annual report on Form 10-K, unless the context otherwise indicates, the term “Company” refers collectively to John B. Sanfilippo & Son, Inc., JBSS Properties, LLC and JBS International, Inc., a previously wholly-owned subsidiary, that was dissolved in November, 2004. The Company’s fiscal year ends on the final Thursday of June each year, and typically consists of fifty-two weeks (four thirteen week quarters). Fiscal 2005, however, contained fifty-three weeks, with the fourth quarter containing fourteen weeks. References herein to fiscal 2007 are to the fiscal year that will end June 28, 2007. References herein to fiscal 2006 are to the fiscal year ended June 29, 2006. References herein to fiscal 2005 are to the fiscal year ended June 30, 2005. References herein to fiscal 2004 are to the fiscal year ended June 24, 2004.

The Company is one of the leading processors and marketers of tree nuts and peanuts in the United States. These nuts are sold under a variety of private labels and under the Company’s Fisher, Evon’s, Flavor Tree, Sunshine Country, Texas Pride and Tom Scott brand names. The Company also markets and distributes, and in most cases manufactures or processes, a diverse product line of food and snack items, including peanut butter, candy and confections, natural snacks and trail mixes, sunflower seeds, corn snacks, sesame sticks and other sesame snack products.

The Company’s Internet website is accessible to the public at http://www.jbssinc.com. Information about the Company, including the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are made available free of charge through the Company’s Internet website as soon as reasonably practicable after such reports have been filed with the United States Securities and Exchange Commission (the “SEC”). The Company’s materials filed with the SEC are also available on the SEC’s website at http://www.sec.gov. The public may read and copy any materials the Company files with the SEC at the SEC’s public reference room at 450 Fifth St., NW, Washington, DC 20549. The public may obtain information about the reference room by calling the SEC at 1-800-SEC-0330.

The Company’s headquarters and executive offices are located at 2299 Busse Road, Elk Grove Village, Illinois, 60007, and its telephone number for investor relations is (847) 593-2300, extension 6612.

(ii)

Facility Consolidation Project

The Company is in the process of moving its Illinois operations to a central location in Elgin, Illinois. On April 15, 2005, the Company closed on the $48.0 million purchase of a site in Elgin, Illinois (the “Current Site”). Prior to acquiring the Current Site, the Company engaged in a series of transactions whereby it purchased property that it anticipated using in the facility consolidation project (the “Original Site”). The Company is currently marketing the Original Site to potential buyers and moving forward with the facility consolidation project on the Current Site. The Current Site includes both an office building and a warehouse. The Company is leasing 41.5% of the office building back to the seller for a three year period, with options for an additional seven years. The remaining portion of the office building may be leased to third parties; however, further capital expenditures, such as for increased parking availability, will be necessary to lease a substantial portion of the remaining space. The 653,302 square foot warehouse was expanded to slightly over 1,000,000 square feet during fiscal 2006 and is being modified to serve as the Company’s principal processing and distribution facility and headquarters. The Company transferred its primary Chicago area distribution facility from a leased location to the Current Site in July 2006. Processing operations are scheduled to begin at the Current Site in the second quarter of fiscal 2007, with operations moving from the existing Chicago area locations, and new equipment installed, beginning in the second quarter of fiscal 2007 and continuing on a gradual basis through the end of calendar 2008.

(iii)

Credit Facilities

At the end of fiscal 2006 the Company was a party to a unsecured revolving bank credit facility (the “Prior Bank Credit Facility”), which was to expire on July 31, 2006. On July 27, 2006, the Company entered into an amended and restated bank credit facility (the “Bank Credit Facility”), which replaced the Prior Bank Credit Facility. The Bank Credit Facility provides for $100.0 million in secured borrowings and is comprised of (i) a working capital revolving loan which provides working capital financing of up to $93.6 million in the aggregate, and matures on July 25, 2009, and (ii) a $6.4 million letter of credit maturing on June 1, 2011(the “IDB Letter of Credit”) to secure the industrial development bonds which financed the construction of a peanut shelling plant in 1987. The Bank Credit Facility also allows for an amendment to increase the total amount of secured borrowings to $125.0 million at the election of the Company, the agent under the facility and one or more of the lenders under the facility. Borrowings under the Bank Credit Facility accrue interest at a rate determined pursuant to a formula based on the agent bank’s reference rate, the prime rate and the Eurodollar rate. The interest rate varies depending upon the Company’s quarterly financial performance, as measured by the available borrowing base. The Bank Credit Facility also waived all non-compliance with financial covenants under the Prior Bank Credit Facility.

The terms of the Bank Credit Facility include certain restrictive covenants that, among other things, require the Company to maintain certain specified financial ratios (if the borrowing base is below a designated level), restrict certain investments, indebtedness and capital expenditures and restrict certain cash dividends, redemptions of capital stock and prepayment of certain indebtedness of the Company. The lenders are entitled to require immediate repayment of the Company’s obligations under the Bank Credit Facility in the event the Company defaults on payments required under the Bank Credit Facility, non-compliance with the financial covenants, or upon the occurrence of certain other defaults by the Company under the Bank Credit Facility (including a default under the Note Agreement, as defined below).

In order to finance a portion of the Company’s facility consolidation project and to provide for the Company’s general working capital needs, the Company received $65.0 million pursuant to a Note Purchase Agreement (the “Note Agreement”) entered into on December 14, 2004 with various lenders.

On July 27, 2006, the Note Agreement was amended to, among other things, increase the interest rate from 4.67% to 5.67% per annum, waive all non-compliance with financial covenants through June 29, 2006, secure the Company’s obligations and modify future financial covenants. Additionally, the Company is required to pay an excess leverage fee of up to an additional 1.00% per annum depending upon its leverage ratio and financial performance.

The terms of the Note Agreement include certain restrictive covenants that, among other things, require the Company to maintain certain specified financial ratios, attain minimum quarterly earnings before interest, taxes, depreciation and amortization (“EBITDA”) levels, restrict certain investments, indebtedness and capital expenditures and restrict certain cash dividends, redemptions of capital stock and prepayment of certain indebtedness of the Company. The lenders are entitled to require immediate repayment of the Company’s obligations under the Note Agreement in the event the Company defaults on payments required under the Note Agreement, non-compliance with the financial covenants, or upon the occurrence of certain other defaults by the Company under the Note Agreement (including a default under the Bank Credit Facility).

(iii)

Sales/Leaseback Transactions

In fiscal 2005, in order to facilitate the facility consolidation project, the Company’s Board of Directors appointed an independent board committee to explore alternatives with respect to the Company’s existing leases for the properties owned by two related party partnerships. After negotiations with the partnerships, the independent committee approved a proposed transaction and, subsequently, the Company entered into various agreements with the partnerships. The agreements provided for an overall transaction whereby: (i) the current related party leases were terminated without penalty to the

Company; (ii) the Company sold the portion of the Busse Road property that it owned to the partnerships for $2.0 million; and (iii) the Company sold its Selma, Texas properties to the partnerships for $14.3 million (an estimate of fair value which also slightly exceeds its carrying value) and leased the properties back. The sale price and rental rate for the Selma, Texas properties were determined by an independent appraiser to be at fair market value. The lease for the Selma, Texas properties has a ten-year term at a fair market value rent, with three five-year renewal options. In addition, the Company has an option to repurchase the Selma property from the partnerships after five years at 95% (100% in certain circumstances) of the then fair market value, but not to be less than the $14.3 million purchase price. The sale of the Selma, Texas properties at fair market value to the related party partnerships was consummated during the first quarter of fiscal 2007.

In March 2006, the Company and the related party partnership that owned a facility located in Des Plaines, Illinois entered in to an agreement whereby the lease was terminated at no cost to the Company upon the sale of the facility by the partnership. The facility was sold by the partnership to a third party in March 2006. A gain of $0.9 million was recorded as a reduction to administrative expenses in the third quarter of fiscal 2006 for the termination of this capital lease.

The portion of the Busse Road property that the Company owned was sold to the related party partnership in July 2006 and the related lease obligation was terminated without penalty to the Company. The related party partnership then sold the Busse Road property to a third party, which is leasing back the property to the Company for the time period necessary to transition operations to the Current Site. Proceeds received from the sales exceeded the Company’s carrying value of these assets by $0.8 million.

In July 2006, the Company also sold its Arlington Heights and Arthur Avenue facilities to a third party for a total of $7.8 million and is leasing back the facilities for the time period necessary to transition operations to the Current Site. Proceeds received from the sales exceeded the carrying value of the assets by $3.9 million.

b.

Segment Reporting

The Company operates in a single reportable operating segment that consists of selling various nut products procured and processed in a vertically integrated manner through multiple distribution channels.

c.

Narrative Description of Business

(i)

General

As stated above, the Company is one of the leading processors and marketers of tree nuts and peanuts in the United States. Through a deliberate strategy of capital expenditures and complementary acquisitions, the Company has built a vertically integrated nut processing operation that enables it to control every step of the process, including procurement from growers, shelling, processing, packing and marketing. Vertical integration allows the Company to enhance product quality and to capture additional processing margins. In the past, the Company’s vertically integrated business model has worked to its advantage. Vertical integration, however, can under certain circumstances result in poor earnings or losses. See Item 1A — “Risk Factors.” Products are sold through the major distribution channels to significant buyers of nuts, including food retailers, industrial users for food manufacturing, food service companies and international customers. Selling through a wide array of distribution channels allows the Company to generate multiple revenue opportunities for the nuts it processes. For example, whole almonds could be sold to food retailers and almond pieces could be sold to industrial users. The Company processes and sells all major nut types consumed in the United States, including peanuts, pecans, cashews, walnuts and almonds in a wide variety of package styles, whereas most of the Company’s competitors focus either on fewer nut types or narrower varieties of packaging options. The Company processes all major nut types, thus offering its customers a complete nut product offering. In addition, the Company is less susceptible to any single nut type’s price or crop volume swings.

(ii)

Principal Products

(A)

Raw and Processed Nuts

The Company’s principal products are raw and processed nuts. These products accounted for approximately 92.7%, 91.2% and 90.7% of the Company’s gross sales for fiscal 2006, fiscal 2005 and fiscal 2004, respectively. The nut product line includes peanuts, almonds, Brazil nuts, pecans, pistachios, filberts, cashews, English walnuts, black walnuts, pine nuts and macadamia nuts. The Company’s nut products are sold in numerous package styles and sizes, from poly-cellophane packages, composite cans, vacuum packed tins, plastic jars and glass jars for retail sales, to large cases and sacks for bulk sales to industrial, food service and government customers. In addition, the Company offers its nut products in a variety of different styles and seasonings, including natural (with skins), blanched (without skins), oil roasted, dry roasted, unsalted, honey roasted, butter toffee, praline and cinnamon toasted. The Company sells its products domestically to retailers and wholesalers as well as to industrial, food service and government customers. The Company also sells certain of its products to foreign customers in the retail, food service and industrial markets.

The Company acquires a substantial portion of its peanut, pecan, almond and walnut requirements directly from domestic growers. The balance of the Company’s raw nut supply is purchased from importers, traders and domestic processors. In fiscal 2006, the majority of the Company’s peanuts, pecans and walnuts were shelled at the Company’s four shelling facilities, and the remaining portion was purchased shelled from processors. See “Raw Materials and Supplies” and Item 2 — “Properties — Manufacturing Capability, Utilization, Technology and Engineering” below.

(B)

Peanut Butter

The Company manufactures and markets peanut butter in several sizes and varieties, including creamy, crunchy and natural. Peanut butter accounted for approximately 2.6%, 3.6% and 3.6% of the Company’s gross sales for fiscal 2006, fiscal 2005 and fiscal 2004, respectively.

(C)

Other Products

The Company also markets and distributes, and in many cases processes and manufactures, a wide assortment of other food and snack products. These products accounted for approximately 4.7%, 5.2% and 5.7% of the Company’s gross sales for fiscal 2006, fiscal 2005 and fiscal 2004, respectively. These other products include: candy and confections, natural snacks, trail mixes and chocolate and yogurt coated products sold to retailers and wholesalers; baking ingredients sold to retailers, wholesalers, industrial and food service customers; bulk food products sold to retail and food service customers; an assortment of corn snacks, sunflower seeds, party mixes, sesame sticks and other sesame snack products sold to retail supermarkets, vending companies, mass merchandisers and industrial customers; and a wide variety of toppings for ice cream and yogurt sold to food service customers.

(iii)

Customers

The Company sells products to approximately 2,900 customers, including approximately 100 international accounts. Retailers of the Company’s products include grocery chains, mass merchandisers, drug store chains, convenience stores and membership clubs. Sales to Wal-Mart Stores, Inc. accounted for approximately 19%, 18% and 19% of the Company’s net sales for fiscal 2006, fiscal 2005 and fiscal 2004, respectively. In the fourth quarter of fiscal 2006, the Company lost the majority of the business with one of its five largest customers, which represented 3% of gross sales for fiscal 2006. The Company believes it will be able to replace the loss of this customer in fiscal 2007 through the addition of new customers and expansion of business at existing customers. The Company markets many of its products directly to approximately 400 retail stores in Illinois and five other states through its store-door delivery system discussed below. Wholesale distributors purchase products from the Company for resale to regional retail grocery chains and convenience stores.

The Company’s industrial customers include bakeries, ice cream and candy manufacturers and other food and snack processors. Food service customers include hospitals, schools, universities, airlines, retail and wholesale restaurant businesses and national food service franchises. In addition, the Company packages and distributes products manufactured or processed by others.

(iv)

Sales and Distribution

The Company markets its products through its own sales department and through a network of approximately 160 independent brokers and various independent distributors and suppliers.

The Company distributes its products from its Illinois, Georgia, California, North Carolina and Texas production facilities and from public warehouse and distribution facilities located in various other states. The majority of the Company’s products are shipped from the Company’s production, warehouse and distribution facilities by contract and common carriers.

The Company distributes its products to approximately 400 convenience stores, supermarkets and other retail customer locations through its store-door delivery system. Under this system, the Company uses its own fleet of step-vans to market and distribute nuts, snacks and candy directly to retail customers on a store-by-store basis. Presently, the store-door delivery system consists of 11 route salespeople covering routes located in Illinois and other Midwestern states. District and regional route managers, as well as sales and marketing personnel operating out of the Company’s corporate offices, are responsible for monitoring and managing the route salespeople.

In the Chicago area, the Company operates thrift stores at one of its production facilities and at three other retail stores. These stores sell bulk foods and other products produced by the Company and by other vendors.

(v)

Marketing

Marketing strategies are developed by distribution channel. Private label and branded consumer efforts are focused on building brand awareness, attracting new customers and increasing consumption in the snack and baking nut categories. Industrial and food service efforts are focused on trade-oriented marketing.

The Company’s consumer promotional campaigns include newspaper and radio advertisements, coupon offers and co-op advertising with select retail customers. The Company also conducts an integrated marketing campaign using multiple media outlets for the promotion of the Fisher brand, including sports marketing. The Company also designs and manufactures point of purchase displays and bulk food dispensers for use by several of its retail customers. Additionally, shipper display units are utilized in retail stores in an effort to gain additional temporary product placement and to drive sales volume.

Industrial and food service trade promotion includes attending regional and national trade shows, trade publication advertising and one-on-one marketing. These promotional efforts highlight the Company’s processing capabilities, broad product portfolio, product customization and packaging innovation. Additionally, the Company has established a number of co-branding relationships with industrial customers.

Through participation in several trade associations, funding of industry research and sponsorship of educational programs, the Company supports efforts to increase awareness of the health benefits, convenience and versatility of nuts as both a snack and a recipe ingredient among existing and next generation consumers of nuts.

(vi)

Competition

The Company’s nuts and other snack food products compete against products manufactured and sold by numerous other companies in the snack food industry, some of whom are substantially larger and have greater resources than the Company. In the nut industry, the Company competes with, among others, Planters, Ralcorp Holdings, Inc., Diamond Foods, Inc. and numerous regional snack food processors. Competitive factors in the Company’s markets include price, product quality, customer service, breadth of product line, brand name awareness, method of distribution and sales promotion. See Item 1A — “Risk Factors” below.

(vii)

Raw Materials and Supplies

The Company purchases nuts from domestic and foreign sources. In fiscal 2006, all of the Company’s peanuts, walnuts and almonds were purchased from domestic sources. The Company purchases its pecans from the southern United States and Mexico. Cashew nuts are imported from India, Africa, Brazil and Southeast Asia. For fiscal 2006, approximately 29% of the Company’s nut purchases were from foreign sources.

Competition in the nut shelling industry is driven by shellers’ ability to access and purchase raw nuts, to shell the nuts efficiently and to sell the nuts to processors. The Company is the only sheller of all five major domestic nut types and is among a select few shellers who further process, package and sell nuts to the end-user. Raw material pricing pressure, the inability of some shellers to extend credit to raw material suppliers and the high cost of equipment automation have contributed to a consolidation among shellers across all nut types, especially peanuts and pecans.

