SANFILIPPO JOHN B & SON INC - Quarter Report: 2007 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended March 29, 2007


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

Commission File Number 0-19681

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 No.)

1703 North Randall Road Elgin, Illinois		60123-7820

(Address of principal executive offices)		(Zip code)

(847) 289-1800

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.

o Yes þ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One)

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). o Yes þ No

As of May 8, 2007, 8,121,349 shares of the Registrant’s Common Stock, $0.01 par value per share, excluding 117,900 treasury shares, and 2,597,426 shares of the Registrant’s Class A Common Stock, $0.01 par value per share, were outstanding.

JOHN B. SANFILIPPO & SON, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 29, 2007
INDEX


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Consolidated Statements of Operations for the quarters and thirty-nine weeks ended March 29, 2007 and March 30, 2006		3
Consolidated Balance Sheets as of March 29, 2007, June 29, 2006 and March 30, 2006		5
Consolidated Statements of Cash Flows for the thirty-nine weeks ended March 29, 2007 and March 30, 2006		6
Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14

Item 3. Quantitative and Qualitative Disclosures about Market Risk		26

Item 4. Controls and Procedures		27

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		29

Item 1A. Risk Factors		29

Item 6. Exhibits		29

SIGNATURE		30
Section 302 Certification
Section 302 Certification
Section 1350 Certification
Section 1350 Certification

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

JOHN B. SANFILIPPO & SON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except earnings per share)


							For the
	For the Quarter Ended						Thirty-nine Weeks Ended
	March 29,			March 30,			March 29,			March 30,
	2007			2006			2007			2006
Net sales	$	107,009		$	119,004		$	418,456		$	448,739
Cost of sales		101,043			114,506			387,629			414,822

Gross profit		5,966			4,498			30,827			33,917

Operating expenses:
Selling expenses		8,131			9,005			30,202			30,026
Administrative expenses		3,956			3,858			11,917			11,076
Gain related to real estate sales		—			(940	)		(3,047	)		(940	)

Total operating expenses		12,087			11,923			39,072			40,162

Loss from operations		(6,121	)		(7,425	)		(8,245	)		(6,245	)

Other expense:
Interest expense ($281, $150, $614 and $468 to related parties)		(2,861	)		(1,849	)		(6,315	)		(4,513	)
Rental and miscellaneous expense, net		(530	)		(190	)		(626	)		(458	)

Total other expense, net		(3,391	)		(2,039	)		(6,941	)		(4,971	)

Loss before income taxes		(9,512	)		(9,464	)		(15,186	)		(11,216	)
Income tax benefit		(3,330	)		(3,551	)		(5,419	)		(4,111	)

Net loss	$	(6,182	)	$	(5,913	)	$	(9,767	)	$	(7,105	)

Basic and diluted loss per common share	$	(0.58	)	$	(0.56	)	$	(0.92	)	$	(0.67	)

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

JOHN B. SANFILIPPO & SON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)


	March 29,		June 29,		March 30,
	2007		2006		2006
ASSETS
CURRENT ASSETS:
Cash	$	2,187	$	2,232	$	2,309
Accounts receivable, less allowances of $5,025, $3,766 and $4,093		33,393		35,481		36,955
Inventories		168,237		164,390		206,173
Income taxes receivable		4,891		6,427		5,142
Deferred income taxes		2,499		2,984		2,305
Prepaid expenses and other current assets		1,123		2,248		859
Asset held for sale		5,569		—		—

TOTAL CURRENT ASSETS		217,899		213,762		253,743


PROPERTY, PLANT AND EQUIPMENT:
Land		9,463		10,299		10,301
Buildings		77,733		64,146		63,400
Machinery and equipment		133,179		109,391		107,923
Furniture and leasehold improvements		6,113		5,440		5,558
Vehicles		2,880		2,897		2,991
Construction in progress		29,253		53,811		38,979

		258,621		245,984		229,152
Less: Accumulated depreciation		114,678		117,094		115,592

		143,943		128,890		113,560
Rental investment property, less accumulated depreciation of $1,536, $924 and $726		28,594		27,969		28,167

TOTAL PROPERTY, PLANT AND EQUIPMENT		172,537		156,859		141,727


Intangible asset — minimum retirement plan liability		6,197		6,197		10,467
Cash surrender value of officers’ life insurance and other assets		6,254		5,440		4,980
Development agreement		—		6,806		6,806
Goodwill		—		—		1,242
Brand name, less accumulated amortization of $6,392, $6,072 and $5,965		1,528		1,848		1,955


TOTAL ASSETS	$	404,415	$	390,912	$	420,920

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

JOHN B. SANFILIPPO & SON, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)


	March 29,			June 29,			March 30,
	2007			2006			2006
LIABILITIES & STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving credit facility borrowings	$	80,987		$	64,341		$	78,620
Current maturities of long-term debt, including related party debt of $196, $4,279 and $3,173		58,544			67,717			76,091
Accounts payable, including related party payables of $1,279, $140 and $559		31,174			27,944			32,993
Book overdraft		10,076			14,301			10,584
Accrued payroll and related benefits		5,318			5,930			4,986
Accrued workers’ compensation		6,052			5,619			4,363
Other accrued expenses		6,826			5,293			4,843

