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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended July 31, 2004

OR

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

Commission file number: 000-33385

CALAVO GROWERS, INC.

(Exact name of registrant as specified in its charter)
     
California   33-0945304
(State of incorporation)   (I.R.S. Employer Identification No.)

2530 Red Hill Avenue
Santa Ana, California 92705-5542

(Address of principal executive offices) (Zip code)

(949) 223-1111
(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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]    No [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [X]    No [   ]

Registrant’s number of shares of common stock outstanding as of July 31, 2004 was 13,506,833.




 


CALAVO GROWERS, INC.

INDEX

             
        PAGE
       
  Financial Statements (unaudited):        
 
  Consolidated Condensed Balance Sheets - July 31, 2004 and October 31, 2003     3  
 
  Consolidated Condensed Statements of Income - Three Months and Nine Months Ended July 31, 2004 and 2003     4  
 
  Consolidated Condensed Statements of Cash Flows - Nine Months Ended July 31, 2004 and 2003     5  
 
  Notes to Consolidated Condensed Financial Statements     6  
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     13  
  Quantitative and Qualitative Disclosures About Market Risk     22  
  Controls and Procedures     23  
       
  Legal Proceedings     24  
  Exhibits and Reports on Form 8-K     25  
 
  Signatures     26  
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)

(All amounts in thousands, except per share amounts)
                 
    July 31,   October 31,
    2004
  2003
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 848     $ 5,375  
Accounts receivable, net of allowances of $1,476 (2004) and $700 (2003)
    27,749       16,560  
Inventories, net
    13,759       8,021  
Prepaid expenses and other current assets
    4,135       4,487  
Loans to growers
    65       353  
Advances to suppliers
    2,396       624  
Deferred income taxes
    1,379       1,379  
 
   
 
     
 
 
Total current assets
    50,331       36,799  
Property, plant, and equipment, net
    16,857       13,121  
Goodwill
    3,591        
Other assets
    3,996       3,769  
 
   
 
     
 
 
 
  $ 74,775     $ 53,689  
 
   
 
     
 
 
Liabilities and shareholders’ equity
               
Current liabilities:
               
Payable to growers
  $ 14,949     $ 3,446  
Trade accounts payable
    3,599       1,534  
Accrued expenses
    7,399       7,777  
Income taxes payable
    1,138       51  
Dividend payable
          3,232  
Current portion of long-term obligations
    23       24  
 
   
 
     
 
 
Total current liabilities
    27,108       16,064  
Long-term liabilities:
               
Long-term obligations, less current portion
    37       61  
Deferred income taxes
    764       417  
 
   
 
     
 
 
Total long-term liabilities
    801       478  
Commitments and contingencies
               
Shareholders’ equity:
               
Common stock, $0.001 par value; 100,000 shares authorized; 13,507 (2004) and 12,930 (2003) issued and outstanding
    14       13  
Additional paid-in capital
    28,809       24,727  
Notes receivable from shareholders
    (2,883 )     (3,563 )
Retained earnings
    20,926       15,970  
 
   
 
     
 
 
Total shareholders’ equity
    46,866       37,147  
 
   
 
     
 
 
 
  $ 74,775     $ 53,689  
 
   
 
     
 
 

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

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)

(All amounts in thousands, except per share amounts)
                                 
    Three months ended   Nine months ended
    July 31,
  July 31,
    2004
  2003
  2004
  2003
Net sales
  $ 83,318     $ 81,359     $ 208,782     $ 182,981  
Cost of sales
    74,833       72,203       189,389       162,931  
 
   
 
     
 
     
 
     
 
 
Gross margin
    8,485       9,156       19,393       20,050  
Special charges
          5             103  
Selling, general and administrative
    3,777       3,919       11,504       11,240  
 
   
 
     
 
     
 
     
 
 
Operating income
    4,708       5,232       7,889       8,707  
Other income, net
    (91 )     (294 )     (311 )     (615 )
 
   
 
     
 
     
 
     
 
 
Income before provision for income taxes
    4,799       5,526       8,200       9,322  
Provision for income taxes
    1,739       2,287       3,100       3,848  
 
   
 
     
 
     
 
     
 
 
Net income
  $ 3,060     $ 3,239     $ 5,100     $ 5,474  
 
   
 
     
 
     
 
     
 
 
Net income per share:
                               
Basic
  $ 0.23     $ 0.25     $ 0.38     $ 0.42  
 
   
 
     
 
     
 
     
 
 
Diluted
  $ 0.23     $ 0.25     $ 0.38     $ 0.42  
 
   
 
     
 
     
 
     
 
 
Number of shares used in per share computation:
                               
Basic
    13,507       12,930       13,494       12,905  
 
   
 
     
 
     
 
     
 
 
Diluted
    13,594       12,960       13,579       12,935  
 
   
 
     
 
     
 
     
 
 

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

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CALAVO GROWERS, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
                 
    Nine months ended July 31,
    2004
  2003
Cash Flows from Operating Activities:
               