The Company is vertically integrated and, unlike its major retail competitors, who purchase nuts on the open market, the Company purchases nuts directly from growers. For fiscal 2006, the Company’s results of operations were severely impacted by a decline in the market price for almonds after entering into fixed price purchase contracts. Consequently, the Company experienced negative margins on its almond sales for fiscal 2006. In order to help decrease the Company’s exposure to the effects of a possible recurrence of a declining almond market in fiscal 2007, the Company is changing its method of purchasing almonds in fiscal 2007. To the extent practicable, the procurement will occur as industrial sales contracts are entered into, thus helping to reduce the Company’s exposure to the effects of changing market prices. Although the Company is modifying its method for procuring almonds, there can be no assurance that this method will reduce the Company’s losses or the risks associated with buying almonds. Furthermore, the risks associated with vertical integration that contributed to the Company’s negative margins for almond sales also exist, to varying degrees, for other nut types that the Company shells. Accordingly, since the Company is a vertically integrated sheller, processor and seller of nuts and nut products, the effects of changing market prices can never be eliminated.

The Company sponsors a seed exchange program under which it provides peanut seed to growers in return for a commitment to repay the dollar value of that seed, plus interest, in the form of farmer stock inshell peanuts at harvest. Approximately 56% of the farmer stock peanuts purchased by the Company in fiscal 2006 were grown from seed provided by the Company. The Company also contracts for the growing of a limited number of generations of peanut seeds to increase seed quality and maintain desired genetic characteristics of the peanut seed used in processing.

The availability and cost of raw materials for the production of the Company’s products, including peanuts, pecans, walnuts, almonds, other nuts, roasting oil, sugar, dried fruit, coconut and chocolate, are subject to crop size and yield fluctuations caused by factors beyond the Company’s control, such as weather conditions and plant diseases. These fluctuations can adversely impact the Company’s profitability. Additionally, the supply of edible nuts and other raw materials used in the Company’s products could be reduced upon a determination by the USDA or any other government agency that certain pesticides, herbicides or other chemicals used by growers have left harmful residues on portions of the crop or that the crop has been contaminated by aflatoxin or other agents.

Due, in part, to the seasonal nature of the industry, the Company maintains significant inventories of peanuts, pecans, walnuts and almonds at certain times of the year, especially in the second and third quarters of the Company’s fiscal year. Fluctuations in the market price of peanuts, pecans, walnuts, almonds and other nuts may affect the value of the Company’s inventory and thus the Company’s gross profit and gross profit margin. See “Introduction”, “Fiscal 2006 Compared to Fiscal 2005 — Gross Profit” and “Fiscal 2005 Compared to Fiscal 2004 — Gross Profit” under Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

The Company purchases other inventory items, such as roasting oils, seasonings, glass jars, plastic jars, labels, composite cans and other packaging materials, from related parties and third parties.

(viii)

Trademarks and Patents

The Company markets its products primarily under private labels and the Fisher, Evon’s, Sunshine Country, Flavor Tree, Texas Pride and Tom Scott brand names, which are registered as trademarks with the U.S. Patent and Trademark Office as well as in various other jurisdictions. The Company also owns several patents of various durations. The Company expects to continue to renew for the foreseeable future those trademarks that are important to the Company’s business.

(ix)

Employees

As of June 29, 2006, the Company had approximately 1,800 active employees, including approximately 190 corporate staff employees. The Company’s labor requirements typically peak during the last quarter of the calendar year, at which time temporary labor is generally used to supplement the full-time work force.

(x)

Seasonality

The Company’s business is seasonal. Demand for peanut and other nut products is highest during the months of October, November and December. Peanuts, pecans, walnuts and almonds, the Company’s principal raw materials, are primarily purchased between August and February and are processed throughout the year until the following harvest. As a result of this seasonality, the Company’s personnel requirements rise during the last four months of the calendar year. This seasonality also impacts capacity utilization at the Company’s Chicago area facilities, with these facilities routinely operating at full capacity during the last four months of the calendar year. The Company’s working capital requirements generally peak during the third quarter of the Company’s fiscal year. See Item 8 — “Financial Statements and Supplementary Data” and Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Introduction”.

(xi)

Backlog

Because the time between order and shipment is usually less than three weeks, the Company believes that backlog as of a particular date is not indicative of annual sales.

(xii)

Operating Hazards and Uninsured Risks

The sale of food products for human consumption involves the risk of injury to consumers as a result of product contamination or spoilage, including the presence of foreign objects, substances, chemicals, aflatoxin and other agents, or residues introduced during the growing, storage, handling or transportation phases. Although the Company maintains rigid quality control standards, inspects its products by visual examination, metal detectors or electronic monitors at various stages of its shelling and processing operations for all of its nut and other food products, permits the USDA to inspect all lots of peanuts shipped to and from the Company’s peanut shelling facilities, and complies with the Nutrition Labeling and Education Act by labeling each product that it sells with labels that disclose the nutritional value and content of each of the Company’s products, no assurance can be given that some nut or other food products sold by the Company may not contain or develop harmful substances. The Company currently maintains product liability insurance of $1 million per occurrence and umbrella coverage of up to $50 million.

The Company has begun to move its raw material storage facility to the Current Site and expects to complete the move during the first quarter of fiscal 2007. The cooling system at the Current Site utilizes ammonia. If a leak in the system were to occur, there is a possibility all of the Company’s inventory could be destroyed. At this time, the Company’s insurance policy would not reimburse the Company for such a loss. The Company is currently evaluating the risk of an ammonia leak and the cost of additional insurance.

Item 1A — Risk Factors

The Company faces a number of significant risks and uncertainties in connection with its operations. The Company’s business, results of operations and financial condition could be materially adversely affected by the factors described below. While each risk is described separately, some of these risks are interrelated and it is possible that certain risks could trigger the applicability of other risks described below. Also, the risks and uncertainties described below are not the only ones that the Company faces. Additional risks and uncertainties not presently known to the Company, or that are currently deemed immaterial, could also potentially impair the Company’s business, results of operations and financial condition.

Sustained Losses Would Have a Material Adverse Affect on the Company

In fiscal 2006, the Company incurred operating losses of $16.5 million. If the Company continues to experience net operating losses due to, among other things, losses on various nut types such as almonds, such losses would have a material adverse affect on the Company and its financial condition. For example, the terms of the Note Agreement, as amended, include certain restrictive covenants that, among other things, require the Company to attain minimum quarterly adjusted EBITDA levels ($1.5 million, $5.5 million, $6.25 million and $8.0 million for the four quarters of fiscal 2007). If the Company continues to experience net operating losses, among other things, the Company will not be able to fulfill its obligations pursuant to the Note Agreement and the Bank Credit Facility.

Availability of Raw Materials and Market Price Fluctuations

The availability and cost of raw materials for the production of the Company’s products, including peanuts, pecans, almonds, walnuts and other nuts are subject to crop size and yield fluctuations caused by factors beyond the Company’s control, such as weather conditions, plant diseases and changes in government programs. Additionally, the supply of edible nuts and other raw materials used in the Company’s products could be reduced upon any determination by the United States Department of Agriculture (“USDA”) or other government agencies that certain pesticides, herbicides or other chemicals used by growers have left harmful residues on portions of the crop or that the crop has been contaminated by aflatoxin or other agents. The Company purchases some of its nut supply directly from growers using fixed price contracts, some of which are entered into before harvest. Accordingly, there is a possibility that after the Company enters into the fixed price contracts market conditions may change, and the Company will be forced to sell the nuts at a loss. In addition, the Company is not able to hedge against changes in commodity prices because no market to do so exists, and thus, shortages in the supply of and increases in the prices of nuts and other raw materials used by the Company in its products (to the extent that cost increases cannot be passed on to customers) could have an adverse impact on the Company’s profitability. Furthermore, fluctuations in the market prices of nuts may affect the value of the Company’s inventories and profitability. The Company has significant inventories of nuts that would be adversely affected by any decrease in the market price of such raw materials. See Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Introduction”.

Fixed Price Commitments

The great majority of the Company’s industrial sales customers, and certain other customers, require the Company to enter into fixed price commitments with its customers. Such commitments represented approximately 25% of the Company’s annual net sales in fiscal 2006, and in many cases are entered into after the Company’s cost to acquire the nut products necessary to satisfy the fixed price commitment is substantially fixed. The commitments are for a fixed period of time, typically one year, but may be extended if remaining balances exist. The Company expects to continue to enter into fixed price commitments with respect to certain of its nut products after fixing its acquisition cost in order to maintain customer relationships or when, in management’s judgment, market or crop harvest conditions so warrant. To the extent the Company does so, however, these fixed price commitments may result in reduced gross profit margins that have a material adverse effect on the Company’s results of operations. For example, the Company’s results of operations were adversely affected during fiscal 2006 due to losses on fixed price almond contracts. The market prices for almonds declined significantly after the Company entered into fixed price purchase contracts, but before fixed price sales

contracts with customers were entered into. In order to retain customers and remain competitive, the Company was forced to sell the almonds at a loss. In order to help decrease the Company’s exposure to the effects of a possible recurrence of a declining almond market in fiscal 2007, the Company is changing its method of purchasing almonds. Although the Company is modifying its method for procuring almonds, there can be no assurance that this method will reduce the Company’s losses or the risks associated with buying almonds. Furthermore, the risks associated with vertical integration that contributed to the Company’s negative margins for almond sales also exist, to varying degrees, for other nut types that the Company shells. Accordingly, since the Company is a vertically integrated sheller, processor and seller of nuts and nut products, the effects of changing market prices can never be eliminated.

Competitive Environment

The Company operates in a highly competitive environment. The Company’s principal products compete against food and snack products manufactured and sold by numerous regional and national companies, some of which are substantially larger and have greater resources than the Company, such as Planters and Ralcorp Holdings, Inc. The Company’s retail competitors buy their nuts on the open market and are thus not exposed to the risks of purchasing raw materials at fixed prices that later, due to altered market conditions, prove to be above market prices. The Company also competes with other shellers in the industrial market and with regional processors in the retail and wholesale markets. In order to maintain or increase its market share, the Company must continue to price its products competitively, which may lower revenue per unit and cause declines in gross margin, if the Company is unable to increase unit volumes as well as reduce its costs.

Dependence Upon Customers

The Company is dependent on a few significant customers for a large portion of its total sales, particularly in the consumer channel. Sales to the Company’s five largest customers represented approximately 38%, 38% and 39% of gross sales in fiscal 2006, fiscal 2005 and fiscal 2004, respectively. Wal-Mart alone accounted for approximately 19%, 18% and 19% of the Company’s net sales for fiscal 2006, fiscal 2005 and fiscal 2004, respectively. The loss of one of the Company’s largest customers, or a material decrease in purchases by one or more of its largest customers, would result in decreased sales and adversely impact the Company’s income and cash flow.

Pricing Pressures

As the retail grocery trade continues to consolidate and the Company’s retail customers grow larger and become more sophisticated, the Company’s retail customers are demanding lower pricing and increased promotional programs. Further, these customers may begin to place a greater emphasis on the lowest-cost supplier in making purchasing decisions, particularly if buying techniques such as reverse internet auctions increase in popularity. An increased focus on the lowest-cost supplier could reduce the benefits of some of the Company’s competitive advantages. The Company’s sales volume growth could suffer, and it may become necessary to lower the Company’s prices and increase promotional support of the Company’s products, any of which would adversely affect its gross profit and gross profit margin.

Production Limitations

The Company typically operates at or near its production capacity at certain times of the year. If the Company experiences an increase in customer demand, particularly prior to the completion of the Company’s facility consolidation project, it may be unable to fully satisfy its customers’ supply needs. If the Company becomes unable to supply sufficient quantities of products, it may lose sales and market share to its competitors.

Food Safety and Product Contamination

The Company could be adversely affected if consumers in the Company’s principal markets lose confidence in the safety of nut products, particularly with respect to peanut and tree nut allergies. Individuals with nut allergies may be at risk of serious illness or death resulting from the consumption of the Company’s nut products, including consumption of other companies’ products containing the Company’s products as an ingredient. Notwithstanding existing food safety controls, the Company

processes peanuts and tree nuts on the same equipment, and there is no guarantee that the Company’s products will not be cross-contaminated. Concerns generated by risks of peanut and tree nut cross-contamination and other food safety matters may discourage consumers from buying the Company’s products, cause production and delivery disruptions, or result in product recalls.

Product Liability and Product Recalls

The Company faces risks associated with product liability claims and product recalls in the event its food safety and quality control procedures fail and its products cause injury or become adulterated or misbranded. In addition, the Company does not control the labeling of other companies’ products containing the Company’s products as an ingredient. A product recall of a sufficient quantity, or a significant product liability judgment against the Company, could cause the Company’s products to be unavailable for a period of time and could result in a loss of consumer confidence in the Company’s food products. These kinds of events, were they to occur, would have a material adverse effect on demand for the Company’s products and, consequently, the Company’s income and liquidity.

Retention of Key Personnel

The Company’s future success will be largely dependent on the personal efforts of its senior operating management team, including Michael J. Valentine, the Company’s Executive Vice President Finance, Chief Financial Officer and Secretary, Jeffrey T. Sanfilippo, the Company’s Executive Vice President Sales and Marketing, and Jasper B. Sanfilippo, Jr., the Company’s Executive Vice President of Operations, who have assumed management of the day-to-day operation of the Company’s business over the past two years. In addition, the Company’s success depends on the talents of Everardo Soria, Senior Vice President Pecan Operations and Procurement, Walter R. Tankersley, Jr., Senior Vice President Industrial Sales, Charles M. Nicketta, Senior Vice President of Manufacturing and Michael G. Cannon, Senior Vice President of Corporate Operations. The Company believes that the expertise and knowledge of these individuals in the industry, and in their respective fields, is a critical factor to the Company’s continued growth and success. The Company has not entered into an employment agreement with any of these individuals, nor does the Company have key officer insurance coverage policies in effect. The loss of the services of any of these individuals could have a material adverse effect on the Company’s business and prospects if the Company were unable to identify a suitable candidate to replace any such individual. The Company’s success is also dependent upon its ability to attract and retain additional qualified marketing, technical and other personnel, and there can be no assurance that the Company will be able to do so.

Risks and Uncertainties Regarding Facility Consolidation Project

The facility consolidation project may not result in significant cost savings or increases in efficiency, or allow the Company to increase its production capabilities to meet any future increases in customer demand. Moreover, the Company’s expectations with respect to the financial impact of the facility consolidation project are based on numerous estimates and assumptions, any or all of which may differ from actual results. Such differences could substantially reduce the anticipated benefit of the project. The total projected cost of the facility consolidation project is now estimated at approximately $110 million, which is $15 million higher than original estimates.

More specifically, the following risks, among others, may limit the financial benefits of the facility consolidation project:

	•		delays and further cost overruns in the construction of and equipment for the new facility are possible and could offset other cost savings expected from the consolidation;
	•		the facility consolidation project is likely to have a negative impact on the Company’s earnings during the construction period and the time during which operations are transitioned to the Current Site;
	•		the facility consolidation project may not eliminate as many redundant processes as the Company presently anticipates;
	•		the Company may not realize any future increase in demand for its products necessary to justify additional production capacity created by the facility consolidation;

	•		the Company may have problems or unexpected costs in transferring equipment or obtaining new equipment;
	•		the Company may not be able to transfer production from its existing facilities to the new facility without a significant interruption in its business;
	•		moving the Company’s facilities to a new location may cause attrition in its personnel at levels that result in a significant interruption in its operations, and the Company expects to incur additional annual compensation costs of approximately $300,000 to facilitate the retention of certain of its key personnel while the facility consolidation project is in process;
	•		the Company may be unable to obtain amendments or waivers for any future non-compliance with restrictive financial covenants under its credit facilities;
	•		the Company may not receive the anticipated rental income for the unused portion of the Current Site; and
	•		the Company may not be able to recover its investment in the Original Site.

If for any reason the Company were to realize less than the expected benefits from the facility consolidation project, its future income stream, cash flows and debt levels could be materially adversely affected. In addition, the facility consolidation project is a long-term project and unanticipated risks may develop as the project proceeds.

Government Regulation

The Company is subject to extensive regulation by the United States Food and Drug Administration, the United States Department of Agriculture, the United States Environmental Protection Agency and other state and local authorities in jurisdictions where its products are manufactured, processed or sold. Among other things, these regulations govern the manufacturing, importation, processing, packaging, storage, distribution and labeling of the Company’s products. The Company’s manufacturing and processing facilities and products are subject to periodic compliance inspections by federal, state and local authorities. The Company is also subject to environmental regulations governing the discharge of air emissions, water and food waste, and the generation, handling, storage, transportation, treatment and disposal of waste materials. Amendments to existing statutes and regulations, adoption of new statutes and regulations, increased production at the Company’s existing facilities as well as its expansion into new operations and jurisdictions, may require the Company to obtain additional licenses and permits and could require it to adapt or alter methods of operations at costs that could be substantial. Compliance with applicable laws and regulations may adversely affect the Company’s business. Failure to comply with applicable laws and regulations could subject the Company to civil remedies, including fines, injunctions, recalls or seizures, as well as possible criminal sanctions, which could have a material adverse effect on the Company’s business.

Economic, Political and Social Risks of Doing Business in Emerging Markets

The Company purchases a substantial portion of its cashew inventories from India, Brazil and Vietnam, which are in many respects emerging markets. To this extent, the Company is exposed to risks inherent in emerging markets, including:

	•		increased governmental ownership and regulation of the economy;
	•		greater likelihood of inflation and adverse economic conditions stemming from governmental attempts to reduce inflation, such as imposition of higher interest rates and wage and price controls;
	•		potential for contractual defaults or forced renegotiations on purchase contracts with limited legal recourse;
	•		tariffs and other barriers to trade that may reduce the Company’s profitability; and
	•		civil unrest and significant political instability.