TOTAL CURRENT LIABILITIES		198,977			191,145			212,480


LONG-TERM LIABILITIES:
Long-term debt, less current maturities, including related party debt of $13,911, $0 and $0		20,267			5,618			104
Retirement plan		8,644			7,654			11,745
Deferred income taxes		5,475			6,385			7,011
Other		310			—			—

TOTAL LONG-TERM LIABILITIES		34,696			19,657			18,860


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			26
Common Stock, non-cumulative voting rights of one vote per share, $.01 par value; 17,000,000 shares authorized, 8,121,349, 8,112,099 and 8,110,849 shares issued and outstanding		81			81			81
Capital in excess of par value		100,219			99,820			99,674
Retained earnings		71,620			81,387			91,003
Treasury stock, at cost; 117,900 shares of Common Stock		(1,204	)		(1,204	)		(1,204	)

TOTAL STOCKHOLDERS’ EQUITY		170,742			180,110			189,580


TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	404,415		$	390,912		$	420,920

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

JOHN B. SANFILIPPO & SON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)


	For the Thirty-nine Weeks Ended
	March 29,			March 30,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(9,767	)	$	(7,105	)
Depreciation and amortization		9,970			7,563
Gain on disposition of properties		(3,108	)		(963	)
Deferred income tax benefit		(425	)		(695	)
Stock-based compensation expense		309			410
Change in current assets and current liabilities:
Accounts receivable, net		2,088			2,047
Inventories		(3,847	)		11,451
Prepaid expenses and other current assets		1,125			804
Accounts payable		6,189			3,085
Accrued expenses		(70	)		962
Income taxes receivable		1,536			(5,937	)
Other operating assets		(1,718	)		732

Net cash provided by operating activities		2,282			12,354


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(3,114	)		(8,019	)
Facility expansion costs		(29,986	)		(22,740	)
Proceeds from disposition of properties		17,812			24
Cash surrender value of officers’ life insurance		(285	)		(280	)

Net cash used in investing activities		(15,573	)		(31,015	)


CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under revolving credit facility		119,915			120,288
Repayments of revolving credit borrowings		(103,269	)		(108,229	)
Principal payments on long-term debt		(10,020	)		(611	)
Financing obligation with related parties		14,300			—
(Decrease) increase in book overdraft		(4,225	)		7,537
Issuance of Common Stock under option plans		68			63
Minority interest distribution		(3,545	)		—
Tax benefit of stock options exercised		22			37

Net cash provided by financing activities		13,246			19,085


NET (DECREASE) INCREASE IN CASH		(45	)		424
Cash, beginning of period		2,232			1,885

Cash, end of period	$	2,187		$	2,309


SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations incurred		1,117			133

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

JOHN B. SANFILIPPO & SON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except where noted and per share data)

Note 1 — Basis of Presentation

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 herein, unless the context otherwise indicates, the term “Company” refers collectively to John B. Sanfilippo & Son, Inc. and JBSS Properties LLC, a wholly-owned subsidiary of John B. Sanfilippo & Son, Inc. 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). References herein to fiscal 2007 are to the fiscal year ending June 28, 2007. References herein to fiscal 2006 are to the fiscal year ended June 29, 2006. References herein to the third quarter of fiscal 2007 are to the quarter ended March 29, 2007. References herein to the third quarter of fiscal 2006 are to the quarter ended March 30, 2006. The Company’s Note Agreement and Bank Credit Facility, as defined in Note 8, are sometimes collectively referred to “the Company’s primary financing facilities” and “the Company’s financing arrangements”.

In the opinion of the Company’s management, the accompanying statements present fairly the consolidated statements of operations, consolidated balance sheets and consolidated statements of cash flows, and reflect all adjustments, consisting only of normal recurring adjustments which, in the opinion of management, are necessary for the fair presentation of the results of the interim periods. The extent of the Company’s losses in fiscal 2006 and the first thirty-nine weeks of fiscal 2007, the non-compliance with restrictive covenants under its primary financing facilities and uncertainties related to meeting future restrictive covenants under its primary financing facilities raise substantial doubt over the Company’s ability to continue as a going concern. See Note 9. The interim results of operations are not necessarily indicative of the results to be expected for a full year. The balance sheet as of June 29, 2006 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s 2006 Annual Report filed on Form 10-K/A for the year ended June 29, 2006.

Note 2 — Inventories

Inventories are stated at the lower of cost (first in, first out) or market. Inventories consist of the following:


	March 29,		June 29,		March 30,
	2007		2006		2006
Raw material and supplies	$	87,282	$	77,209	$	113,357
Work-in-process and finished goods		80,955		87,181		92,816

Inventories	$	168,237	$	164,390	$	206,173

Note 3 — Earnings Per Common 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:


					For the
	For the Quarter Ended				Thirty-nine Weeks Ended
	March 29,		March 30,		March 29,		March 30,
	2007		2006		2007		2006
Weighted average shares outstanding — basic		10,594,944		10,585,749		10,593,981		10,582,815
Effect of dilutive securities:
Stock options		—		—		—		—

Weighted average shares outstanding — diluted		10,594,944		10,585,749		10,593,981		10,582,815

359,690 stock options with a weighted average exercise price of $12.98 were excluded from the computation of diluted earnings per share for both the quarter and thirty-nine weeks ended March 29, 2007, due to the net loss for the quarterly and thirty-nine week periods. 329,940 stock options with a weighted average exercise price of $13.70

were excluded from the diluted earnings per share computation for both the quarter and thirty-nine weeks ended March 30, 2006 due to the net loss for the quarterly and thirty-nine week periods.