Net income
  $ 5,100     $ 5,474  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,792       1,488  
Write-off of fixed assets
          32  
Stock based compensation
    33        
Gain on sale of investments held to maturity
          (163 )
Provision for losses on accounts receivable
    25       19  
Effect on cash of changes in operating assets and liabilities:
               
Accounts receivable
    (11,214 )     (10,008 )
Inventories, net
    (5,738 )     (7 )
Prepaid expenses and other assets
    992       1,219  
Loans to growers
    288       62  
Advances to suppliers
    (1,772 )     (613 )
Income taxes receivable
          360  
Payable to growers
    11,503       10,333  
Trade accounts payable and accrued expenses
    1,577       791  
Income taxes payable
    1,087       1,369  
 
   
 
     
 
 
Net cash provided by operating activities
    3,673       10,356  
Cash Flows from Investing Activities:
               
Direct costs of Maui acquisition
    (65 )      
Proceeds from sale of investments held to maturity
          2,060  
Purchase of short-term investments
          (2,223 )
Acquisitions of and deposits on property, plant, and equipment
    (5,414 )     (2,804 )
 
   
 
     
 
 
Net cash used in investing activities
    (5,479 )     (2,967 )
Cash Flows from Financing Activities:
               
Payment of dividend to shareholders
    (3,376 )     (2,567 )
Proceeds from short-term borrowings, net
          (3,000 )
Additional costs related to the rights offering
          (41 )
Collection on notes receivable from shareholders
    680       2,093  
Payments on long-term obligations
    (25 )     (512 )
Exercise of stock options
          475  
 
   
 
     
 
 
Net cash used in financing activities
    (2,721 )     (3,552 )
 
   
 
     
 
 
Net increase (decrease) in cash and cash equivalents
    (4,527 )     3,837  
Cash and cash equivalents, beginning of period
    5,375       921  
 
   
 
     
 
 
Cash and cash equivalents, end of period
  $ 848     $ 4,758  
 
   
 
     
 
 
Supplemental Information -
               
Cash paid during the year for:
               
Interest
  $ 58     $ 159  
 
   
 
     
 
 
Income taxes
  $ 1,907     $ 1,854  
 
   
 
     
 
 
Noncash Investing and Financing Activities:
               
Tax benefit related to stock options
  $     $ 72  
 
   
 
     
 
 

In November 2003, the Company acquired all of the outstanding common shares of Maui Fresh International, Inc. for 576,924 shares of the Company’s common stock, valued at $4.05 million, plus acquisition costs of $65,000. See Note 1 for further explanation. The following table summarizes the estimated fair values of the non-cash assets acquired and liabilities assumed at the date of acquisition.

         
    April
(in thousands)   2004
Fixed assets
  $ 114  
Goodwill
    3,526  
Intangible assets
    867  
 
   
 
 
Total non-cash assets acquired
    4,507  
Current liabilities
    110  
Deferred tax liabilities assumed
    347  
 
   
 
 
Net non-cash assets acquired
  $ 4,050  
 
   
 
 

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

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CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

1. Description of the business

Business

     Calavo Growers, Inc. (Calavo, the Company, we, us or our) procures and markets avocados and other perishable foods and prepares and distributes processed avocado products. Our expertise in marketing and distributing avocados, processed avocados, and other perishable foods allows us to deliver a wide array of fresh and processed food products to food distributors, produce wholesalers, supermarkets, and restaurants on a world-wide basis. Through our two operating facilities in Southern California and three facilities in Mexico, we sort and pack avocados procured in California and Mexico and prepare processed avocado products. Additionally, we procure avocados internationally, principally from Chile, the Dominican Republic and New Zealand, and distribute other perishable foods. We report these operations in three different business segments: California avocados, international avocados and perishable food products and processed products.

     The accompanying consolidated condensed financial statements are unaudited. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments necessary to present fairly our financial position, results of operations, and cash flows. Such adjustments consist of adjustments of a normal recurring nature. Interim results are subject to significant seasonal variations and are not necessarily indicative of the results of operations for a full year. Our operations are sensitive to a number of factors, including weather-related phenomena and their effects on industry volumes, prices, product quality and costs. Operations are also sensitive to fluctuations in currency exchange rates in both sourcing and selling locations, as well as economic crises and security risks in developing countries. These statements should also be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2003.

     In order to diversify our product lines and increase synergies within the marketplace, we acquired all the outstanding common shares of Maui Fresh International, Inc. (Maui) for 576,924 shares of our common stock valued at $4.05 million in November 2003, plus acquisition costs of $65,000. Maui, which generated approximately $20 million in revenues during its fiscal year ended December 31, 2002, is a specialty produce company servicing a wide array of retail, food service, and terminal market wholesale customers with over 25 different specialty commodities. The value of our common stock issued in conjunction with the acquisition was based on the average quoted market price of our common stock for three days before and after the announcement date.

     As security for certain potential contingencies, such as unrecorded liabilities, we are entitled to hold approximately 58,000 shares issued in conjunction with such acquisition for one full year from the acquisition date. In the event that these contingencies resolve as we expect them to, we will be obligated to return these shares.