The existence of these risks in these and other foreign countries that are the origins of the Company’s raw materials could jeopardize or limit its ability to purchase sufficient supplies of cashews and other imported raw materials and may adversely affect the Company’s income by increasing the costs of doing business overseas.

Inventory Measurement

The Company acquires its nut inventories from growers and farmers in large quantities at harvest times, which are primarily during the second and third quarters of the Company’s fiscal year, and receives nut shipments in bulk truckloads. The weights of these nuts are measured using truck scales at the time of receipt, and inventories are recorded on the basis of those measurements. The nuts are then stored in bulk in large warehouses to be shelled or processed throughout the year. Bulk-stored nut inventories are relieved on the basis of continuous high-speed bulk weighing systems as the nuts are shelled or processed or on the basis of calculations derived from the weight of the shelled nuts that are produced. While the Company performs various procedures to periodically confirm the accuracy of its bulk-stored nut inventories, these inventories are estimates that must be periodically adjusted to account for positive or negative variations in quantities and yields, and such adjustments directly affect earnings. The precise amount of the Company’s bulk-stored nut inventories is not known until the entire quantity of the particular nut is depleted, which may not necessarily occur every year. Prior crop year inventories may still be on hand as the new crop year inventories are purchased. There can be no assurance that such inventory quantity adjustments will not have a material adverse effect on the Company’s results of operations in the future.

2002 Farm Bill

The Farm Security and Rural Investment Act of 2002 (the “2002 Farm Bill”) terminated the federal peanut quota program beginning with the 2002 crop year. The 2002 Farm Bill replaced the federal peanut quota program with a fixed payment system through the 2007 crop year that can be either coupled or decoupled. A coupled system is tied to the actual amount of production, while a decoupled system is not. The series of loans and subsidies established by the 2002 Farm Bill is similar to the systems used for other crops such as grains and cotton. To compensate farmers for the elimination of the peanut quota, the 2002 Farm Bill provides a buy-out at a specified rate for each pound of peanuts that had been in that farmer’s quota under the prior program. Additionally, among other provisions, the Secretary of Agriculture may make certain counter-cyclical payments whenever the Secretary believes that the effective price for peanuts is less than the target price. The termination of the federal peanut quota program has reduced the Company’s costs for peanuts, beginning in fiscal 2003, and has resulted in a higher gross margin than the Company has historically achieved. The Company may be unable to maintain these higher gross profit margins on the sale of peanuts, and the Company’s business, financial position and results of operations would thus be materially adversely affected. The 2002 Farm Bill expires at the end of the 2007 crop year and will be replaced with new legislation. At this time, the final contents of such legislation are unknown. While there is no indication that the peanut quota program will be reestablished, there can be no assurance such a program, or one like it, will not be passed. Accordingly, the new legislation could alter the fixed payment system currently in place pursuant to the 2002 Farm Bill in a manner that could result in a material adverse affect on the Company’s operations.

Public Health Security and Bioterrorism Preparedness and Response Act of 2002

The Company is subject to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 (the “Bioterrorism Act”). The Bioterrorism Act includes a number of provisions to help guard against the threat of bioterrorism, including new authority for the Secretary of Health and Human Services (“HHS”) to take action to protect the nation’s food supply against the threat of international contamination. The Food and Drug Administration (“FDA”), as the food regulatory arm of HHS, is responsible for developing and implementing these food safety measures, which fall into four broad categories: (i) registration of food facilities, (ii) establishment and maintenance of records regarding the sources and recipients of foods, (iii) prior notice to FDA of imported food shipments and (iv) administrative detention of potentially affected foods. There can be no assurances that the effects of the Bioterrorism Act and the rules enacted there under by the FDA, including any potential disruption in the Company’s supply of imported nuts, which represented approximately 29% of the Company’s total nut purchases in fiscal 2006, will not have a material adverse effect on the Company’s business, financial position or results of operations in the future.

The Company’s Largest Stockholders Possess a Majority of the Company’s Aggregate Voting Power, Which May Make a Takeover or Change in Control More Difficult; The Sanfilippo Group Has Pledged a Substantial Amount of their Class A Common Stock

As of September 27, 2006, Jasper B. Sanfilippo, Marian Sanfilippo, Jeffrey T. Sanfilippo, Jasper B. Sanfilippo, Jr., Lisa A. Evon, John E. Sanfilippo and James J. Sanfillipo (the “Sanfilippo Group”) own or control Common Stock (one vote per share) and Class A Common Stock (ten votes per share) representing approximately a 52.2% voting interest in the Company. As of September 27, 2006, Michael J. Valentine and Mathias A. Valentine (the “Valentine Group”) own or control Common Stock (one vote per share) and Class A Common Stock (ten votes per share) representing approximately a 24.3% voting interest in the Company. As a result, the Sanfilippo Group and the Valentine Group together are able to direct the election of a majority of the members to the Board of Directors. In addition, the Sanfilippo Group is able to exert influence on the Company’s business that cannot be counteracted by another shareholder or group of shareholders. The Sanfilippo Group is able to determine the outcome of nearly all matters submitted to a vote of the Company’s stockholders, including any amendments to the Company’s certificate of incorporation or bylaws. The Sanfilippo Group has the power to prevent a change in control or sale of the Company, which may be beneficial to the public stockholders, or cause a change in control which may not be beneficial to the public stockholders, and can take other actions that might be less favorable to the Company’s stockholders and more favorable to the Sanfilippo Group, subject to applicable legal limitations. In addition, several members of the Sanfilippo Group that beneficially own a significant interest in the Company have pledged a substantial portion of the Company’s Class A Stock that they own to secure loans made to them by commercial banks. If a stockholder defaults on any of its obligations under these pledge agreements or the related loan documents, these banks may have the right to sell the pledged shares. Such a sale could cause the Company’s stock price to decline. Many of the occurrences that could result in a foreclosure of the pledged shares are out of the Company’s control and are unrelated to the Company’s operations. Because these shares are pledged to secure loans, the occurrence of an event of default could result in a sale of pledged shares that could cause a change of control of the Company, even when such a change may not be in the best interests of the Company’s stockholders, and it would also result in a default under the Company’s Note Agreement and Bank Credit Facility.

Item 1B — Unresolved Staff Comments

None.

Item 2 — Properties

As of September 2006, the Company owned or leased seven principal production facilities. Two of these facilities are located in Elk Grove Village, Illinois. The first Elk Grove Village facility, the Busse Road facility, serves as the Company’s corporate headquarters and main processing facility and was owned in part by the Company and in part by a related party partnership until sold and leased back to the Company in July 2006. (See footnote 1 in the table below). The other Elk Grove Village facility is located on Arthur Avenue adjacent to the Busse Road facility. The remaining principal production facilities are located in Bainbridge, Georgia; Garysburg, North Carolina; Selma, Texas; Gustine, California; and Arlington Heights, Illinois. In April 2005, the Company closed on the purchase of a site in Elgin, Illinois (the “Current Site), which includes both an office building and a warehouse. The Company’s primary distribution facility is now located at the Current Site and the Company is in the process of transferring the remainder of its Illinois operations to the Current Site. The Company also leases a warehousing facility in Elk Grove Village, Illinois. In addition, the Company operates a thrift store out of the Busse Road facility, and owns one retail store and leases two additional retail stores in the Chicago area. The Company also leases space in public warehouse facilities in various states.

The Company believes that its facilities are generally well maintained and in good operating condition.

a.

Principal Facilities

The following table provides certain information regarding the Company’s principal facilities:

Date Company

Type

Constructed,

Square

of

Description of

Acquired or First

Location

Footage

Interest

Principal Use

Occupied

Elk Grove Village, Illinois(1) (Busse Road facility)

300,000

Leased

Processing, packaging, warehousing, distribution, corporate offices and thrift store

1981

Elk Grove Village, Illinois(2) (Arthur Avenue facility)

83,000

Leased

Processing, packaging, warehousing and distribution

1989

Bainbridge, Georgia(3)

245,000

Owned

Peanut shelling, purchasing, processing, packaging, warehousing and distribution

1987

Garysburg, North Carolina

160,000

Owned

Peanut shelling, purchasing, processing, packaging, warehousing and distribution

1994

Selma, Texas(4)

300,000

Leased

Pecan shelling, processing, packaging, warehousing and distribution

1992

Gustine, California

215,000

Owned

Walnut shelling, processing, packaging, warehousing and distribution

1993

Arlington Heights, Illinois(5)

83,000

Leased

Processing, packaging, warehousing and distribution

1994

Elk Grove Village, Illinois(6) (1951 Arthur facility)

68,000

Leased

Warehousing

2004

Elgin, Illinois(7) (Elgin Office Building)

400,000

Owned

Rental property

2005

Elgin, Illinois(8) (Elgin Warehouse Building)

1,001,000

Owned

Distribution and future processing, packaging, warehousing and corporate offices

2005

b.

Manufacturing Capability, Utilization, Technology and Engineering

The Company’s principal production facilities are equipped with modern processing and packaging machinery and equipment.

The physical structure and the layout of the production lines at the Busse Road facility were designed so that peanuts and other nuts can be processed, jarred and packed in cases for distribution on a completely automated basis. The facility also has production lines for chocolate chips, candies, peanut butter and other products processed or packaged by the Company.

The Selma facility contains the Company’s automated pecan shelling and bulk packaging operation. The facility’s pecan shelling production lines currently have the capacity to shell in excess of 90 million inshell pounds of pecans annually. For fiscal 2006, the Company processed approximately 52 million inshell pounds of pecans at the Selma, Texas facility.

The Bainbridge facility is located in the largest peanut producing region in the United States. This facility takes direct delivery of farmer stock peanuts and cleans, shells, sizes, inspects, blanches, roasts and packages them for sale to the Company’s customers. The production line at the Bainbridge facility is almost entirely automated and has the capacity to shell approximately 120 million inshell pounds of peanuts annually. During fiscal 2006, the Bainbridge facility shelled approximately 67 million inshell pounds of peanuts.

The Garysburg facility has the capacity to process approximately 70 million inshell pounds of farmer stock peanuts annually. For fiscal 2006, the Garysburg facility processed approximately 26 million pounds of inshell peanuts.

The Gustine facility is used for walnut shelling, walnut and almond processing, warehousing and distribution. This facility has the capacity to shell in excess of 50 million inshell pounds of walnuts annually. For fiscal 2006, the Gustine facility shelled approximately 42 million inshell pounds of walnuts. The Gustine facility has the capacity to process in excess of 50 million pounds of almonds annually. For fiscal 2006, the Gustine facility processed approximately 18 million pounds of almonds.

The Arlington Heights facility is used for the production and packaging of the majority of the Company’s Fisher Nut products, the “stand-up pouch” packaging for its Flavor Tree brand products and for the production and packaging of the Company’s sunflower seeds. The Arlington Heights facility is well utilized.

c.

Facility Consolidation Project

The opportunity for growth, and the seasonality of the Company’s business that has caused full-capacity utilization rates at the Company’s Chicago area facilities, has led the Company to explore additional means of expanding its production capacity and enhancing its operational efficiency. As a result, the Company is in the process of consolidating its remaining four Chicago area facilities (as of September 2006) into a single location through the construction of a new production facility at the Current Site. See “Capital Expenditures” and “Capital Resources” under Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

This facility consolidation project is anticipated to achieve two primary objectives. First, the consolidation is intended to generate cost savings through the elimination of redundant costs and improvements in manufacturing and distribution efficiencies. Second, the new facility is expected to initially increase production capacity by 25% to 40% and would provide substantially more square footage than the aggregate space now available in the Company’s existing Chicago area facilities to support future growth in the Company’s business.

On April 15, 2005, the Company closed on the $48.0 million purchase of the Current Site. The Current Site includes both an office building and a warehouse. The Company is leasing 41.5% of the office building back to the seller for a three year period, with options for an additional seven years. The remaining portion of the office building may be leased to third parties; however, further capital expenditures, such as for increased parking availability, will be necessary to lease a substantial portion of the remaining space. The 653,302 square foot warehouse was expanded to slightly over 1,000,000 square feet during fiscal 2006 and is being modified to serve as the Company’s principal processing and distribution facility and headquarters. The Company transferred its primary Chicago area distribution facility from a leased location to the Current Site in July 2006. Processing operations are

scheduled to begin at the Current Site in the second quarter of fiscal 2007, with operations moving from the existing Chicago area locations, and new equipment installed, beginning in the second quarter of fiscal 2007 and continuing on a gradual basis through the end of calendar 2008. Total remaining capital expenditures for the facility consolidation project are estimated to be approximately $25 -$30 million.

Item 3 — Legal Proceedings

The Company is party to various lawsuits, proceedings and other matters arising out of the conduct of its business. Currently, it is management’s opinion that the ultimate resolution of these matters will not have a material adverse effect upon the business, financial condition or results of operations of the Company.

Item 4 — Submission of Matters to a Vote of Security Holders

No matter was submitted during the fourth quarter of fiscal 2006 to a vote of security holders, through solicitation of proxies or otherwise.

EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant to General Instruction G (3) of Form 10-K and Instruction 3 to Item 401(b) of Regulation S-K, the following information is included as an unnumbered item in Part I of this Report in lieu of being included in the Proxy Statement for the Company’s annual meeting of stockholders to be held on November 6, 2006:

Jasper B. Sanfilippo, Chairman of the Board and Chief Executive Officer, age 75 — Mr. Sanfilippo has been employed by the Company since 1953. Mr. Sanfilippo served as the Company’s President from 1982 to December 1995 and was the Company’s Treasurer from 1959 to October 1991. He became the Company’s Chairman of the Board and Chief Executive Officer in October 1991 and has been a member of the Company’s Board of Directors since 1959. Mr. Sanfilippo was also a member of the Company’s Compensation Committee until April 28, 2004 (when that committee was terminated and its responsibilities assumed by the Compensation, Nominating and Corporate Governance Committee) and the Stock Option Committee until February 27, 1997 (when that Committee was disbanded). The Company has announced that Mr. Sanfilippo will remain Chief Executive Officer until November 6, 2006, and retire effective January 1, 2008. Mr. Sanfilippo intends to continue to serve as Chairman of the Board (if elected).

Michael J. Valentine, Executive Vice President Finance, Chief Financial Officer and Secretary, age 47 — Mr. Valentine has been employed by the Company since 1987 and in January 2001 was named its Executive Vice President Finance, Chief Financial Officer and Secretary. Mr. Valentine served as the Company’s Senior Vice President and Secretary from August 1999 to January 2001. Mr. Valentine has been a member of the Company’s Board of Directors since April 1997. Mr. Valentine served as the Company’s Vice President and Secretary from December 1995 to August 1999. He served as an Assistant Secretary and the General Manager of External Operations for the Company from June 1987 and 1990, respectively, to December 1995. Mr. Valentine’s responsibilities also include the Company’s peanut operations, including sales and procurement, and contract packaging business. It is expected that Mr. Valentine will be named Chief Financial Officer and Group President on November 6, 2006.

Jeffrey T. Sanfilippo, Executive Vice President Sales and Marketing, age 43 — Mr. Sanfilippo has been employed by the Company since 1991 and in January 2001 was named its Executive Vice President Sales and Marketing. Mr. Sanfilippo served as the Company’s Senior Vice President Sales and Marketing from August 1999 to January 2001. Mr. Sanfilippo has been a member of the Company’s Board of Directors since August 1999. He served as General Manager West Coast Operations from September 1991 to September 1993. He served as Vice President West Coast Operations and Sales from October 1993 to September 1995. He served as Vice President Sales and Marketing from October 1995 to August 1999. It is expected that Mr. Sanfilippo will be named Chief Executive Officer on November 6, 2006.

Jasper B. Sanfilippo, Jr., Executive Vice President of Operations and Assistant Secretary, age 38 — Mr. Sanfilippo became a member of the Company’s Board of Directors in December 2003. Mr. Sanfilippo has been employed by the Company since 1992 and in 2001 was named Executive Vice President

Operations, retaining his position as Assistant Secretary, which he assumed in December 1995. He became the Company’s Senior Vice President Operations in August 1999 and served as Vice President Operations between December 1995 and August 1999. Prior to that, Mr. Sanfilippo was the General Manager of the Company’s Gustine, California facility beginning in October 1995, and from June 1992 to October 1995 he served as Assistant Treasurer and worked in the Company’s Financial Relations Department. Mr. Sanfilippo is responsible for the Company’s non-peanut shelling operations, including plant operations and procurement. It is expected that Mr. Sanfilippo will be named Chief Operating Officer and President on November 6, 2006.

James A. Valentine, Executive Vice President Information Technology, age 42 — Mr. Valentine has been employed by the Company since 1986 and in August 2001 was named Executive Vice President Information Technology. Mr. Valentine served as Senior Vice President Information Technology from January 2000 to August 2001 and as Vice President of Management Information Systems from January 1995 to January 2000. It is expected that Mr. Valentine will be named Chief Information Officer on November 6, 2006.