Note 4 — Stock-Based Compensation

At the Company’s annual meeting of stockholders on October 28, 1998, the Company’s stockholders approved a new stock option plan (the “1998 Equity Incentive Plan”) under which non-qualified options and stock-based awards may be made. There are 700,000 shares of common stock authorized for issuance to certain key employees and “outside directors” (i.e. directors who are not employees of the Company or any of its subsidiaries). The exercise price of the options will be determined by the Board of Directors as set forth in the 1998 Equity Incentive Plan. The exercise price for the stock options must be at least the fair market value of the Common Stock on the date of grant, with the exception of non-qualified stock options, which can have an exercise price equal to at least 50% of the fair market value of the Common Stock on the date of grant. Except as set forth in the 1998 Equity Incentive Plan, options expire upon termination of employment or directorship. The options granted under the 1998 Equity Incentive Plan are exercisable 25% annually commencing on the first anniversary date of grant and become fully exercisable on the fourth anniversary date of grant. All of the options granted, except those granted to outside directors, were intended to qualify as incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. On March 29, 2007, there were 155,000 options available for distribution under this plan. Option exercises are satisfied through the issuance of new shares of Common Stock.

Activity in the Company’s stock option plans for the first thirty-nine weeks of fiscal 2007 was as follows:


						Weighted Average		Aggregate Intrinsic
				Weighted Average		Remaining		Value
Options	Shares			Exercise Price		Contractual Term		(in thousands)
Outstanding, at June 29, 2006		324,815		$	13.70
Activity:
Granted		75,000			10.23
Exercised		(9,250	)		6.95
Forfeited		(30,875	)		15.69

Outstanding, at March 29, 2007		359,690		$	12.98		6.34	$	1,015


Exercisable, at March 29, 2007		202,315		$	11.57		5.48	$	788

The weighted average grant date fair value of stock options granted during the first thirty-nine weeks of fiscal years 2007 and 2006 was $5.45 and $9.43, respectively. The total intrinsic value of options exercised during the first thirty-nine weeks of fiscal years 2007 and 2006 was $57 and $96, respectively.

Compensation expense attributable to stock-based compensation during the first thirty-nine weeks of fiscal years 2007 and 2006 was $309 and $410, respectively. As of March 29, 2007, there was $899 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. The Company expects to recognize that cost over a weighted average period of 1.37 years.

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


	Thirty-nine Weeks Ended
	March 29,			March 30,
	2007			2006
Weighted average expected stock-price volatility		54.00	%		54.66	%
Average risk-free interest rate		4.57	%		4.14	%
Average dividend yield		0.00	%		0.00	%
Weighted average expected option life (in years)		5.78			5.72
Forfeiture percentage		5.00	%		0.00	%

Note 5 — Retirement Plan

On August 25, 2005, the Company’s Compensation, Nominating and Corporate Governance Committee approved a Supplemental Retirement Plan (the “SERP”) to cover certain executive officers of the Company. The purpose of the SERP is to provide an unfunded, non-qualified deferred compensation monthly benefit upon retirement, disability or death to a select group of management and key employees of the Company. The monthly benefit is based upon each individual’s earnings and his number of years of service. Administrative expenses include the following net periodic benefit costs:


						For the
	For the Quarter Ended					Thirty-nine Weeks Ended
	March 29,			March 30,		March 29,			March 30,
	2007			2006		2007			2006
Service cost	$	66		$	116	$	196		$	270
Interest cost		163			193		490			450
Amortization of prior service cost		239			239		718			558
Amortization of gain		(76	)		—		(229	)		—

Net periodic benefit cost	$	392		$	548	$	1,175		$	1,278

Note 6 — Distribution Channel and Product Type Sales Mix

The Company operates in a single reportable segment through which it sells various nut products through multiple distribution channels.

The following summarizes net sales by distribution channel:


					For the
	For the Quarter Ended				Thirty-nine Weeks Ended
	March 29,		March 30,		March 29,		March 30,
Distribution Channel	2007		2006		2007		2006
Consumer	$	51,387	$	56,548	$	218,371	$	229,219
Industrial		22,772		27,836		85,418		104,344
Food Service		13,788		13,852		44,666		47,125
Contract Packaging		10,047		10,492		32,924		32,464
Export		9,015		10,276		37,077		35,587

Total	$	107,009	$	119,004	$	418,456	$	448,739

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


							For the
	For the Quarter Ended						Thirty-nine Weeks Ended
	March 29,			March 30,			March 29,			March 30,
Product Type	2007			2006			2007			2006
Peanuts		21.1	%		21.4	%		18.9	%		19.6	%
Pecans		17.5			17.0			23.8			23.6
Cashews & Mixed Nuts		21.3			22.4			21.1			21.8
Walnuts		13.7			11.5			13.8			11.6
Almonds		16.8			18.7			13.0			15.2
Other		9.6			9.0			9.4			8.2

Total		100.0	%		100.0	%		100.0	%		100.0	%

Note 7 — Comprehensive 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.

Note 8 — Credit Facilities

The Company’s primary financing arrangements include a long-term financing facility (the “Note Agreement”) and a revolving bank credit facility (the “Bank Credit Facility”). The Company was not in compliance with the minimum adjusted quarterly earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirement under the Company’s Note Agreement for the third quarter of fiscal 2007, which resulted in a cross-default under the Company’s Bank Credit Facility. Also, the Company was not in compliance with the monthly minimum working capital requirement under the Note Agreement and Bank Credit Facility for each of the months in the quarter ended March 29, 2007. As a result of the Company’s current non-compliance, the Bank Credit Facility lenders and Noteholders may demand immediate payment for all amounts outstanding pursuant to the Note Agreement and Bank Credit Facility, and in certain circumstances the Company could be required to prepay outstanding debt balances as required by such agreements. The Company has requested waivers from the Noteholders and Bank Credit Facility lenders for its current non-compliance and is uncertain whether waivers can be obtained. If waivers are not received, the Company would be required to obtain alternative financing for amounts outstanding pursuant to its Bank Credit Facility and Note Agreement. The Company is uncertain whether alternative financing could be obtained or whether new lenders would be willing to negotiate commercially reasonable terms not adverse to the Company. The Company expects that it will be unable to comply with the covenants and warranties contained in the Note Agreement and Bank Credit Facility, such as the minimum adjusted EBITDA covenant contained in its Note Agreement and the minimum working capital requirement contained in its Note Agreement and Bank Credit Facility, for the fourth quarter of fiscal 2007 and is uncertain whether it will be able to comply with the covenants and warranties contained in such agreements in fiscal 2008. If the Company does not comply with the covenants or warranties in its financing arrangements in the future, the Company will continue to seek waivers from the Noteholders and Bank Credit Facility lenders, as applicable.

There can be no assurance that waivers will be received for current or future non-compliance with the requirements in the Bank Credit Facility and Note Agreement, or that such waivers will be on commercially reasonable terms that are not adverse to the Company. If waivers are not received or acceptable terms renegotiated with respect to current and future non-compliance with covenant or warranty requirements, the Company’s ability to pursue its business plans, objectives and its ability to continue as a going concern would be adversely affected and would require the Company to seek alternative sources of financing. In light of the non-compliance with restrictive covenants as a result of the Company’s performance for the first thirty-nine weeks of fiscal 2007, and the uncertainty relating to the Company’s ability to comply with covenants and warranties during future periods, amounts due pursuant to the Note Agreement as of March 29, 2007 are classified as “Current Maturities of Long-Term Debt”. Sustained losses by the Company, the inability to receive waivers from the Company’s lenders, the inability to secure alternative financing for amounts due pursuant to the Note Agreement and/or Bank Credit Facility, and/or continued non-compliance with the covenants or warranties in the Company’s Bank Credit Facility and Note Agreement would have a material adverse effect on the Company’s financial position, results of operations and cash flows. There is also substantial doubt with respect to the Company’s ability to continue as a going concern.

Note 9—Management’s Plans to Continue as a Going Concern

The Company’s ability to continue as a going concern is dependent on the ability of the Company to return to historic levels of profitability and, in the near term, obtain either funding from outside sources or on-going waivers from the lenders of amounts due pursuant to the Company’s primary financing arrangements. The extent of the Company’s

losses in fiscal 2006 and the first thirty-nine weeks of fiscal 2007, the non-compliance with restrictive covenants under its primary financing facilities and uncertainties related to meeting future restrictive covenants under its primary financing facilities raise substantial doubt with respect to the Company’s ability to continue as a going concern. The significant losses incurred for fiscal 2006 and the first half of fiscal 2007 were caused in large part by the decline in the market price for almonds after the 2005 crop was procured. Sales of the 2005 almond crop were completed in November 2006 (the second quarter of fiscal 2007). Almond profit margins returned to normal historical levels in December 2006. The Company no longer purchases almonds directly from growers and discontinued its almond handling operation conducted at its Gustine, California facility during the third quarter of fiscal 2007. The Company decided to discontinue its almond handling operation in order to reduce the commodity risk that had such a significant negative financial impact in fiscal 2006 and to eliminate the significant labor costs associated with processing almonds purchased directly from growers that could not be recovered completely when the almonds were sold. While the decline in the market price of the 2005 crop almonds negatively affected the Company’s profitability through the second quarter of fiscal 2007, the loss incurred during the third quarter of fiscal 2007 was due primarily to insufficient sales volume and expenses related to the Company’s relocation of its Chicago area operations to its new facility in Elgin, Illinois. The Company will continue to incur costs at its old Chicago area locations through fiscal 2008 as production lines are transferred to the new facility in Elgin.