William R. Pokrajac, Vice President of Finance, age 52 — Mr. Pokrajac has been with the Company since 1985 and was named Vice President of Finance and Controller in August 2001. He served as the Company’s Controller from 1987 to August 2003. Mr. Pokrajac is responsible for the Company’s accounting and inventory control functions.

Walter R. Tankersley, Jr., Senior Vice President Industrial Sales, age 54 — Mr. Tankersley has been with the Company since 2002 as the Vice President of Industrial Sales, and was named Senior Vice President in August 2003. He was previously Director of Industrial Sales at Mauna Loa Macadamia Co. from September 2000 to December 2001 and Vice President of Sales and Marketing with the Young Pecan Company from November 1992 to August 2000.

Everardo Soria, Senior Vice President Pecan Operations and Procurement, age 49 — Mr. Soria has been with the Company since 1985. Mr. Soria was named Director of Pecan Operations in July 1995 and was named Vice President Pecan Operations and Procurement in January 2002. Mr. Soria was named Senior Vice President Pecan Operations and Procurement in August 2003. Mr. Soria is responsible for the procurement of pecans and for the shelling of pecans at the Company’s Selma, Texas facility.

Herbert J. Marros, Controller, age 48 — Mr. Marros has been with the Company since 1995 as Assistant Controller and was named Controller in August 2003. Mr. Marros is responsible for the Company’s financial reporting.

Charles M. Nicketta, Senior Vice President of Manufacturing, age 58 — Mr. Nicketta has been with the Company since 1983. Mr. Nicketta was named Director of Manufacturing in July 1985 and was named Vice President of Manufacturing in August 2001. Mr. Nicketta was named Senior Vice President of Manufacturing in August 2004. Mr. Nicketta is responsible for the Company’s production design, engineering and facilities expansion.

Michael G. Cannon, Senior Vice President of Corporate Operations, age 53 — Mr. Cannon joined the Company in October 2005 as Senior Vice President of Operations. Previously, Mr. Cannon was Vice President of Operations at Sugar Foods Corp from 1995 to October 2005. Mr. Cannon is responsible for the production operations for all of the Company’s facilities.

RELATIONSHIPS AMONG CERTAIN DIRECTORS AND EXECUTIVE OFFICERS

Jasper B. Sanfilippo, Chairman of the Board and Chief Executive Officer and a director of the Company, is (i) the father of Jasper B. Sanfilippo, Jr. and Jeffrey T. Sanfilippo, executive officers and directors of the Company, (ii) the brother-in-law of Mathias A. Valentine, a director of the Company, and (iii) the uncle of Michael J. Valentine, an executive officer and a director of the Company and James A. Valentine, an executive officer of the Company. Michael J. Valentine, Executive Vice President, Chief Financial Officer and Secretary and a director of the Company, is (i) the son of Mathias A. Valentine, (ii) the brother of James A. Valentine, (iii) the nephew of Jasper B. Sanfilippo, and (iv) the cousin of Jasper B. Sanfilippo, Jr. and Jeffrey T. Sanfilippo. Jeffrey T. Sanfilippo, Executive Vice President Sales and Marketing and a

director of the Company, is (i) the son of Jasper B. Sanfilippo, (ii) the brother of Jasper B. Sanfilippo, Jr., (iii) the nephew of Mathias A Valentine, and (iv) the cousin of Michael J. Valentine and James A. Valentine. Jasper B. Sanfilippo, Jr., Executive Vice President of Operations and a director of the Company, is (i) the son of Jasper B. Sanfilippo, (ii) the brother of Jeffrey T. Sanfilippo, (iii) the nephew of Mathias A. Valentine, and (iv) the cousin of Michael J. Valentine and James A. Valentine. James A. Valentine, Executive Vice President Information Technology, is (i) the son of Mathias A. Valentine, (ii) the brother of Michael J Valentine, (iii) the nephew of Jasper B. Sanfilippo, and (iv) the cousin of Jasper B. Sanfilippo, Jr. and Jeffrey T. Sanfilippo.

PART II

Item 5 — Market for Registrant’s Common Equity and Related Stockholder Matters

The Company has two classes of stock: Class A Common Stock (“Class A Stock”) and Common Stock. The holders of Common Stock are entitled to elect 25% of the members of the Board of Directors, rounded up to the nearest whole number, and the holders of Class A Stock are entitled to elect the remaining directors. With respect to matters other than the election of directors or any matters for which class voting is required by law, the holders of Common Stock are entitled to one vote per share while the holders of Class A Stock are entitled to ten votes per share. The Company’s Class A Stock is not registered under the Securities Act of 1933 and there is no established public trading market for the Class A Stock. However, each share of Class A Stock is convertible at the option of the holder at any time and from time to time (and, upon the occurrence of certain events specified in the Company’s Restated Certificate of Incorporation, automatically converts) into one share of Common Stock.

The Common Stock of the Company is quoted on the NASDAQ National Market and its trading symbol is “JBSS”. The following tables set forth, for the quarters indicated, the high and low reported last sales prices for the Common Stock as reported on the NASDAQ national market.

		Price Range of
		Common Stock
Year Ended June 29, 2006		High				Low
4th Quarter		$	16.54			$	12.46
3rd Quarter		$	15.55			$	12.24
2nd Quarter		$	18.28			$	12.79
1st Quarter		$	23.29			$	16.88

		Price Range of
		Common Stock
Year Ended June 30, 2005		High				Low
4th Quarter		$	24.65			$	20.20
3rd Quarter		$	26.80			$	22.87
2nd Quarter		$	26.20			$	15.60
1st Quarter		$	29.08			$	22.36

As of September 21, 2006, there were 80 holders and 16 holders of record of the Company’s Common Stock and Class A Stock, respectively.

Under the Company’s Restated Certificate of Incorporation, the Class A Stock and the Common Stock are entitled to share equally on a share for share basis in any dividends declared by the Board of Directors on the Company’s common equity.

No dividends have been declared since 1995. The Company does not expect to pay any cash dividends in the foreseeable future because cash flow from operations will be used to finance future growth, including the facility consolidation project. In addition, the Company’s current financing agreements restrict the payment of annual dividends to amounts specified in the loan agreements. The declaration and payment of future dividends will be at the sole discretion of the Board of Directors and will depend on the Company’s profitability, financial condition, debt covenant compliance, cash requirements, future prospects and other factors deemed relevant by the Board of Directors. See Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”

For purposes of the calculation of the aggregate market value of the Company’s voting stock held by nonaffiliates of the Company as set forth on the cover page of this Report, the Company did not consider any of the siblings of Jasper B. Sanfilippo, or any of the lineal descendants (all of whom are adults and some of whom are employed by the Company) of either Jasper B. Sanfilippo, Mathias A. Valentine or such siblings (other than those who are executive officers of the Company) as an affiliate of the Company. See “Compensation Committee Interlocks, Insider Participation and Certain Transactions” and “Security Ownership of Certain Beneficial Owners and Management” contained in the Company’s Proxy Statement for the 2006 Annual Meeting and “Executive Officers of the Registrant — Relationships Among Certain Directors and Executive Officers” appearing immediately after Part I of this Report.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table summarizes the Company’s equity compensation plans as of June 29, 2006:

Number of

securities remaining

available for future

issuance under

equity

Number of

compensation plans

securities to be

Weighted average

(excluding

issued upon

exercise price of

securities reflected

exercise of options

outstanding options

in the first column)

Equity compensation plans approved by stockholders

324,815

$

13.70

199,125

Equity compensation plans not approved by stockholders

—

—

—

Total

324,815

$

13.70

199,125

Item 6 — Selected Financial Data

The following historical consolidated financial data as of and for the years ended June 29, 2006, June 30, 2005, June 24, 2004, June 26, 2003 and June 27, 2002 were derived from the Company’s consolidated financial statements. The financial data should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto, which are included elsewhere herein, and with Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The information below is not necessarily indicative of the results of future operations. No dividends have been declared since 1995.

Statement of Operations Data: ($ in thousands, except per share data)

		Year Ended
		June 29,				June 30,				June 24,				June 26,				June 27,
		2006				2005				2004				2003				2002
Net sales		$	579,564			$	581,729			$	520,811			$	419,677			$	352,799
Cost of sales			541,909				503,300				428,967				346,755				294,999
Gross profit			37,655				78,429				91,844				72,922				57,800
Selling and administrative expenses			54,159				51,842				50,780				44,093				39,898
(Loss) income from operations			(16,504	)			26,587				41,064				28,829				17,902
Interest expense			(6,516	)			(3,998	)			(3,434	)			(4,681	)			(5,757	)
Debt extinguishment fees			—				—				(972	)			—				—
Rental and miscellaneous (expense) income, net			(610	)			1,179				440				486				590
Loss (income) before income taxes			(23,630	)			23,768				37,098				24,634				12,735
Income tax (benefit) expense			(9,189	)			9,269				14,468				9,607				5,044
Net (loss) income		$	(14,441	)		$	14,499			$	22,630			$	15,027			$	7,691
Basic (loss) earnings per common share		$	(1.36	)		$	1.37			$	2.35			$	1.63			$	0.84
Diluted (loss) earnings per common share		$	(1.36	)		$	1.35			$	2.32			$	1.61			$	0.84

Balance Sheet Data: ($ in thousands)

		June 29,				June 30,				June 24,				June 26,				June 27,
		2006				2005				2004				2003				2002
Working capital		$	78,030			$	137,764			$	122,854			$	75,182			$	67,645
Total assets			391,446				394,472				246,934				223,727				206,815
Long-term debt, less current maturities			59,785				67,002				12,620				29,640				40,421
Total debt			136,430				144,174				19,166				70,118				69,623
Stockholders’ equity			182,390				196,175				181,360				118,781				102,060

Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The Company maintains a vertically integrated nut processing operation that allows the Company to control every step of the process, including procurement from growers, shelling, processing, packing and marketing. For example, by purchasing nuts directly from growers, processing the nuts and then marketing the end products to customers, the Company is able to capture profit margins on the original purchase of the nuts. In the past, the Company’s vertically integrated business model has worked to its advantage. Vertical integration, however, can under certain circumstances result in poor earnings or losses. For example, during fiscal 2006 (i) the Company bought too many nuts, such as almonds, directly from growers, (ii) subsequent to the Company’s purchases from growers, the market for certain nuts, such as almonds, declined, which impaired the Company’s ability to profit from its purchases and (iii) as a result of an overall increase in the price of nuts, consumption of nuts and nut products decreased. The combination of these three factors, among others, contributed to the Company’s losses in fiscal 2006 and limited the Company’s ability to profit from its vertically integrated business model.

The risks associated with vertical integration that contributed to the Company’s negative margins for almond sales also exist, to varying degrees, for other nut types that the Company shells. Accordingly, since the Company is a vertically integrated sheller, processor and seller of nuts and nut products, the effects of changing market prices can never be eliminated.

The Company’s results for fiscal 2006 were disappointing in terms of both sales and earnings. Net sales decreased by 0.4% to $579.6 million for fiscal 2006 compared to $581.7 million for fiscal 2005, and sales volume measured in pounds decreased by 10.2%, approximately 20% of which was caused by fiscal 2005 containing fifty-three rather than fifty-two weeks. The primary factor causing the decline in sales volume was the higher costs and related selling prices of tree nuts in fiscal 2006 when compared to fiscal 2005, which led to decreased demand for nut products. The Company’s decline in unit volume is consistent with trends throughout the entire nut category. The Company realized a net loss of $14.4 million for fiscal 2006 compared to net income of $14.5 million for fiscal 2005. In addition to the decline in sales volume, the effects of a declining market price of almonds, after the crop was procured at fixed prices, negatively affected the Company’s operating results for fiscal 2006. Almonds in inventory at June 29, 2006 have been adjusted to the lower of cost or market. It is anticipated that the almonds in inventory at June 29, 2006 will be sufficient to meet demand into the second quarter of fiscal 2007. Consequently, the Company expects zero gross profit on almond sales through this time period. In order to help decrease the Company’s exposure to the effects of a possible recurrence of a declining almond market in fiscal 2007, the Company is changing its method of purchasing almonds. To the extent practicable, the procurement will occur as industrial sales contracts are entered into, thus helping to reduce the Company’s exposure to the effects of changing market prices. Although the Company is modifying its method for procuring almonds, there can be no assurance that this method will reduce the Company’s losses or the risks associated with buying almonds.

The Company expects that the demand for nuts will improve in fiscal 2007 as lower prices are anticipated for most major nut types. Private label sales in the consumer distribution channel were negatively impacted by the high nut costs in fiscal 2006. The price differential between private label products and major branded products was very narrow in fiscal 2006 which hampered sales promotions of the private label products. The anticipated lower nut prices for fiscal 2007 are expected to stimulate promotional activity in the private label market as lower prices increase consumer demand and the gap between private label and branded products returns to normal historical levels. The high price of tree nuts also had a negative impact in the industrial distribution channel. Food processors decreased the usage of nuts in their products as a result of the higher price of tree nuts.

The Company’s unfavorable operating results have caused non-compliance with certain restrictive covenants under its financing facilities throughout fiscal 2006. Specifically, the Company failed to achieve the minimum trailing fiscal four quarters earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirement, the maximum allowable funded debt to twelve-month EBITDA ratio, the minimum fixed charge coverage ratio and the monthly minimum working capital requirement under its unsecured bank credit facility effective during fiscal 2006 (the “Prior Bank Credit Facility”) and the Note Agreement for the second and third quarters of fiscal 2006 and at June 29, 2006. In July 2006, the Company amended its Prior Bank Credit Facility into a secured bank credit facility (the “Bank Credit Facility”) that also waived all non-compliance with financial covenants through June 29, 2006. The Note Agreement was also amended to, among other things, waive all non-compliance with financial covenants through June 29, 2006, increase the interest rate to 5.67% from 4.67% per annum, secure the Company’s obligations and modify future financial covenants.

On April 15, 2005, the Company closed on the $48.0 million purchase of a site in Elgin, Illinois (the “Current Site”). The Current Site includes both an office building and a warehouse. The Company is leasing 41.5% of the office building back to the seller for a three year period, with options for an additional seven years. The remaining portion of the office building may be leased to third parties; however, further capital expenditures, such as for increased parking availability, will be necessary to lease a substantial portion of the remaining space. The 653,302 square foot warehouse was expanded to slightly over 1,000,000 square feet during fiscal 2006 and is being modified to serve as the Company’s principal processing and distribution facility and the Company’s headquarters. The Company transferred its primary Chicago area distribution facility from a leased location to the Current Site in July 2006. Processing operations are scheduled to begin at the Current Site in the second

quarter of fiscal 2007, with operations moving from the existing Chicago area locations, and new equipment installed, beginning in the second quarter of fiscal 2007 and continuing on a gradual basis through the end of calendar 2008.

In fiscal 2005, in order to facilitate the facility consolidation project, the Company’s Board of Directors appointed an independent board committee to explore alternatives with respect to the Company’s existing leases for the properties owned by two related party partnerships. After negotiations with the partnerships, the independent committee approved a proposed transaction and, subsequently, the Company entered into various agreements with the partnerships. The agreements provided for an overall transaction whereby: (i) the current related party leases were terminated without penalty to the Company; (ii) the Company sold the portion of the Busse Road property that it owned to the partnerships for $2.0 million; and (iii) the Company sold its Selma, Texas properties to the partnerships for $14.3 million (an estimate of fair value which also slightly exceeds its carrying value) and leased the properties back. The sale price and rental rate for the Selma, Texas properties were determined by an independent appraiser to be at fair market value. The lease for the Selma, Texas properties has a ten-year term at a fair market value rent, with three five-year renewal options. In addition, the Company has an option to repurchase the Selma property from the partnerships after five years at 95% (100% in certain circumstances) of the then fair market value, but not to be less than the $14.3 million purchase price. The sale of the Selma, Texas properties at fair market value to the related party partnerships was consummated during the first quarter of fiscal 2007.

In March 2006, the Company and the related party partnership that owned a facility located in Des Plaines, Illinois entered in to an agreement whereby the lease was terminated at no cost to the Company upon the sale of the facility by the partnership. The facility was sold by the partnership to a third party in March 2006. A gain of $940 thousand was recorded as a reduction to administrative expenses in the third quarter of fiscal 2006 for the termination of this capital lease.

The portion of the Busse Road property that the Company owned was sold to the related party partnership in July 2006 and the related lease obligation was terminated without penalty to the Company. The related party partnership then sold the Busse Road property to a third party, which is leasing back the property to the Company for the time period necessary to transition operations to the new Elgin facility. Proceeds received from the sales exceeded the Company’s carrying value of these assets by $0.8 million.

In July 2006, the Company also sold its Arlington Heights and Arthur Avenue facilities to a third party for a total of $7.8 million and is leasing back the facilities at fair market value for the time period necessary to transition operations to the Current Site. Proceeds received from the sales exceeded the carrying value of the assets by $3.9 million.

The Company faces a number of challenges in the future. The Company’s Chicago area processing facilities operate at full capacity at certain times during the year. If the Company experiences growth in unit volume sales, it could exceed its capacity to meet the demand for its products, especially prior to the completion of the facility consolidation project. The Company faces potential disruptive effects on its business, such as cost overruns for the construction of the new facility or business interruptions that may result from the transfer of production to the new facility. For example, the total projected cost of the facility consolidation project is now estimated at approximately $110 million, which is $15 million higher than original estimates. In addition, the Company will continue to face the ongoing challenges of its business such as fluctuating commodity costs, food safety and regulatory issues and the maintenance and growth of its customer base. See Item 1A — “Risk Factors.”