Management’s plans to further address the Company’s ability to continue as a going concern include: (1) conducting a market review of all items that the Company sells and reducing unprofitable items or increasing prices; (2) implementing merchandising, retail operating and marketing plans to help increase unit sales and gross margin; (3) continuing to reduce manufacturing spending and costs associated with excess waste at its production facilities to improve gross margin; (4) achieving planned efficiencies from the new facility, and (5) if necessary, attempting to obtain waivers from the Company’s lenders with respect to any future events of default pursuant to the Company’s primary financing arrangements. During the second quarter of fiscal 2007, management began addressing the items discussed above. Management continued to address the items during the third quarter of fiscal 2007 and will continue to address these items in the future. For example, profitability reviews are being conducted for all major items. Price increases are being sought for certain sales that are generating unsatisfactory gross margins. In certain cases, sales will be eliminated to customers that do not accept price increases. The Company is actively developing plans, especially for its Fisher brand, with the intention of increasing sales and gross margin. As a result of these efforts, the Company has secured additional private label business that should generate approximately $25 million in new sales on an annual basis. While the Company’s new facility is expected to provide substantial cost savings in the future, additional costs, estimated at $2.5 million per quarter, will be incurred through fiscal 2008 until all Chicago area operations are consolidated into the new facility. The Company is currently evaluating whether the benefits of reduced manufacturing spending in fiscal 2008 from accelerating the move exceed the increased costs associated with such acceleration, including using outside contractors for the removal and installation of the existing equipment. If the Company decides to accelerate the move, it would incur moving costs in a shorter amount of time than anticipated.

Management believes that the implementation of the initiatives described above should enhance future operating performance; however, the discontinuance of the almond handling operation and the efforts to reduce unprofitable items will likely lead to a decline in net sales. Virtually all of these sales were significantly unprofitable in fiscal 2006 and the remaining sales are expected to generate a nominal gross profit through the end of fiscal 2007. The discontinuance of purchasing almonds directly from growers is expected to free up working capital for debt reduction and/or purchases of other nuts that typically deliver a higher gross profit than the gross profit from almonds.

In summary, management believes that the steps that it has taken and will take to improve operating performance and decreased nut acquisition costs should enhance its ability to return to historic levels of profitability. However, the Company is currently in non-compliance with restrictive covenants under its financing facilities. If waivers are not received from its lenders, the Company would attempt to obtain alternative financing. The Company is uncertain as to its ability to obtain waivers and/or alternative financing.

If the Company is not able to achieve these objectives, the Company’s financial condition will be adversely affected in a material way.

Note 10 — Interest Cost

The following is a breakout of interest cost:


						For the
	For the Quarter Ended					Thirty-nine Weeks Ended
	March 29,		March 30,			March 29,			March 30,
	2007		2006			2007			2006
Gross interest cost	$	2,861	$	2,383		$	7,216		$	5,614
Capitalized interest		—		(534	)		(901	)		(1,101	)

Interest expense	$	2,861	$	1,849		$	6,315		$	4,513

Note 11— Property Sale and Leaseback Transactions

In furtherance of its facility consolidation project, the Company sold its Chicago area facilities in July 2006. One such Chicago area facility (the Busse Road facility) was owned partially by the Company and partially by a consolidated related party partnership, a variable interest entity. The related party partnership leased its portion of the Busse Road facility to the Company. 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 through December 2007 with a three to nine month renewal option for the time period necessary to transition operations to the new Elgin facility. The proceeds upon disposition of the property by the partnership totaled $9.6 million (with $2.0 million directly allocable to the Company-owned portion of the property), resulting in the Company recognizing a gain of approximately $4.6 million (net of $1.3 million being deferred and amortized as reductions in rental expense over the lease term), with offsetting amounts applicable to the partnership’s minority interest of $4.6 million. As the Company was the primary beneficiary of the partnership, upon consolidation of the partnership the deficit, which includes losses in excess of the minority interest, was absorbed by the Company. Upon sale of the facility by the partnership for a gain, the previously recognized losses attributable to the minority interest of approximately $1.1 million were recovered by the Company to the extent such losses were previously allocated to the Company operations in consolidation and reduced any gain allocable to the partnership interest.

Also in July 2006, the Company sold its Arlington Heights and Arthur Avenue facilities for a combined $7.8 million in proceeds and is leasing back the facilities from the purchaser. The Arlington Heights facility is being leased back through December 2008 with a three to nine month renewal option. The Arthur Avenue facility is being leased back through August 2008 with a three to nine month renewal option. The gain on these property sale transactions totaled $1.8 million, net of $1.2 million being deferred and amortized as reductions in rental expense over the lease terms, which range from 17 to 29 months. In order to sell the Arlington Heights facility, the Company prepaid its existing mortgage obligations of $1.7 million plus a $0.3 million prepayment fee.

Note 12— Financing Obligation

In September 2006, the Company sold its Selma, Texas properties to two related party partnerships for $14.3 million and is leasing them back. The selling price was determined by an independent appraiser to be the fair market value which also approximated the Company’s carrying 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. Also, the Company has an option to purchase the properties 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 financing obligation is being accounted for similar to the accounting for a capital lease whereby $14.3 million was recorded as a debt obligation, as the provisions of the arrangement are not eligible for sale-leaseback accounting. No gain or loss was recorded on the transaction. These partnerships were previously consolidated as variable interest entities. Based on reconsideration events in the third quarter of 2006 and in the first quarter of fiscal 2007, the Company determined the partnerships were no longer subject to consolidation. These partnerships are no longer considered variable interest entities subject to consolidation as the partnerships had substantive equity at risk at the time of entering into the Selma, Texas sale-leaseback transaction. See Note 11 in this Form 10-Q and Note 3 in the Company’s 2006 Annual Report filed on Form 10-K/A for the year ended June 29, 2006 for discussion of the related party partnership transaction in fiscal 2006 and 2007.

Note 13—Commitments and Contingencies

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.

Note 14 — Asset Held for Sale/Development Agreement

Prior to acquiring the site being used for the Company’s facility consolidation project, 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 acquired title to the Original Site by quitclaim deed, and JBSS Properties LLC entered into an Assignment and Assumption Agreement (the “Agreement”) with the City. Under the terms of the Agreement, the City

	(1)		The Company did not maintain effective controls to ensure the completeness and accuracy of information communicated within the organization on a timely basis. Specifically, there was inadequate sharing of information impacting the financial statements between the accounting, sales, and operating departments for consideration by the appropriate accounting personnel in the Company’s financial forecast. This control deficiency resulted in the restatement of the 2006 consolidated financial statements, affecting the classification of long-term debt, valuation allowance associated with state tax net operating loss carryforwards and disclosures relating to the Company’s ability to continue as a going concern.

	(2)		The Company did not maintain effective controls over the completeness and accuracy of the periodic goodwill impairment assessment. Specifically, effective controls were not maintained to ensure that a complete and accurate periodic impairment analysis was prepared, reviewed, and approved in order to identify and record impairments, as required under generally accepted accounting principles. This control deficiency resulted in the restatement of the Company’s 2006 consolidated financial statements, affecting goodwill, goodwill impairment loss and disclosures.

	(3)		The Company did not maintain effective controls to ensure the accuracy of accounting for lease transactions. Specifically, effective controls were not maintained to ensure that an accurate analysis was prepared, reviewed and approved in order to properly evaluate the accounting for certain sale-leaseback transactions, as required under generally accepted accounting principles, affecting plant, property and equipment, current and long-term liabilities, gains relating to real estate sales, lease expense, interest expense and sale-leaseback transaction disclosures.

	(4)		The Company did not maintain a sufficient complement of accounting and finance personnel with an appropriate level of accounting knowledge, experience and training in the selection and application of generally accepted accounting principles commensurate with the Company’s financial reporting requirements. This control deficiency contributed to the material weaknesses discussed in items 1, 2 and 3 above and the restatement of the Company’s 2006 consolidated financial statements.

			These control deficiencies could result in a misstatement of the aforementioned account balances and disclosures that would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that each of these control deficiencies constitutes a material weakness at March 29, 2007.


	JOHN B. SANFILIPPO & SON, INC
	By:	/s/ Michael J. Valentine
		Michael J. Valentine
		Chief Financial Officer and Group President


Exhibit
Number		Description


	3.1	Restated Certificate of Incorporation of Registrant⁽¹³⁾

	3.2	Bylaws of Registrant⁽¹⁾

	4.1	Specimen Common Stock Certificate⁽³⁾

	4.2	Specimen Class A Common Stock Certificate⁽³⁾

	4.3	Limited Waiver and Second Amendment to Note Purchase Agreement (the “Note Agreement”) in the amount of $65 million by the Company with The Prudential Insurance Company of America, Pruco Life Insurance Company, American Skandia Life Assurance Corporation, Prudential Retirement Ceded Business Trust, ING Life Insurance and Annuity Company, Farmers New World Life Insurance Company, Physicians Mutual Insurance Company, Great-West Life & Annuity Insurance Company, The Great-West Life Assurance Company, United of Omaha Life Insurance Company and Jefferson Pilot Financial Insurance Company (collectively the “Noteholders”) dated as of July 25, 2006⁽¹⁹⁾

	4.4	Note in the principal amount of $7,749,166.67 executed by the Company in favor of Prudential Insurance Company of America, dated June 1, 2006⁽¹⁹⁾

	4.5	Note in the principal amount of $1,945,555.56 executed by the Company in favor of Pruco Life Insurance Company, dated June 1, 2006⁽¹⁹⁾

	4.6	Note in the principal amount of $7,980,555.55 executed by the Company in favor of ING Life Insurance and Annuity Company, dated June 1, 2006⁽¹⁹⁾

	4.7	Note in the principal amount of $1,261,777.78 executed by the Company in favor of American Skandia Life Insurance Corporation, dated June 1, 2006⁽¹⁹⁾

	4.8	Note in the principal amount of $3,210,166.67 executed by the Company in favor of Prudential Retirement Insurance and Annuity Company, dated June 1, 2006⁽¹⁹⁾

	4.9	Note in the principal amount of $3,919,444.44 executed by the Company in favor of Farmers New World Life Insurance Company, dated June 1, 2006⁽¹⁹⁾