The Company performed an analysis of its existing assets at its Chicago locations, and based on this analysis identified those assets which will be transferred to the Current Site and those that will not. For those assets which are not expected to be transferred to the Current Site, the remaining depreciation period has been reduced to reflect the Company’s estimate of the useful lives of these assets. In addition to the assets being transferred, new machinery and equipment will also be installed at the Current Site. The Company currently anticipates that operations will be fully integrated into the Current Site by December 2008. Total remaining capital expenditures for the facility consolidation project are estimated to be approximately $25 — $30 million, which the Company expects to finance through the

Bank Credit Facility, available cash flow from operations, proceeds from the sale of existing facilities and rental income from the office building at the Current Site. Several uncertainties exist, such as those described under Item 1A — “Risk Factors.”

Prior to acquiring the Current Site, the Company and certain related party partnerships entered into a Development Agreement with the City of Elgin, Illinois (the “Development Agreement”) for the development and purchase of the land where a new facility could be constructed (the “Original Site”). The Development Agreement provided for certain conditions, including but not limited to the completion of environmental and asbestos remediation procedures, the inclusion of the property in the Elgin enterprise zone and the establishment of a tax incremental financing district covering the property. The Company fulfilled its remediation obligations under the Development Agreement during fiscal 2005. On February 1, 2006, the Company and the related party partnerships entered into a termination agreement with the City of Elgin whereby the Development Agreement was terminated and the Company and the City of Elgin (the “City”) became obligated to convey the property to the Company and the partnerships within thirty days. The partnerships subsequently agreed to convey their respective interests in the Original Site to the Company by quitclaim deed without consideration. On March 28, 2006, JBSS Properties, LLC (“JBSS LLC”), a wholly owned subsidiary of the Company, acquired title to the Original Site by quitclaim deed, and JBSS LLC entered into an Assignment and Assumption Agreement (the “Agreement”) with the City. Under the terms of the Agreement, the City assigned to the Company all the City’s remaining rights and obligations under the Development Agreement. The Company is currently marketing the Original Site to potential buyers. The Company’s costs under the Development Agreement totaling $6.8 million are recorded as “Other Assets” at June 29, 2006 and June 30, 2005. The Company has reviewed the asset under the Development Agreement for realization, and concluded that no adjustment of the carrying value is required.

Total inventories were approximately $164.4 million at June 29, 2006, a decrease of $53.2 million, or 24.5%, from the balance at June 30, 2005. The decrease is due primarily to decreases in finished goods, almonds, cashews and peanuts. The decreases in finished goods and cashews are due to management emphasis on inventory reduction in order to capitalize on anticipated market price declines in virtually all nuts in fiscal 2007. The decrease in almonds was due to lower purchases in fiscal 2006 than in fiscal 2005. Overall volume of nut inventory, as measured by pounds on hand, decreased by 20.1% at June 29, 2006 when compared to June 30, 2005. Net accounts receivable were $35.0 million at June 29, 2006, a decrease of approximately $3.5 million, or 9.0%, from the balance at June 30, 2005.

The Company’s business is seasonal. Demand for peanut and other nut products is highest during the months of October, November and December. Peanuts, pecans, walnuts and almonds, the Company’s principal raw materials, are primarily purchased between August and February and are processed throughout the year until the following harvest. As a result of this seasonality, the Company’s personnel requirements rise during the last four months of the calendar year. This seasonality also impacts capacity utilization at the Company’s Chicago area facilities, with these facilities routinely operating at full capacity during the last four months of the calendar year. The Company’s working capital requirements generally peak during the third quarter of the Company’s fiscal year.

Results of Operations

The following table sets forth the percentage relationship of certain items to net sales for the periods indicated and the percentage increase of such items from fiscal 2005 to fiscal 2006 and from fiscal 2004 to fiscal 2005.

		Percentage of Net Sales												Percentage Increase (Decrease)
		Fiscal 2006				Fiscal 2005				Fiscal 2004				Fiscal 2006 vs. 2005				Fiscal 2005 vs. 2004
Net sales			100.0	%			100.0	%			100.0	%			(0.4	)%			11.7	%
Gross profit			6.5				13.5				17.6				(52.0	)			(14.6	)
Selling expenses			6.9				6.8				7.2				1.3				5.7
Administrative expenses			2.5				2.1				2.6				14.4				(7.9	)
(Loss) income from operations			(2.8	)			4.6				7.9				(162.1	)			(35.3	)

Fiscal 2006 Compared to Fiscal 2005

Net Sales. Net sales decreased to approximately $579.6 million for fiscal 2006 from approximately $581.7 million for fiscal 2005, a decrease of approximately $2.2 million or 0.4%. Net sales would have increased in fiscal 2006 when compared to fiscal 2005, except that fiscal 2005 contained fifty-three weeks rather than fifty-two-weeks. Unit volume, measured in terms of pounds shipped, decreased by 10.2% in fiscal 2006 compared to fiscal 2005.

Unit volume sales decreases of 13.2% in the consumer distribution channel and 13.4% in the industrial distribution channel were primarily responsible for the overall decrease in unit volume sales. The decrease in consumer sales volume was due primarily to lower sales of private label products. Sales volume of the Company’s Fisher brand decreased 4.5% for fiscal 2006 compared to fiscal 2005. The private label decrease was caused in large part by the loss of private label business in the latter part of fiscal 2005 with customers that would not accept price increases. Also, market studies have shown a shift in consumer preference to branded snack nuts away from private label as the price differential between branded and private label products has narrowed. Market studies have also shown a decrease in overall nut category volume sales during fiscal 2006. The decrease in unit volume sales in the industrial distribution channel was caused primarily by reduced demand due to the higher costs of tree nuts. Unit volume sales decreased by 3.8% and 1.6% in the food service and contract packaging distribution channels, respectively, and increased by 0.2% in the export distribution channel.

The following table shows a comparison of sales by distribution channel, and as a percentage of total net sales (dollars in thousands):

Distribution Channel		Fiscal 2006								Fiscal 2005
Consumer		$	292,890				50.6	%		$	298,298				51.3	%
Industrial			131,635				22.7				132,900				22.8
Food Service			64,356				11.1				61,294				10.5
Contract Packaging			44,874				7.7				45,181				7.8
Export			45,809				7.9				44,056				7.6
Total		$	579,564				100.0	%		$	581,729				100.0	%

The following table shows an annual comparison of sales by product type as a percentage of total gross sales. The table is based on gross sales, rather than net sales, because certain adjustments, such as promotional discounts, are not allocable to product type.

Product Type		Fiscal 2006				Fiscal 2005
Peanuts			20.1	%			22.4	%
Pecans			21.8				23.3
Cashews & Mixed Nuts			22.4				22.7
Walnuts			11.8				9.4
Almonds			15.4				13.5
Other			8.5				8.7
Total			100.0	%			100.0	%

     Gross Profit. Gross profit in fiscal 2006 decreased 52.0% to $37.7 million from approximately $78.4 million for fiscal 2005. Gross profit margin decreased to 6.5% for fiscal 2006 from 13.5% for fiscal 2005. The two major factors for the significant decline in gross profit and gross profit margin were (i) a 16% decline in production volume in fiscal 2006 compared to fiscal 2005, and (ii) losses on almond sales due

to a substantial decline in market costs after the procurement costs of almonds were fixed. The major components contributing to the decrease in gross profit of $40.8 million may be summarized as follows:

		Amount
		(in millions)
Impact of 16% production volume decline		$	19.3
Decrease in gross profit on almond sales			10.3
Industrial almond contract loss reserve			2.0
Bulk stored inventory adjustments			3.9
Disposal and reserve for walnut and almond by-products and packaging materials			2.8
Increase in workers’ compensation expense			0.8
Other			1.7
		$	40.8

The decreases in sales volume led to a corresponding decrease in production. Also, production further decreased due to a concerted effort to reduce finished goods inventory levels. Manufacturing expenses of a fixed nature do not decrease with the decrease in production. Accordingly, the production volume decline reduced the Company’s gross profit by $19.3 million. Almonds also severely affected the Company’s profitability. Almond sales generated a decrease in gross profit of $10.3 million in fiscal 2006 compared to fiscal 2005. A significant decrease in the market price for almonds occurred after the Company’s costs to procure almonds were fixed. The majority of the Company’s almond sales are to industrial customers on fixed price contracts. For competitive reasons, the Company entered into fixed price almond sales contracts at unfavorable prices with major customers in order to maintain good relationships. A $2.0 million reserve remained at June 29, 2006 for losses expected on the fulfillment of fixed price almond sales contracts during the first half of fiscal 2007. The Company maintains significant quantities of bulk stored inshell inventories. $3.4 million in adjustments to increase the estimated quantities of bulk stored inventories were recorded during fiscal 2005, while a $0.5 million adjustment was recorded to decrease the estimated quantities of bulk stored inventories as of June 29, 2006, resulting in a $3.9 million change in gross profit between fiscal 2006 and fiscal 2005. An increase in the processing of almonds and walnuts led to an increase in the production of by-products. The processes of slicing and slivering almonds inevitably result in the production of by-products. The walnut by-products were caused by poor quality inshell walnuts that required additional reprocessing. Along with the identification of obsolete packaging materials, the generation of by-products affected gross profit by $2.8 million in fiscal 2006. Workers’ compensation expense increased by $0.8 million in fiscal 2006 compared to fiscal 2005 due primarily to a change in estimate in fiscal 2006.

Selling and Administrative Expenses. Selling and administrative expenses increased to $54.2 million, or 9.3% of net sales, for fiscal 2006 from $51.8 million, or 8.9% of net sales, for fiscal 2005. Selling expenses increased to $39.9 million, or 6.9% of net sales, for fiscal 2006 from $39.4 million, or 6.8% of net sales, for fiscal 2005. The increase was due primarily to an increase of $0.4 million in general advertising expenses. Administrative expenses increased to $14.2 million, or 2.5% of net sales, for fiscal 2006 from $12.4 million, or 2.1% of net sales, for fiscal 2005. This increase was due primarily to $1.8 million of expenses related to a supplemental retirement plan adopted in August 2005 and to a $0.4 million increase in legal expenses relating primarily to the facility consolidation project and new financing arrangements, offset partially by the $0.9 million gain from the termination of a related party capital lease.

(Loss) Income from Operations. Due to the factors discussed above, the loss from operations was $(16.5) million, or (2.8)% of net sales, for fiscal 2006, compared to income from operations of $26.6 million, or 4.6% of net sales, for fiscal 2005.

Interest Expense. Interest expense increased to $6.5 million for fiscal 2006 from $4.0 million for fiscal 2005. Additionally, $1.8 million of interest was capitalized pertaining to the Company’s facility consolidation project during fiscal 2006. This increase was caused primarily by higher average levels of borrowings and a higher interest rate on the Company’s revolving bank credit facility.

Rental and Miscellaneous (Expense) Income, Net. Net rental and miscellaneous (expense) income was an expense of $0.6 million for fiscal 2006 compared to income of $1.2 million for fiscal 2005. The decrease of $1.8 million was caused by expenses at the office building at the Current Site, including depreciation, exceeding rental income. This net expense is expected to continue until a larger portion of the office building at the Current Site is rented.

Income Taxes. Income tax benefit was approximately $9.2 million, or 38.9% of loss before income taxes, for fiscal 2006, compared to income tax expense of $9.3 million, or 39.0% of income before income taxes, for fiscal 2005.

Net (Loss) Income. Net loss was $(14.4) million, or $(1.36) basic and diluted per common share, for fiscal 2006, compared to net income of $14.5 million, or $1.37 basic per common share ($1.35 diluted), for fiscal 2005, due to the factors discussed above.

Fiscal 2005 Compared to Fiscal 2004

Net Sales. Net sales increased to $581.7 million for fiscal 2005 from $520.8 million for fiscal 2004, an increase of $60.9 million or 11.7%. The increase in net sales was due primarily to higher prices related to higher commodity costs, especially for almonds and pecans. Also, fiscal 2005 contained fifty-three weeks whereas fiscal 2004 contained fifty-two-weeks. Unit volume, measured in terms of pounds shipped, was virtually the same in fiscal 2005 and fiscal 2004, and would have decreased slightly if not for the extra week in fiscal 2005.

Unit volume sales increased by 13.3% in the food service distribution channel and by 27.4% in the contract packaging distribution channel, but decreased by 3.5% in the consumer distribution channel and by 6.4% in the industrial distribution channel. Unit volume sales in the export distribution channel were virtually unchanged in fiscal 2005 when compared to fiscal 2004. Food service volume increased due primarily to: (i) higher airline sales; (ii) sales to new customers; and (iii) expanded sales to existing customers. Contract packaging volume increased significantly due to the introduction of new products and the expansion of business with a major customer. Consumer distribution channel volume decreased, due primarily to lower promotional activity for Fisher peanut products at a major customer during the first half of fiscal 2005 and lost business with private label customers that would not accept price increases. Sales volume in the industrial distribution channel decreased due primarily to lower peanut sales as fiscal 2004 contained non-recurring significant sales of peanuts to other peanut shellers.

The following table shows a comparison of sales by distribution channel, and as a percentage of total net sales (dollars in thousands):

Distribution Channel		Fiscal 2005								Fiscal 2004
Consumer		$	298,298				51.3	%		$	289,586				55.6	%
Industrial			132,900				22.8				110,813				21.3
Food Service			61,294				10.5				48,969				9.4
Contract Packaging			45,181				7.8				33,074				6.3
Export			44,056				7.6				38,369				7.4
Total		$	581,729				100.0	%		$	520,811				100.0	%

The following table shows an annual comparison of sales by product type as a percentage of total gross sales. The table is based on gross sales, rather than net sales, because certain adjustments, such as promotional discounts are not allocable to product type.

Product Type		Fiscal 2005				Fiscal 2004
Peanuts			22.4	%			24.9	%
Pecans			23.3				20.1
Cashews & Mixed Nuts			22.7				22.7
Walnuts			9.4				9.9
Almonds			13.5				12.3
Other			8.7				10.1
Total			100.0	%			100.0	%

Gross Profit. Gross profit in fiscal 2005 decreased 14.6% to $78.4 million from $91.8 million for fiscal 2004. Gross profit margin decreased to 13.5% for fiscal 2005 from 17.6% for fiscal 2004. Several factors led to the decrease in gross profit margin. Industrial sales are typically sold under calendar year fixed price contracts. Thus, industrial sales in the first half of fiscal 2005 that were priced based on prior year crop costs were fulfilled with current crop costs that were significantly higher, especially for pecans and almonds. Also, price increases in the consumer distribution channel due to the higher commodity costs were not fully instituted until the third quarter of fiscal 2005. Other contributing factors leading to the decrease in gross profit margin include: (i) contract packaging sales, which generally carry lower gross margins than the Company’s overall gross margins, accounting for a greater percentage of sales in fiscal 2005 than fiscal 2004; (ii) unfavorable almond processing variances generated from the use of low quality almonds that were required to be purchased during the first quarter of fiscal 2005 to fulfill contracts; (iii) a higher than anticipated final settlement of $1.2 million with almond growers for the 2003 crop year; and (iv) the scrapping of $0.4 million of certain obsolete packaging materials in fiscal 2005.

Selling and Administrative Expenses. Selling and administrative expenses as a percentage of net sales decreased to 8.9% for fiscal 2005 from 9.8% for fiscal 2004. Selling expenses as a percentage of net sales decreased to 6.8% for fiscal 2005 from 7.2% for fiscal 2004. This decrease was due primarily to the fixed nature of certain of these expenses relative to a larger revenue base. The approximately $2.1 million increase in selling expenses for fiscal 2005 compared to fiscal 2004 was due primarily to higher freight and advertising costs of $2.1 million and $0.6 million, respectively, offset partially by a $1.1 million decrease in incentive compensation. Administrative expenses as a percentage of net sales decreased slightly to 2.1% for fiscal 2005 from 2.6% for fiscal 2004. The $1.1 million decrease in administrative expenses was due primarily to lower incentive compensation expenses of $2.7 million. No bonuses were paid for fiscal 2005 under the Company’s incentive compensation program since the minimum earnings per share level was not attained. Partially offsetting the decrease in incentive compensation costs was an increase in professional expenses of $0.7 million related primarily to corporate governance expenses.

Income from Operations. Due to the factors discussed above, income from operations decreased to $26.6 million, or 4.6% of net sales, for fiscal 2005 from $41.1 million, or 7.9% of net sales, for fiscal 2004.

Interest Expense. Interest expense increased to $4.0 million for fiscal 2005 from $3.4 million for fiscal 2004. This increase was due primarily to the Company’s issuance on December 16, 2004, of $65.0 million of ten year notes bearing interest at a fixed rate of 4.67% under the Note Agreement to fund a portion of the Company’s facility consolidation project and for general working capital purposes. Average borrowings under the Prior Bank Credit Facility also increased to finance the increased purchase of inventories. Also, the interest rate on the Prior Bank Credit Facility increased in fiscal 2005 when compared to fiscal 2004 due to an increase in short-term interest rates.

Rental and Miscellaneous Income, Net. Net rental and miscellaneous income increased to $1.2 million for fiscal 2005 compared to $0.4 million for fiscal 2004. This increase is due to rental income received from the lease back of the Current Site to the seller. The office building at the Current Site is being leased for a minimum three year-period, with options for an additional seven years. The current monthly rental rate for the office building lease is $128 thousand per month. The warehouse building was leased back to the seller from April 15, 2005 to May 31, 2005 for $333 thousand per month. A separate portion of the warehouse building is being leased back to the seller for $43 thousand per month through September 2005.

Income Taxes. Income tax expense was $9.3 million, or 39.0% of income before income taxes, for fiscal 2005, compared to $14.5 million, or 39.0% of income before income taxes, for fiscal 2004.

Net Income. Net income was $14.5 million, or $1.37 basic per common share ($1.35 diluted), for fiscal 2005, compared to $22.6 million, or $2.35 basic per common share ($2.32 diluted), for fiscal 2004, due to the factors discussed above.

Liquidity and Capital Resources

General

The primary uses of cash are to fund the Company’s current operations, including its facility consolidation project, fulfill contractual obligations and repay indebtedness. Also, various uncertainties could result in additional uses of cash, such as those described under Item 1A — “Risk Factors.”

Cash flows from operating activities have historically been driven by net income but are also significantly influenced by inventory requirements, which can change based upon fluctuations in both quantities and market prices of the various nuts the Company sells. Current market trends in nut prices and crop estimates also impact nut procurement.

Net cash provided by operating activities was $41.0 million for fiscal 2006 compared to net cash used in operating activities of $57.4 million for fiscal 2005. The increase is due primarily to a $93.1 million decrease in inventory purchases, primarily in pecans, peanuts, cashews and almonds. Inshell pecan purchases decreased due to a 26.5% decrease in the average cost of inshell pecans, with the quantity purchased relatively unchanged. Peanut purchases decreased due to higher quantities on hand at the beginning of fiscal 2006 compared to fiscal 2005 and to lower peanut sales in fiscal 2006 compared to fiscal 2005. Cashew purchases decreased due to sufficient quantities already on hand in inventories at the beginning of the fiscal year. Almond purchases decreased 45.2% due to a reduction in the demand for almonds in the industrial market. Overall nut purchases for fiscal 2006 compared to fiscal 2005 decreased by 23.9% in terms of pounds, and 22.7% in terms of dollars. The Company focused on inventory reduction during fiscal 2006 in order to capitalize on anticipated market declines in virtually all nuts, except for pecans, during fiscal 2007. The Company expects improved gross margins in fiscal 2007, as the lower costs of nuts will not be offset by corresponding decreases in sales prices.

The Company repaid $4.7 million of long-term debt during fiscal 2006 compared to $1.3 million during fiscal 2005.

Financing Arrangements

On July 27, 2006, the Company amended its Prior Bank Credit Facility into a secured facility (the “Bank Credit Facility”). The Bank Credit Facility provides for $100.0 million in secured borrowings and is comprised of (i) a working capital revolving loan which provides working capital financing of up to $93.6 million in the aggregate, and matures on July 25, 2009, and (ii) $6.4 million for the IDB Letter of Credit maturing on June 1, 2011 to secure the industrial development bonds which finances the construction of a peanut shelling plant in 1987. The Bank Credit Facility also allows for an amendment to increase the total amount of secured borrowings to $125.0 million at the election of the Company, the agent under the facility and one or more of the lenders under the facility. Borrowings under the Bank Credit Facility accrue interest at a rate determined pursuant to a formula based on the agent bank’s reference rate, the prime rate and the Eurodollar rate. The interest rate varies depending upon the Company’s quarterly financial performance, as measured by the available borrowing base. The Bank Credit Facility also waived all non-compliance with financial covenants under the previous Bank Credit Facility (the “Prior Bank Credit Facility”) that existed through June 29, 2006. As of June 29, 2006 the Company had $26.1 million of available credit under the Prior Bank Credit Facility.

The terms of the Bank Credit Facility include certain restrictive covenants that, among other things,

require the Company to maintain certain specified financial ratios (if the borrowing base is below a designated level), restrict certain investments, indebtedness and capital expenditures and restrict certain cash dividends, redemptions of capital stock and prepayment of certain indebtedness of the Company. The lenders are entitled to require immediate repayment of the Company’s obligations under the Bank Credit Facility in the event the Company defaults on payments required under the Bank Credit Facility, non-compliance with the financial covenants, or upon the occurrence of certain other defaults by the Company under the Bank Credit Facility (including a default under the Note Agreement). The Company is required to pay termination fees of $2.0 and $1.0 million if it terminates the Bank Credit Facility in the first and second years of the agreement, respectively.

In order to finance a portion of the Company’s facility consolidation project and to provide for the Company’s general working capital needs, the Company received $65.0 million pursuant to a note purchase agreement (the “Note Agreement”) entered into on December 16, 2004 with various lenders. The Note Agreement requires semi-annual principal payments of $3.6 million plus interest through December 1, 2014. As of June 29, 2006, the outstanding balance on the Note Agreement was $61.4 million. The Company has the option to prepay amounts outstanding under the Note Agreement. Any such prepayment must be for at least 5% of the outstanding amount at the time of prepayment up to 100%. A prepayment fee would be incurred based on the differential between the interest rate in the Note Agreement and .50% over published U.S. treasury securities having a maturity equal to the remaining average life of the prepaid principal amounts.

On July 27, 2006, the Note Agreement was amended to, among other things, increase the interest rate from 4.67% to 5.67% per annum, waive all non-compliance with financial covenants through June 29, 2006, secure the Company’s obligations and modify future financial covenants. Additionally, the Company is required to pay an excess leverage fee of up to an additional 1.00% per annum depending upon its leverage ratio and financial performance.

The terms of the Note Agreement, as amended, include certain restrictive covenants that, among other things, require the Company to maintain certain specified financial ratios, attain minimum quarterly adjusted EBITDA levels ($1.5 million, $5.5 million, $6.25 million and $8.0 million for the four quarters of fiscal 2007), restrict certain investments, indebtedness and capital expenditures and restrict certain cash dividends, redemptions of capital stock and prepayment of certain indebtedness of the Company. EBITDA is calculated in accordance with provisions under the Note Agreement and may be adjusted for certain items of income and expense, including gains and losses on the sale of assets, pension expense and others. The lenders are entitled to require immediate repayment of the Company’s obligations under the Note Agreement in the event the Company defaults on payments required under the Note Agreement, non-compliance with the financial covenants, or upon the occurrence of certain other defaults by the Company under the Note Agreement (including a default under the Bank Credit Facility). The Company expects to be in compliance with all restrictive covenants under the Note Agreement for the next twelve months.

The Company’s unfavorable operating results have caused non-compliance with certain restrictive covenants under its financing facilities throughout fiscal 2006. Specifically, the Company failed to achieve the minimum trailing fiscal four quarters EBITDA requirement, the maximum allowable funded debt to twelve-month EBITDA ratio, the minimum fixed charge coverage ratio and the monthly minimum working capital requirement under the Prior Bank Credit Facility and the Note Agreement for the second and third quarters of fiscal 2006 and at June 29, 2006. In July 2006, the Company entered into the Bank Credit Facility whereby the lenders waived all non-compliance with financial covenants under the terms of the Prior Bank Credit Facility through June 29, 2006. The Note Agreement was also amended to, among other things, waive all non-compliance with financial covenants through June 29, 2006, increase the interest rate from 4.67% to 5.67% per annum, secure the Company’s obligations and modify future financial covenants.

The Company entered into a Security Agreement with the lenders under the Bank Credit Facility (the “Lenders”) and the noteholders under the Note Agreement (the “Noteholders”) whereby the Company granted collateral interests in certain of the Company’s assets including, but not limited to, accounts receivable, inventories and equipment to the Lenders and Noteholders. The Company also granted

liens against the Company’s real property located in Elgin, Illinois and Gustine, California to the Lenders and Noteholders.

As of June 29, 2006, the Company had $5.9 million in aggregate principal amount of industrial development bonds outstanding, which was originally used to finance the acquisition, construction and equipping of the Company’s Bainbridge, Georgia facility. The bonds bear interest payable semiannually at 4.55% (which was reset on June 1, 2006) through May 2011. On June 1, 2011, and on each subsequent interest reset date for the bonds, the Company is required to redeem the bonds at face value plus any accrued and unpaid interest, unless a bondholder elects to retain his or her bonds. Any bonds redeemed by the Company at the demand of a bondholder on the reset date are required to be remarketed by the underwriter of the bonds on a “best efforts” basis. Funds for the redemption of bonds on the demand of any bondholder are required to be obtained from the following sources in the following order of priority: (i) funds supplied by the Company for redemption; (ii) proceeds from the remarketing of the bonds; (iii) proceeds from a drawing under the IDB Letter of Credit; or (iv) in the event funds from the foregoing sources are insufficient, a mandatory payment by the Company. Drawings under the IDB Letter of Credit to redeem bonds on the demand of any bondholder are payable in full by the Company upon demand of the lenders under the Bank Credit Facility. In addition, the Company is required to redeem the bonds in varying annual installments, ranging from $0.3 million in fiscal 2007 to $0.8 million in fiscal 2017. The Company is also required to redeem the bonds in certain other circumstances; for example, within 180 days after any determination that interest on the bonds is taxable. The Company has the option, subject to certain conditions, to redeem the bonds at face value plus accrued interest, if any.

The Company expects to comply with the financial covenants under its financing arrangements for the next twelve months. Non-compliance with restrictive covenants allows the lenders to demand immediate payment. While the Company believes that the lenders would provide waivers in the event of non-compliance with restrictive covenants and/or renegotiate the terms of the financing arrangements, there can be no assurance that waivers would be received or that the lenders would be willing to renegotiate on terms acceptable to the Company. If waivers could not be obtained or acceptable terms renegotiated, the Company believes it would be able to secure alternative financing such as through conventional mortgages, though there can be no assurance that alternative financing could be obtained or the terms of such financing. The inability of the Company to comply with its financial covenants, obtain waivers for non-compliance and obtain alternative financing would have a material adverse effect on the Company’s financial position, results of operations and cash flows.

Capital Expenditures

The Company made $44.8 million of capital expenditures in fiscal 2006 compared to approximately $63.8 million in fiscal 2005. The decrease is due primarily to the $48.0 million purchase of the Current Site and $6.1 million of remediation costs under the Development Agreement incurred in fiscal 2005. $34.5 million of the fiscal 2006 capital expenditures related to the expansion and modification to the Current Site. The Company expects to incur an additional $25 — $30 million on the facility consolidation project from fiscal 2007 to the expected completion date of December 2008. The total projected cost of the facility consolidation project is now estimated at approximately $110 million, which is $15 million higher than original estimates. Capital expenditures for fiscal 2007 that are unrelated to the facility consolidation project are not expected to exceed $10 million.

In fiscal 2005, in order to facilitate the facility consolidation project, the Company’s Board of Directors appointed an independent board committee to explore alternatives with respect to the Company’s existing leases for the properties owned by two related party partnerships. After negotiations with the partnerships, the independent committee approved a proposed transaction and, subsequently, the Company entered into various agreements with the partnerships. The agreements provided for an overall transaction whereby: (i) the current related party leases were terminated without penalty to the Company; (ii) the Company sold the portion of the Busse Road property that it owned to the partnerships for $2.0 million; and (iii) the Company sold its Selma, Texas properties to the partnerships for $14.3 million (an estimate of fair value which also slightly exceeds its carrying value) and leased the properties back. The sale price and rental rate for the Selma, Texas properties were determined by an independent appraiser to be at fair market value. The lease for the Selma, Texas properties has a ten-year term at a fair market value rent, with three five-year renewal options. In addition, the Company has an option to repurchase the Selma property from the partnerships after five years at 95% (100% in

certain circumstances) of the then fair market value, but not to be less than the $14.3 million purchase price. The sale of the Selma, Texas properties at fair market value to the related party partnerships was consummated during the first quarter of fiscal 2007.

In March 2006, the Company and the related party partnership that owned a facility located in Des Plaines, Illinois entered in to an agreement whereby the lease was terminated at no cost to the Company upon the sale of the facility by the partnership. The facility was sold by the partnership to a third party in March 2006. A gain of $0.9 million was recorded as a reduction to administrative expenses in the third quarter of fiscal 2006 for the termination of this capital lease.

The portion of the Busse Road property that the Company owned was sold to the related party partnership in July 2006 and the related lease obligation was terminated without penalty to the Company. The related party partnership then sold the Busse Road property to a third party, which is leasing back the property to the Company at fair market value for the time period necessary to convert operations to the Current Site. Proceeds received from the sales exceeded the Company’s carrying value of these assets.

In July 2006, the Company also sold its Arlington Heights and Arthur Avenue facilities to a third party for a combined $7.8 million and is leasing back the facilities for the time period necessary to convert operations to the Current Site. Proceeds received from the sale exceeded the carrying value of the asset.

Capital Resources

As of June 29, 2006, the Company had $26.1 million of available credit under the Prior Bank Credit Facility. In July 2006, the Company received $9.8 million proceeds from the sale of its owned Chicago area facilities that are now being leased by the Company until operations are converted to the Current Site. In September 2006, the Company received $14.3 million in proceeds from the sale and leaseback at fair market value of its Selma, Texas facility to the related party partnerships. Scheduled long-term debt payments, including interest for fiscal 2007 are $15.9 million. Scheduled operating lease payments are $2.6 million.

Contractual Cash Obligations

At June 29, 2006, the Company had the following contractual cash obligations for long-term debt (including scheduled interest payments), capital leases, operating leases, the revolving credit facility and purchase obligations (amounts in thousands):

						Less
						Than 1												More Than 5
		Total				Year				1-3 Years				3-5 Years				Years
Long-term debt		$	89,426			$	15,928			$	21,235			$	24,119			$	28,144
Capital lease obligations			133				25				50				50				8
Minimum operating lease commitments			5,224				2,590				2,351				263				20
Revolving credit facility borrowings			64,341				—				—				64,341				—
Purchase obligations			101,925				101,925				—				—				—
Total contractual cash obligations		$	261,049			$	120,468			$	23,636			$	88,773			$	28,172

The purchase obligations include $94,539 of inventory purchase commitments and $7,386 of construction costs related to the Company’s facility consolidation project.

Critical Accounting Policies

The accounting policies as disclosed in the Notes to Consolidated Financial Statements are applied in the preparation of the Company’s financial statements and accounting for the underlying transactions and balances. The policies discussed below are considered by the Company’s management to be critical for an understanding of the Company’s financial statements because the application of these policies places the most significant demands on management’s judgment, with financial reporting results relying on estimation regarding the effect of matters that are inherently uncertain. Specific risks, if applicable, for these critical accounting policies are described in the following paragraphs. For a detailed discussion on the application of these and other accounting policies, see Note 2 of the Notes to Consolidated Financial Statements.

Preparation of this Annual Report on Form 10-K requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the Company’s financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, title has transferred (based upon terms of shipment), price is fixed, delivery occurs and collection is reasonably assured. The Company sells its products under some arrangements which include customer contracts which fix the sales price for periods typically of up to one year for some industrial customers and through specific programs consisting of promotion allowances, volume and customer rebates and marketing allowances, among others, to consumer and food service customers. Reserves for these programs are established based upon the terms of specific arrangements. Revenues are recorded net of rebates and promotion and marketing allowances. Revenues are also recorded net of customer deductions which are provided for based on past experiences. The Company’s net accounts receivable includes an allowance for customer deductions. While customers do have the right to return products, past experience has demonstrated that product returns have been insignificant. Provisions for returns are reflected as a reduction in net sales and are estimated based upon customer specific circumstances.

Inventories

Inventories, which consist principally of inshell bulk-stored nuts, shelled nuts and processed and packaged nut products, are stated at the lower of cost (first-in, first-out) or market. Inventory costs are reviewed each quarter. Fluctuations in the market price of peanuts, pecans, walnuts, almonds and other nuts may affect the value of inventory and gross profit and gross profit margin. When expected market sales prices move below costs, the Company records adjustments to write down the carrying values of inventories to fair market value. The results of the Company’s shelling process can also result in changes to its inventory costs, for example based upon actual versus expected crop yields. The Company maintains significant inventories of bulk-stored inshell pecans, walnuts and peanuts. Quantities of inshell bulk-stored nuts are determined based on the Company’s inventory systems and are subject to quarterly physical verification techniques including observation, weighing and other methods. The quantities of each crop year bulk-stored nut inventories are generally shelled out over a ten to fifteen month period, at which time revisions to any estimates are also recorded.

Impairment of Long-Lived Assets

The Company reviews long-lived assets to assess recoverability from projected undiscounted cash flows whenever events or changes in facts and circumstances indicate that the carrying value of the assets may not be recoverable, for example, in connection with the Company’s facility consolidation project. An impairment loss is recognized in operating results when future undiscounted cash flows are less than the assets’ carrying value. The impairment loss would adjust the carrying value to the assets’ fair value. To date the Company has not recorded any impairment charges.