	4.10	Note in the principal amount of $2,266,666.79 executed by the Company in favor of How & Co., dated June 1, 2006⁽¹⁹⁾

	4.11	Note in the principal amount of $9,444,444.44 executed by the Company in favor of Great-West Life & Annuity Insurance Company, dated June 1, 2006⁽¹⁹⁾

	4.12	Note in the principal amount of $9,444,444.44 executed by the Company in favor of Mac & Co., dated June 1, 2006⁽¹⁹⁾

	4.13	Note in the principal amount of $4,722,222.22 executed by the Company in favor of Jefferson Pilot Financial Insurance Company, dated June 1, 2006⁽¹⁹⁾

	4.14	Note in the principal amount of $9,444,444.44 executed by the Company in favor of United of Omaha Life Insurance Company, dated June 1, 2006⁽¹⁹⁾

	5-9	Not applicable

	10.1	Certain documents relating to $8.0 million Decatur County-Bainbridge Industrial Development Authority Industrial Development Revenue Bonds (John B. Sanfilippo & Son, Inc. Project) Series 1987 dated as of June 1, 1987⁽¹⁾

	10.2	Tax Indemnification Agreement between Registrant and certain Stockholders of Registrant prior to its initial public offering⁽²⁾

	10.3	Indemnification Agreement between Registrant and certain Stockholders of Registrant prior to its initial public offering⁽²⁾

	10.4	The Registrant’s 1995 Equity Incentive Plan⁽⁴⁾


Exhibit
Number		Description


	10.5	The Registrant’s 1998 Equity Incentive Plan⁽⁵⁾

	10.6	First Amendment to the Registrant’s 1998 Equity Incentive Plan⁽⁶⁾

	10.7	Amended and Restated John B. Sanfilippo & Son, Inc. Split-Dollar Insurance Agreement Number One among John E. Sanfilippo, as trustee of the Jasper and Marian Sanfilippo Irrevocable Trust, dated September 23, 1990, Jasper B. Sanfilippo, Marian R. Sanfilippo and Registrant, dated December 31, 2003⁽⁷⁾

	10.8	Amended and Restated John B. Sanfilippo & Son, Inc. Split-Dollar Insurance Agreement Number Two among Michael J. Valentine, as trustee of the Valentine Life Insurance Trust, Mathias Valentine, Mary Valentine and Registrant, dated December 31, 2003⁽⁷⁾

	10.9	Amendment, dated February 12, 2004, to Amended and Restated John B. Sanfilippo & Son, Inc. Split-Dollar Insurance Agreement Number One among John E. Sanfilippo, as trustee of the Jasper and Marian Sanfilippo Irrevocable Trust, dated September 23, 1990, Jasper B. Sanfilippo, Marian R. Sanfilippo and Registrant, dated December 31, 2003⁽⁸⁾

	10.10	Amendment, dated February 12, 2004, to Amended and Restated John B. Sanfilippo & Son, Inc. Split-Dollar Insurance Agreement Number Two among Michael J. Valentine, as trustee of the Valentine Life Insurance Trust, Mathias Valentine, Mary Valentine and Registrant, dated December 31, 2003⁽⁸⁾

	10.11	Development Agreement dated as of May 26, 2004, by and between the City of Elgin, an Illinois municipal corporation, the Registrant, Arthur/Busse Limited Partnership, an Illinois limited partnership, and 300 East Touhy Avenue Limited Partnership, an Illinois limited partnership⁽⁹⁾

	10.12	Agreement For Sale of Real Property, dated as of June 18, 2004, by and between the State of Illinois, acting by and through its Department of Central Management Services, and the City of Elgin⁽⁹⁾

	10.13	Agreement for Purchase and Sale between Matsushita Electric Corporation of America and the Company, dated December 2, 2004⁽¹⁰⁾

	10.14	First Amendment to Purchase and Sale Agreement dated March 2, 2005 by and between Panasonic Corporation of North America (“Panasonic”), f/k/a Matsushita Electric Corporation, and the Company⁽¹¹⁾

	10.15	Office Lease dated April 15, 2005 between the Company, as landlord, and Panasonic, as tenant⁽¹²⁾

	10.16	Warehouse Lease dated April 15, 2005 between the Company, as landlord, and Panasonic, as tenant⁽¹²⁾

	10.17	Construction contract dated August 18, 2005 between the Company and McShane Construction Corporation, as general contractor⁽¹⁴⁾

	10.18	The Registrant’s Supplemental Retirement Plan⁽¹⁴⁾

	10.19	Form of Option Grant Agreement under 1998 Equity Incentive Plan⁽¹⁴⁾

	10.20	Termination Agreement dated as of January 11, 2006, by and between the City of Elgin, an Illinois municipal corporation, the Registrant, Arthur/Busse Limited Partnership, an Illinois limited partnership, and 300 East Touhy Avenue Limited Partnership, an Illinois limited partnership⁽¹⁵⁾

	10.21	Assignment and Assumption Agreement dated March 28, 2006 by and between JBSS Properties LLC and the City of Elgin, Illinois⁽¹⁶⁾

	10.22	Agreement of Purchase and Sale between the Company and Prologis⁽¹⁷⁾

	10.23	Agreement for Purchase of Real Estate and Related Property between the Company and Arthur/Busse Limited Partnership⁽¹⁸⁾