Introductory Funds

The ability to sell to certain retail customers often requires upfront payments to be made by the Company. Such payments are frequently made pursuant to contracts that stipulate the term of the

33

agreement, the quantity and type of products to be sold and any exclusivity requirements. If appropriate, the cost of these payments is recorded as an asset and is amortized on a straight-line basis over the term of the contract. All contracts that are capitalized include refundability provisions. The Company expenses payments if no written arrangement exists.

Related Party Transactions

As discussed in Notes 6, 8 and 13 of the Notes to Consolidated Financial Statements, the Company leases space from related parties and transacts with other related parties in the normal course of business. The Company believes that these related party transactions are conducted on terms that are competitive with other non-related entities at the time the transactions are entered into.

Recent Accounting Pronouncements

In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143.” FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing or method of settlement is conditional upon a future event that may or may not be within the control of the entity. FIN 47 became effective in fiscal 2006 for the Company. The adoption of FIN 47 did not have a material impact on the Company’s financial position, results of operations and cash flows.

In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. This statement becomes effective for accounting changes and corrections of errors made in fiscal 2007, but early adoption is permitted. Adoption of SFAS 154 is not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. The Interpretation provides clarification related to accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation is effective for fiscal 2007. Adoption of FASB Interpretation No. 48 is not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 becomes effective in fiscal 2007. Adoption of SAB 108 is not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

Forward Looking Statements

The statements contained in this Annual Report on Form 10-K, and in the Chairman’s letter to stockholders accompanying the Annual Report on Form 10-K delivered to stockholders, that are not historical (including statements concerning the Company’s expectations regarding market risk) are “forward looking statements”. These forward looking statements, which generally are followed (and therefore identified) by a cross reference to Item 1A — “Risk Factors” or are identified by the use of forward looking words and phrases such as “intends”, “may”, “believes” and “expects”, represent the Company’s present expectations or beliefs concerning future events. The Company cautions that such statements are qualified by important factors, including the factors described under Item 1A — “Risk Factors”, that could cause actual results to differ materially from those in the forward looking statements, as well as the timing and occurrence (or nonoccurrence) of transactions and events which may be subject to circumstances beyond the Company’s control. Consequently, results actually achieved may differ materially from the expected results included in these statements.

Item 7A — Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to the impact of changes in interest rates and to commodity prices of raw material purchases. The Company has not entered into any arrangements to hedge against changes in market interest rates, commodity prices or foreign currency fluctuations.

The Company is unable to engage in hedging activity related to commodity prices, since there are no established futures markets for nuts. Approximately 29% of nut purchases for fiscal 2006 were made from foreign countries, and while these purchases were payable in U.S. dollars, the underlying costs may fluctuate with changes in the value of the U.S. dollar relative to the currency in the foreign country.

The Company is exposed to interest rate risk on the Bank Credit Facility, its only variable rate credit facility because the Company has not entered into any hedging instruments which fix the floating rate. A hypothetical 10% adverse change in weighted-average interest rates would have had an immaterial impact on the Company’s net income and cash flows from operating activities.

Item 8 — Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of John B. Sanfilippo & Son, Inc:

We have completed integrated audits of John B. Sanfilippo & Son, Inc.’s June 29, 2006 and June 30, 2005 consolidated financial statements and of its internal control over financial reporting as of June 29, 2006, and an audit of its June 24, 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of John B. Sanfilippo & Son, Inc. and its subsidiary at June 29, 2006 and June 30, 2005, and the results of their operations and their cash flows for each of the three years in the period ended June 29, 2006 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share Based Payment, effective July 1, 2005.

Internal control over financial reporting

Also, in our opinion, management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that the Company maintained effective internal control over financial reporting as of June 29, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 29, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the

maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Chicago, Illinois
September 27, 2006

JOHN B. SANFILIPPO & SON, INC.
CONSOLIDATED BALANCE SHEETS
June 29, 2006 and June 30, 2005
(dollars in thousands, except per share amounts)

		June 29,				June 30,
		2006				2005
ASSETS
CURRENT ASSETS:
Cash		$	2,232			$	1,885
Accounts receivable, less allowances of $3,766 and $3,729			35,481				39,002
Inventories			164,390				217,624
Income taxes receivable			6,427				—
Deferred income taxes			2,984				1,742
Prepaid expenses and other current assets			2,248				1,663
TOTAL CURRENT ASSETS			213,762				261,916
PROPERTY, PLANT AND EQUIPMENT:
Land			10,299				9,333
Buildings			63,438				66,288
Machinery and equipment			109,391				104,703
Furniture and leasehold improvements			5,440				5,437
Vehicles			2,897				3,070
Construction in progress			53,811				12,771
			245,276				201,602
Less: Accumulated depreciation			117,094				112,599
			128,182				89,003
Rental investment property, less accumulated depreciation of $924 and $128			27,969				28,766
TOTAL PROPERTY, PLANT AND EQUIPMENT			156,151				117,769
Intangible asset – minimum retirement plan liability			6,197				—
Cash surrender value of officers’ life insurance and other assets			5,440				4,468
Property held for sale/Development agreement			6,806				6,802
Goodwill			1,242				1,242
Brand name, less accumulated amortization of $6,072 and $5,645			1,848				2,275
TOTAL ASSETS		$	391,446			$	394,472

The accompanying notes are an integral part of these consolidated financial statements.

JOHN B. SANFILIPPO & SON, INC.
CONSOLIDATED BALANCE SHEETS
June 29, 2006 and June 30, 2005
(dollars in thousands, except per share amounts)

		June 29,				June 30,
		2006				2005
LIABILITIES & STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving credit facility borrowings		$	64,341			$	66,561
Current maturities of long-term debt, including related party debt of $3,033 and $703			12,304				10,611
Accounts payable, including related party payables of $140 and $1,113			27,944				29,908
Book overdraft			14,301				3,047
Accrued payroll and related benefits			5,930				5,696
Accrued workers’ compensation			5,619				3,564
Other accrued expenses			5,293				3,970
Income taxes payable			—				795
TOTAL CURRENT LIABILITIES			135,732				124,152
LONG-TERM LIABILITIES:
Long-term debt, less current maturities, including related party debt of $0 and $3,929			59,785				67,002
Retirement plan			7,654				—
Deferred income taxes			5,885				7,143
TOTAL LONG-TERM LIABILITIES			73,324				74,145
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Class A Common Stock, convertible to Common Stock on a per share basis, cumulative voting rights of ten votes per share, $.01 par value; 10,000,000 shares authorized, 2,597,426 shares issued and outstanding			26				26
Common Stock, noncumulative voting rights of one vote per share, $.01 par value; 17,000,000 shares authorized, 8,112,099 and 8,100,349 shares issued and outstanding			81				81
Capital in excess of par value			99,820				99,164
Retained earnings			83,667				98,108
Treasury stock, at cost; 117,900 shares of Common Stock			(1,204	)			(1,204	)
TOTAL STOCKHOLDERS’ EQUITY			182,390				196,175
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY		$	391,446			$	394,472

The accompanying notes are an integral part of these consolidated financial statements.

JOHN B. SANFILIPPO & SON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended June 29, 2006, June 30, 2005 and June 24, 2004
(dollars in thousands, except for earnings per share)

		Year Ended				Year Ended				Year Ended
		June 29, 2006				June 30, 2005				June 24, 2004
Net sales		$	579,564			$	581,729			$	520,811
Cost of sales			541,909				503,300				428,967
Gross profit			37,655				78,429				91,844
Selling expenses			39,947				39,417				37,288
Administrative expenses			14,212				12,425				13,492
Total selling and administrative expenses			54,159				51,842				50,780
(Loss) income from operations			(16,504	)			26,587				41,064
Other income (expense):
Interest expense ($583, $699 and $775 to related parties)			(6,516	)			(3,998	)			(3,434	)
Debt extinguishment fees			—				—				(972	)
Rental and miscellaneous (expense) income, net			(610	)			1,179				440
Total other expense, net			(7,126	)			(2,819	)			(3,966	)
(Loss) income before income taxes			(23,630	)			23,768				37,098
Income tax (benefit) expense			(9,189	)			9,269				14,468
Net (loss) income		$	(14,441	)		$	14,499			$	22,630
(Loss) earnings per common share:
Basic		$	(1.36	)		$	1.37			$	2.35
Diluted		$	(1.36	)		$	1.35			$	2.32
Weighted average shares outstanding:
Basic			10,584,764				10,568,400				9,648,456
Diluted			10,584,764				10,720,641				9,758,769

The accompanying notes are an integral part of these consolidated financial statements.

JOHN B. SANFILIPPO & SON, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the years ended June 29, 2006, June 30, 2005 and June 24, 2004
(dollars in thousands)

																		Capital in
		Class A Common Stock								Common Stock								Excess of				Retained				Treasury
		Shares				Amount				Shares				Amount				Par Value				Earnings				Stock				Total
Balance, June 26, 2003			3,667,426			$	37				5,775,564			$	58			$	58,911			$	60,979			$	(1,204	)		$	118,781
Net income and comprehensive income																							22,630								22,630
Stock option exercises											83,660				1				488												489
Tax benefit of stock option exercises																			856												856
Conversion of Class A Common Stock			(1,070,000	)			(11	)			1,070,000				11																—
Issuance of Common Stock											1,150,000				11				38,593												38,604
Balance, June 24, 2004			2,597,426			$	26				8,079,224			$	81			$	98,848			$	83,609			$	(1,204	)		$	181,360
Net income and comprehensive income																							14,499								14,499
Stock option exercises											21,125								198												198
Tax benefit of stock option exercises																			118												118
Balance, June 30, 2005			2,597,426			$	26				8,100,349			$	81			$	99,164			$	98,108			$	(1,204	)		$	196,175
Net loss and comprehensive loss																							(14,441	)							(14,441	)
Stock option exercises											11,750								71												71
Tax benefit of stock option exercises																			39												39
Stock-based compensation expense																			546												546
Balance, June 29, 2006			2,597,426			$	26				8,112,099			$	81			$	99,820			$	83,667			$	(1,204	)		$	182,390

The accompanying notes are an integral part of these consolidated financial statements.

JOHN B. SANFILIPPO & SON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended June 29, 2006, June 30, 2005 and June 24, 2004
(dollars in thousands)

		Year Ended				Year Ended				Year Ended
		June 29, 2006				June 30, 2005				June 24, 2004
Cash flows from operating activities:
Net (loss) income		$	(14,441	)		$	14,499			$	22,630
Depreciation and amortization			10,000				10,501				11,190
Gain related to termination of capital lease with related party			(940	)			—				—
Loss (gain) on disposition of properties			141				(31	)			24
Deferred income tax (benefit) expense			(2,500	)			336				3,359
Tax benefit of stock option exercises			—				118				856
Stock-based compensation expense			546				—				—
Change in current assets and current liabilities:
Accounts receivable, net			3,521				(3,452	)			(6,408	)
Inventories			53,234				(90,165	)			(15,443	)
Prepaid expenses and other current assets			(585	)			440				89
Accounts payable			(5,870	)			13,520				2,730
Accrued expenses			3,612				(2,497	)			3,028
Income taxes receivable/payable			(7,222	)			1,738				(474	)
Other operating assets			1,455				(2,360	)			(1,356	)
Net cash provided by (used in) operating activities			40,951				(57,353	)			20,225
Cash flows from investing activities:
Purchases of property, plant and equipment			(10,244	)			(8,628	)			(6,880	)
Facility expansion costs			(34,520	)			(48,997	)			(3,610	)
Development agreement costs			(4	)			(6,143	)			(659	)
Proceeds from disposition of assets			24				135				1
Cash surrender value of officers’ life insurance			(287	)			—				—
Net cash used in investing activities			(45,031	)			(63,633	)			(11,148	)
Cash flows from financing activities:
Borrowings under revolving credit facility			147,009				149,879				152,682
Repayments of revolving credit borrowings			(149,229	)			(88,587	)			(177,115	)
Issuance of long-term debt			—				65,000				—
Debt issuance costs			—				459				—
Principal payments on long-term debt			(4,717	)			(1,284	)			(26,519	)
Increase/(decrease) in book overdraft			11,254				(4,879	)			2,419
Issuance of Common Stock under option plans			71				198				489
Net proceeds from issuance of Common Stock			—				—				38,604
Tax benefit of stock option exercises			39				—				—
Net cash provided by (used in) financing activities			4,427				120,786				(9,440	)
Net increase (decrease) in cash			347				(200	)			(363	)
Cash:
Beginning of period			1,885				2,085				2,448
End of period		$	2,232			$	1,885			$	2,085
Supplemental disclosures of cash flow information:
Interest paid, net of interest capitalized		$	6,217			$	3,351			$	3,999
Income taxes paid, excluding refunds of $2,193, $34 and $80			2,689				6,812				10,807
Capital lease obligations incurred			133				—				—

The accompanying notes are an integral part of these consolidated financial statements.

JOHN B. SANFILIPPO & SON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share data)

NOTE 1 — NATURE OF BUSINESS

John B. Sanfilippo & Son, Inc. is one of the leading processors and marketers of tree nuts and peanuts in the United States. These nuts are sold under a variety of private labels and under the Company’s Fisher, Evon’s, Flavor Tree, Sunshine Country, Texas Pride and Tom Scott brand names. The Company also markets and distributes, and in most cases manufactures or processes, a diverse product line of food and snack items, including peanut butter, candy and confections, natural snacks and trail mixes, sunflower seeds, corn snacks, sesame sticks and other sesame snack products. The Company has plants located throughout the United States. Revenues are generated from sales to a variety of customers, including several major retailers and the U.S. government which are made on an unsecured basis.

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The consolidated financial statements include the accounts of John B. Sanfilippo & Son, Inc., JBSS Properties, LLC and JBS International, Inc., a previously wholly-owned subsidiary, which was dissolved in November, 2004 (collectively, the “Company”). Certain prior years’ amounts have been reclassified to conform to the current year’s presentation which provides more detail of certain financial statement line items. The Company’s fiscal year ends on the last Thursday of June each year, and typically consists of fifty-two weeks (four thirteen week quarters), but the fiscal year ended June 30, 2005 consisted of fifty-three weeks, with the fourth quarter containing fourteen weeks.

During fiscal 2006 the Company incurred net losses of $14,441. Major factors contributing to the loss were (i) reduced demand for the Company’s products due to higher tree nut costs, (ii) losses on almond sales due to a substantial decline in market costs after the procurement cost of almonds was fixed and (iii) a decline in production volume resulting in an inability to leverage fixed costs. The Company expects to achieve operational profitability through the implementation of a new procurement plan to match nut costs with selling opportunities, the procurement of nuts at lower costs and increased sales and production volumes.

The operating losses in fiscal 2006 caused the Company to violate various financial covenants under its Prior Bank Credit Facility and Note Agreement (Notes 5 and 6), both of which were amended subsequent to year end. The Company has obtained waivers for these violations during 2006. The amended credit agreements waived all non compliance that existed and also contain new financial covenants for fiscal 2007. The Company expects to comply with the financial covenants under its financing arrangements for the next twelve months. Non-compliance with restrictive covenants allows the lenders to demand immediate payment. While the Company believes that the lenders would provide waivers in the event of non-compliance with restrictive covenants and/or renegotiate the terms of the financing arrangements, there can be no assurance that waivers would be received or that the lenders would be willing to renegotiate on terms acceptable to the Company. If waivers could not be obtained or acceptable terms renegotiated, the Company believes it would be able to secure alternative financing such as through conventional mortgages, though there can be no assurance that alternative financing could be obtained or the terms of such financing. The inability of the Company to comply with its financial covenants, obtain waivers for non-compliance and obtain alternative financing would have a material adverse effect on the Company’s financial position, results of operations and cash flows.

Management Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include reserves for customer deductions, allowances for doubtful accounts, the quantity and valuation

of bulk inventories, accruals for workers’ compensation claims and various other accrual accounts. Actual results could differ from those estimates.

Accounts Receivable

Accounts receivable are stated at the amounts charged to customers, less: (i) allowances for doubtful accounts, and (ii) reserves for estimated cash discounts and customer deductions. The allowance for doubtful accounts is calculated by specifically identifying customers that are credit risks. Account balances are charged off against the allowance when the Company feels it is probable the receivable will not be recovered. The reserve for estimated cash discounts is based on actual payments. The reserve for customer deductions represents known customer short payments and an estimate of future credit memos that will be issued to customers related to rebates and allowances for marketing and promotions based on historical experience.

Inventories

Inventories, which consist principally of inshell bulk-stored nuts, shelled nuts and processed and packaged nut products, are stated at the lower of cost (first-in, first-out) or market. Inventory costs are reviewed each quarter. Fluctuations in the market price of peanuts, pecans, walnuts, almonds and other nuts may affect the value of inventory and gross profit and gross profit margin. When expected market sales prices move below costs, the Company records adjustments to write down the carrying values of inventories to fair market value. The results of the Company’s shelling process can also result in changes to its inventory costs, for example based upon actual versus expected crop yields. The Company maintains significant inventories of bulk-stored inshell pecans, walnuts and peanuts. Quantities of inshell bulk-stored nuts are determined based on the Company’s inventory systems and are subject to quarterly physical verification techniques including observation, weighing and other methods. The quantities of each crop year bulk-stored nut inventories are generally shelled out over a ten to fifteen month period, at which time revisions to any estimates are also recorded.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Major improvements that extend the useful life are capitalized and charged to expense through depreciation. Repairs and maintenance are charged to expense as incurred. The cost and accumulated depreciation of assets sold or retired are removed from the respective accounts, and any gain or loss is recognized currently in operating income. Cost is depreciated using the straight-line method over the following estimated useful lives: buildings — 30 to 40 years, machinery and equipment — 5 to 10 years, furniture and leasehold improvements — 5 to 10 years and vehicles — 3 to 5 years. Depreciation expense was $9,207, $8,697 and $8,637 for the years ended June 29, 2006, June 30, 2005 and June 24, 2004, respectively. The Company capitalizes interest costs on its projects. The amount of interest capitalized was $1,808 for the year ended June 29, 2006 and was not material for the years ended June 30, 2005 and June 24, 2004.

Certain lease transactions with related parties relating to the financing of buildings are accounted for as capital leases, whereby the present value of future rental payments, discounted at the interest rate implicit in the lease, is recorded as a liability. See Note 6. A corresponding amount is capitalized as the cost of the assets and is depreciated on a straight-line basis over the estimated lives of the assets or over the lease terms which range from 20 to 30 years, whichever is shorter. The cost and accumulated depreciation of capitalized lease assets were $6,442 and $5,434, respectively at June 29, 2006, and $9,520 and $8,254 at June 30, 2005, respectively.

Long-Lived Assets

The Company reviews long-lived assets to assess recoverability from projected undiscounted cash flows whenever events or changes in facts and circumstances indicate that the carrying value of the assets may not be recoverable. An impairment loss is recognized in operating results when future undiscounted cash flows are less than the assets’ carrying value. The impairment loss would adjust the carrying value to the assets’ fair value. To date the Company has not recorded any impairment charges. In connection with the Company’s facility consolidation project, management performed a review of assets in its existing Chicago area facilities. There was no impairment of these assets, however the useful lives of certain assets were adjusted to the remaining time that the assets are expected to be utilized.

Facility Consolidation Project

In April 2005, the Company acquired property to be used for its facility consolidation project (the “Current Site”). Two buildings are located on the Current Site, one of which is an office building of which 41.5% is being leased back to the seller for a minimum period of three years. The Company is actively seeking tenants to lease the remaining portion of the office building. The other building, a warehouse, has been expanded and is being modified to be used for the Company’s principal processing facility and headquarters. The warehouse building was leased back to the seller for a one and one-half month period in fiscal 2005. The allocation of the purchase price to the two buildings was determined through a third party appraisal. The value assigned to the office building is included in rental investment property on the balance sheet. The value assigned to the warehouse building is included in property, plant and equipment.

The net rental income from the office building and the warehouse building, included in rental and miscellaneous expense (income), net, was an expense of $1,115 for the year ended June 29, 2006 and income of $503 for the year ended June 30, 2005. Gross rental income was $1,665 and $927 for the years ended June 29, 2006 and June 30, 2005, respectively. Future gross rental income under the office building operating lease is as follows for the years ending:

June 28, 2007		$	1,536
June 26, 2008			1,216
		$	2,752

Prior to acquiring the Current Site, the Company and certain related party partnerships entered into a Development Agreement with the City of Elgin, Illinois (the “Development Agreement”) for the development and purchase of the land where a new facility could be constructed (the “Original Site”). The Development Agreement provided for certain conditions, including but not limited to the completion of environmental and asbestos remediation procedures, the inclusion of the property in the Elgin enterprise zone and the establishment of a tax incremental financing district covering the property. The Company fulfilled its remediation obligations under the Development Agreement during fiscal 2005. On February 1, 2006, the Company and the related party partnerships entered into a Termination Agreement with the City of Elgin whereby the Development Agreement was terminated and the Company and the City of Elgin (the “City”) became obligated to convey the property to the Company and the partnerships within thirty days. The partnerships subsequently agreed to convey their respective interests in the Original Site to the Company by quitclaim deed without consideration. On March 28, 2006, JBSS Properties, LLC (“JBSS LLC”), a wholly owned subsidiary of the Company, acquired title to the Original Site by quitclaim deed, and JBSS LLC entered into an Assignment and Assumption Agreement (the “Agreement”) with the City. Under the terms of the Agreement, the City assigned to the Company all the City’s remaining rights and obligations under the Development Agreement. The Company is currently marketing the Original Site to potential buyers. The Company’s costs under the Development Agreement totaling $6,806 and $6,802 at June 29, 2006 and June 30, 2005, respectively, are recorded as “Other Assets”. The Company has reviewed the asset under the Development Agreement for realization, and concluded that no adjustment of the carrying value was required as of June 29, 2006 and June 30, 2005.

In fiscal 2005, in order to facilitate the facility consolidation project, the Company’s Board of Directors appointed an independent board committee to explore alternatives with respect to the Company’s existing leases for the properties owned by two related party partnerships. After negotiations with the partnerships, the independent committee approved a proposed transaction and, subsequently, the Company entered into various agreements with the partnerships. The agreements provided for an overall transaction whereby: (i) the current related party leases were terminated without penalty to the Company; (ii) the Company sold the portion of the Busse Road property that it owned to the partnerships for $2.0 million; and (iii) the Company sold its Selma, Texas properties to the partnerships for $14.3 million (an estimate of fair value which also slightly exceeds its carrying value) and leased the properties back. The sale price and rental rate for the Selma, Texas properties were determined by an

independent appraiser to be at fair market value. The lease for the Selma, Texas properties has a ten-year term at a fair market value rent, with three five-year renewal options. In addition, the Company has an option to repurchase the Selma property from the partnerships after five years at 95% (100% in certain circumstances) of the then fair market value, but not to be less than the $14.3 million purchase price. The sale of the Selma, Texas properties at fair market value to the related party partnerships was consummated during the first quarter of fiscal 2007. The Company expects the Selma, Texas lease transaction to be accounted for similar to a capital lease.

In March 2006, the Company and the related party partnership that owned a facility located in Des Plaines, Illinois entered in to an agreement whereby the lease was terminated at no cost to the Company upon the sale of the facility by the partnership. The facility was sold by the partnership to a third party in March 2006. A gain of $940 was recorded as a reduction to administrative expenses in the third quarter of fiscal 2006 for the termination of this capital lease.

Subsequent to June 29, 2006, the portion of the Busse Road property that the Company owned was sold to the related party partnership and the related lease obligation was terminated without penalty to the Company. The related party partnership then sold the Busse Road property to a third party, which is leasing back the property to the Company for the time period necessary to convert operations to the Current Site. Proceeds received from the sales exceeded the Company’s carrying value of these assets.

In July 2006, the Company also sold its Arlington Heights and Arthur Avenue facilities to a third party and is leasing back the facilities at fair market value for the time period necessary to convert operations to the Current Site. Proceeds received from the sale exceeded the carrying value of the assets.

Introductory Funds

The ability to sell to certain retail customers often requires upfront payments to be made by the Company. Such payments are frequently made pursuant to contracts that stipulate the term of the agreement, the quantity and type of products to be sold and any exclusivity requirements. If appropriate, the cost of these payments is recorded as an asset and is amortized over the term of the contract. The Company expenses payments if no written arrangement exists and amounts are not recoverable in the event of customer cancellation. Total introductory funds included in other assets and prepaid expenses and other current assets were $282 at June 29, 2006 and $710 at June 30, 2005. Amortization expense, which is recorded as a reduction in net sales, was $367, $1,173 and $1,820 for the years ended June 29, 2006, June 30, 2005 and June 24, 2004, respectively.

Goodwill and Brand Name

Intangible asset consists of the Fisher brand name that was acquired in 1995. The Company is amortizing the brand name over a fifteen-year period on a straight-line basis with no estimated residual value. Annual amortization expense for each of the next four fiscal years is expected to be $427, with the remaining amount of $140 amortized in fiscal 2011. Amortization expense was approximately $427, $426 and $427 for the years ended June 29, 2006, June 30, 2005 and June 24, 2004, respectively.

Goodwill represents the excess of the purchase price over the fair value of the net assets from the Company’s acquisition of Sunshine Nut Co., Inc. which occurred in 1992.

The Company does not amortize goodwill and is required to review the carrying value of goodwill for impairment at least annually or if circumstances indicate that the carrying amount of the asset may not be recoverable. If an impairment were determined to exist, any impairment loss would be recorded to adjust the asset’s carrying value to its fair value. Based upon the results of management’s impairment testing, no adjustment to the carrying amount of is required.

Fair Value of Financial Instruments

Based on borrowing rates presently available to the Company under similar borrowing arrangements, the Company believes the recorded amount of its long-term debt obligations approximates fair market value. The carrying amount of the Company’s other financial instruments approximates their estimated fair value based on market prices for the same or similar type of financial instruments.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, title has transferred (based upon terms of shipment), price is fixed, delivery occurs and collection is reasonably assured. The Company sells its products under some arrangements which include customer contracts which fix the sales price for periods, typically of up to one year, for some industrial customers and through specific programs consisting of promotion allowances, volume and customer rebates and marketing allowances, among others, to consumer and food service customers. Revenues are recorded net of rebates and promotion and marketing allowances. While customers do have the right to return products, past experience has demonstrated that product returns have been insignificant. Provisions for returns are reflected as a reduction in net sales and are estimated based upon customer specific circumstances. Billings for shipping and handling costs are included in revenues.

Significant Customers

The highly competitive nature of the Company’s business provides an environment for the loss of customers and the opportunity to gain new customers. Net sales to Wal-Mart Stores, Inc. represented approximately 19%, 18% and 19% of the Company’s net sales for the years ended June 29, 2006, June 30, 2005 and June 24, 2004, respectively. Net accounts receivable from Wal-Mart Stores, Inc. were $4,444 and $4,225 at June 29, 2006 and June 30, 2005, respectively.

Promotion and Advertising Costs

Promotion allowances, customer rebates and marketing allowances are recorded at the time revenue is recognized and are reflected as reductions in sales. Annual volume rebates are estimated based upon projected volumes for the year, while promotion and marketing allowances are recorded based upon terms of the actual arrangements. Coupon incentives have not been significant and are recorded at the time of distribution. The Company expenses the costs of advertising, which include newspaper and other advertising activities, as incurred. Advertising expenses for the years ended June 29, 2006, June 30, 2005 and June 24, 2004 were $2,297, $1,896 and $1,344, respectively.

Shipping and Handling Costs

Shipping and handling costs, which include freight and other expenses to prepare finished goods for shipment, are included in selling expenses. For the years ended June 29, 2006, June 30, 2005 and June 24, 2004, shipping and handling costs totaled $18,767, $19,004 and $16,696, respectively.

Income Taxes

The Company accounts for income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been reported in the Company’s financial statements or tax returns. Such items give rise to differences in the financial reporting and tax basis of assets and liabilities. Any investment tax credits are accounted for by using the flow-through method, whereby the credits are reflected as reductions of tax expense in the year they are recognized in the financial statements. In estimating future tax consequences, the Company considers all expected future events other than changes in tax law or rates.

Segment Reporting

The Company operates in a single reportable operating segment that consists of selling various nut products procured and processed in a vertically integrated manner through multiple distribution channels.

Earnings per Share

Earnings per common share is calculated using the weighted average number of shares of Common Stock and Class A Common Stock outstanding during the period. The following table presents the reconciliation of the weighted average shares outstanding used in computing earnings per share:

		Year Ended				Year Ended				Year Ended
		June 29, 2006				June 30, 2005				June 24, 2004
Weighted average shares outstanding — basic			10,584,764				10,568,400				9,648,456
Effect of dilutive securities:
Stock options			—				152,241				110,313
Weighted average shares outstanding – diluted			10,584,764				10,720,641				9,758,769

All outstanding options were excluded from the calculation of diluted earnings per share for the year ended June 29, 2006 due to the net loss for the year. Also excluded from the computation of diluted earnings per share for the years ended June 30, 2005 and June 24, 2004 were options with exercise prices greater than the average market price of the Common Stock. Total options excluded from the calculation of diluted earnings per share were 324,815, 3,226 and 7,286 for the years ended June 29, 2006, June 30, 2005 and June 24, 2004, respectively. These options had weighted average exercise prices of $13.70, $31.61 and $18.11, respectively.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). This Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees over the requisite service period. FAS 123R eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.

Effective for the first quarter of fiscal 2006, the Company adopted SFAS 123R using the modified prospective method, which requires the Company to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, prior period amounts presented herein have not been restated to reflect the adoption of SFAS 123R.

Prior to the adoption of SFAS 123R, the Company included all tax benefits resulting from the exercise of stock options in operating cash flows in its consolidated statements of cash flows. In accordance with SFAS 123R, for the period beginning with first quarter of fiscal 2006, the Company includes the tax benefits from the exercise of stock options in financing cash flows in its consolidated statement of cash flows.

For the years ended June 30, 2005 and June 24, 2004, the Company accounted for stock-based compensation in accordance with APB 25 and related interpretations using the intrinsic value method, which resulted in no compensation cost for options granted for fiscal 2005 and fiscal 2004. The Company had adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123 (“SFAS 123”) with respect to options granted to employees.

The Company’s reported net income and earnings per share would have changed to the pro forma amounts shown below if compensation cost had been determined based on the fair value at the grant dates in accordance with SFAS Nos. 123 and 148, “Accounting for Stock-Based Compensation”.

		Year Ended				Year Ended
		June 30, 2005				June 24, 2004
Net (loss) income applicable to common stockholders, as reported		$	14,499			$	22,630
Add: Compensation expense included in reported net income			—				—
Deduct: Stock-based employee compensation determined under fair value based method for all awards			353				251
Pro forma net income applicable to common stockholders		$	14,146			$	22,379
Basic earnings per common share:
As reported		$	1.37			$	2.35
Pro forma		$	1.34			$	2.32
Diluted earnings per common share:
As reported		$	1.35			$	2.32
Pro forma		$	1.32			$	2.29

The fair value of each option is estimated on the date of grant using the Black-Scholes pricing model with the following weighted-average assumptions:

		Year Ended				Year Ended				Year Ended
		June 29, 2006				June 30, 2005				June 24, 2004
Average risk-free interest rate			4.1	%			3.3	%			3.6	%
Expected dividend yield			0.0	%			0.0	%			0.0	%
Expected volatility (based on historical)			54.7	%			53.0	%			35.0	%
Expected life (years)			5.7				5.0				5.0

The weighted average fair value per option granted was $9.85, $8.76 and $6.23 for the years ended June 29, 2006, June 30, 2005 and June 24, 2004, respectively.

Comprehensive Loss (Income)

The Company accounts for comprehensive income in accordance with SFAS 130, “Reporting Comprehensive Income”. The Company currently has no components of comprehensive income that are required to be disclosed separately. Consequently, comprehensive income equals net income for all periods presented.

Recent Accounting Pronouncements

In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 47 (“FIN 47”), “Accounting for Conditional Asset Retirement Obligations – an interpretation of FASB Statement No. 143.” FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated. FIN 47 states that a conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing or method of settlement is conditional upon a future event that may or may not be within the control of the entity. FIN 47 became effective in fiscal 2006 for the Company. The adoption of FIN 47 did not have a material impact on the Company’s financial position, results of operations and cash flows.

In May 2005, the FASB issued Statement No. 154, “Accounting Changes and Error Corrections – a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. This statement becomes effective for accounting changes and corrections of errors made in fiscal 2007, but early adoption is permitted. Adoption of SFAS 154 is not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”. The Interpretation provides clarification related to accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation is effective for fiscal 2007. Adoption of FASB Interpretation No. 48 is not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (“SAB 108”) which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 becomes effective in fiscal 2007. Adoption of SAB 108 is not expected to have a material impact on the Company’s financial position, results of operations and cash flows.

NOTE 3 — COMMON STOCK OFFERING

In April 2004, the Company completed an underwritten public offering of an additional 1,150,000 shares of Common Stock at a price of $35.75 per share, or $34.00 per share after the underwriting discount. Total net proceeds to the Company were approximately $38.6 million, after deducting offering costs. The net proceeds were used to prepay long-term debt and to reduce outstanding balances under the Company’s bank credit facility. See Notes 5 and 6.

In conjunction with the offering, an equal number of shares were sold by selling stockholders, all of whom are directors and executive officers of the Company or are related to directors and executive officers of the Company. Prior to the offering, 1,070,000 shares of Class A Stock were converted to Common Stock by the selling stockholders for the offering. The selling stockholders also sold 80,000 shares of previously outstanding Common Stock.

In connection with the offering, the holders of Class A Stock entered into an agreement with the Company under which they have waived their right to convert Class A Stock to Common Stock and agreed not to transfer or otherwise dispose of their shares of Class A Stock in a manner that could result in conversion of such shares into Common Stock pursuant to the Company’s certificate of incorporation. These agreements were required since the number of authorized shares of Common Stock was insufficient to allow for the conversion of all outstanding shares of Class A Stock. These agreements remained in effect until the Company’s certificate of incorporation was amended to increase the number of authorized shares of Common Stock from 10,000,000 to 17,000,000 at the Company’s 2004 annual meeting.

NOTE 4 — INVENTORIES

Inventories consist of the following:

		June 29,				June 30,
		2006				2005
Raw material and supplies		$	77,209			$	99,851
Work-in-process and finished goods			87,181				117,773
Total		$	164,390			$	217,624