	10.24	Lease Agreement between the Company, as Tenant, and Palmtree Acquisition Corporation, as Landlord for property at 3001 Malmo Drive, Arlington Heights, Illinois⁽¹⁸⁾

	10.25	Lease Agreement between the Company, as Tenant, and Palmtree Acquisition Corporation, as Landlord for property at 2299 Busse Road, Elk Grove Village, Illinois⁽¹⁸⁾

	10.26	Lease Agreement between the Company, as Tenant, and Palmtree Acquisition Corporation, as Landlord for property at 1851 Arthur Avenue, Elk Grove Village, Illinois⁽¹⁸⁾


Exhibit
Number		Description


	10.27	Amended and Restated Agreement by and among the Company, U.S. Bank National Association (“USB”), LaSalle Bank National Association (“LSB”) and ING Capital LLC (“ING”) (collectively, the “Lenders”), dated July 25, 2006⁽¹⁹⁾

	10.28	Line of Credit Note in the principal amount of $45.0 million executed by the Company in favor of USB, dated July 25, 2006⁽¹⁹⁾

	10.29	Line of Credit Note in the principal amount of $35.0 million executed by the Company in favor of LSB, dated July 25, 2006⁽¹⁹⁾

	10.30	Line of Credit Note in the principal amount of $20.0 million executed by the Company in favor of ING, dated July 25, 2006⁽¹⁹⁾

	10.31	Security Agreement by and between the Company and USB, in its capacity as Agent for the Lenders and Noteholders, dated July 25, 2006⁽¹⁹⁾

	10.32	Mortgage made by the Company related to its Elgin, Illinois property to USB, in its capacity as Agent for the Lenders and Noteholders, dated July 25, 2006⁽¹⁹⁾

	10.33	Deed of Trust made by the Company related to its Gustine, California property for the benefit of USB, in its capacity as Agent for the Lenders and Noteholders, dated July 25, 2006⁽¹⁹⁾

	10.34	Trademark License Agreement by and between the Company and USB, in its capacity as Agent for the Lenders and Noteholders, dated July 25, 2006⁽¹⁹⁾

	10.35	Agreement for Purchase of Real Estate and Related Property by and among the Company, as Seller, and Arthur/Busse Limited Partnership and 300 East Touhy Limited Partnership, as Purchasers⁽²⁰⁾

	10.36	Industrial Building Lease by and between the Company, as Tenant, and Arthur/Busse Limited Partnership and 300 East Touhy Limited Partnership, as Landlord, dated September 20, 2006⁽²⁰⁾

	11-30	Not applicable

	31.1	Certification of Jeffrey T. Sanfilippo pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended, filed herewith

	31.2	Certification of Michael J. Valentine pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as amended, filed herewith

	32.1	Certification of Jeffrey T. Sanfilippo pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith

	32.2	Certification of Michael J. Valentine pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith

	33-100	Not applicable

SANFILIPPO JOHN B & SON INC - Quarter Report: 2007 March (Form 10-Q)

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	(1)		Conducted month end surveys and meetings of significant functional areas such as operations, purchasing, accounts payable, sales, marketing and payroll in order to ensure that all relevant information is communicated to the accounting department in a complete and timely manner and considered in the financial statement closing process.

	(2)		Implemented a process to ensure that information gathered in the financial statement closing process that requires further action or consideration is tracked and resolved on a timely basis.

	(3)		Implemented a revised lease assessment process to ensure proper lease accounting determinations are made on an interim and annual basis.

	(4)		Performed monthly cutoffs of all transactional activity on a company-wide basis to the same extent that it performs cutoffs at the end of quarters to improve the accuracy of monthly interim periodic financial information. This effort focused primarily on inventory and related reserves and accounts.

	(1)		Implement new forecasting methods, considering the survey and monthly close information on a more frequent basis, with the objective of improving the accuracy and usefulness of such information.

	(2)		Direct the internal audit department to focus on the process changes and on effective operation of the newly implemented information and communication processes discussed above.

	(1)		Hired an additional senior level accounting professional in the third quarter of fiscal 2007, with public accounting and public company experience, to enhance the technical accounting resources of the department.

	(2)		Hired three experienced degreed accountants in the third quarter of fiscal 2007 to improve the timeliness of periodic closings to allow more senior accounting executives to perform higher level review duties and to improve internal reporting.

	(3)		Engaged a consultant to review its monthly closing process and control procedures during the third quarter of fiscal 2007 to further improve the timeliness and accuracy of both the interim and quarterly closing processes. This effort will also focus on improving the timing related to preparation of SEC filings.


(1)		Incorporated by reference to the Registrant’s Registration Statement on Form S-1, Registration No. 33-43353, as filed with the Commission on October 15, 1991 (Commission File No. 0-19681).

(2)		Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1991 (Commission File No. 0-19681), as amended by the certificate of amendment filed as an appendix to the Registrant’s 2004 Proxy Statement filed on September 8, 2004.

(3)		Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (Amendment No. 3), Registration No. 33-43353, as filed with the Commission on November 25, 1991 (Commission File No. 0-19681).

(4)		Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the third quarter ended March 26, 1998 (Commission File No. 0-19681).