     The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The difference from the previously reported amounts of goodwill and intangible assets of $867,000 resulted from the finalization of our valuation information in the second quarter of fiscal 2004.

         
    April
(in thousands)   2004
Fixed assets
  $ 114  
Goodwill
    3,591  
Intangible assets
    867  
 
   
 
 
Total assets acquired
    4,572  
Current liabilities
    110  
Deferred tax liabilities
    347  
 
   
 
 
Net assets acquired
  $ 4,115  
 
   
 
 

     Included in other assets in the accompanying consolidated condensed financial statements are the following intangible assets: customer-related intangibles of $590,000 (accumulated amortization of $59,000 at July 31, 2004), brandname intangibles of $275,000 and other identified intangibles totaling $2,000 (accumulated amortization of $1,000 at July 31, 2004). The customer-related intangibles and other identified intangibles are being amortized over

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CALAVO GROWERS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

five and two years. The intangible asset related to the brandname currently has an indefinite remaining useful life and, as a result, is not currently subject to amortization. Goodwill is also not subject to amortization and is not expected to be deductible for tax purposes. Goodwill and the brandname intangible will be tested for impairment at least annually and more frequently if an event occurs which indicates that goodwill or the brandname intangible may be impaired. We have not identified impairment indicators related to goodwill or the brandname intangible. We anticipate that amortization related to amortizing intangibles will be approximately $89,000 for the year ended October 31, 2004. We anticipate recording amortization expense of approximately $119,000 per annum from fiscal 2005 through fiscal 2008, with the remaining amortization expense of approximately $29,000 recorded in fiscal 2009. Pro forma statement of operations information is not presented, as the acquisition was not deemed to be a material business combination.

Stock Based Compensation

     As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”), which was amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” the Company accounts for stock-based compensation under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations.

     In December 2003, our Board of Directors approved the issuance of options to acquire a total of 50,000 shares of our common stock to two members of our Board of Directors. Each option to acquire 25,000 shares vests in substantially equal installments over a three-year period, has an exercise price of $7.00 per share, and has a term of five years from the grant date. The market price of our common stock at the grant date was $10.01. In accordance with APB 25, we are recording compensation expense of approximately $151,000 over the vesting period of three years from the grant date. During the nine month period ended July 31, 2004, we recognized $33,000 of compensation expense with respect to stock option awards pursuant to APB 25. Had compensation cost for stock option awards been determined based on the fair value of each award at its grant date, consistent with the provisions of SFAS No. 123, the Company’s pro forma net income and net income per share would have been as follows (dollars in thousands, except per share amounts):

                                 
    Three months ended   Nine months ended
    July 31,
  July 31,
    2004
  2003
  2004
  2003
Net Income:
                               
As reported
  $ 3,060     $ 3,239     $ 5,100     $ 5,474  
Add: Total stock-based compensation expense determined under APB 25 and related interpretations, net of tax effects
    9             21        
Deduct: Total stock based compensation expense determined under fair value based method for all awards, net of tax effects
    (9 )           (21 )      
 
   
 
     
 
     
 
     
 
 
Pro forma
  $ 3,060     $ 3,239     $ 5,100     $ 5,474  
 
   
 
     
 
     
 
     
 
 
Net income per share, as reported:
                               
Basic
  $ 0.23     $ 0.25     $ 0.38     $ 0.42  
Diluted
  $ 0.23     $ 0.25     $ 0.38     $ 0.42  
Net income per share, pro forma:
                               
Basic
  $ 0.23     $ 0.25     $ 0.38     $ 0.42  
Diluted
  $ 0.23     $ 0.25     $ 0.38     $ 0.42  

     For purposes of pro forma disclosures under SFAS No. 123, the estimated fair value of the options is assumed to be amortized to compensation expense over the options’ vesting period. The fair value of the options granted in

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CALAVO GROWERS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

2004 has been estimated at the date of grant using the binomial option pricing model with the following assumptions:

         
Risk-free interest rate
    3.3 %
Expected volatility
    26.9 %
Dividend yield
    20 %
Expected life (years)
    5  
Weighted-average fair value of options granted
  $ 3.01  

     The binomial option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because options held by our directors have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of these options.

Reclassifications

     Certain prior year amounts have been reclassified to conform to the current period presentation.

2. Information regarding our operations in different segments

     We operate and track results in three reportable segments: California avocados, international avocados and perishable foods products, and processed products. These three business segments are presented based on our management structure and information used by our president to measure performance and allocate resources. The California avocados segment includes all operations that involve the distribution of avocados grown in California. The international avocados and perishable foods products segment includes both operations related to distribution of fresh avocados grown outside of California and distribution of other perishable food items. The processed products segment represents all operations related to the purchase, manufacturing, and distribution of processed avocado products. Those costs that can be specifically identified with a particular product line are charged directly to that product line. Costs that are not segment specific are generally allocated based on five-year average sales dollars. We do not allocate assets or specifically identify them to our operating segments.

                                         
            International            
            avocados and            
    California   perishable food   Processed   Inter-segment    
    avocados
  products
  products
  eliminations
  Total
    (All amounts are presented in thousands)
Nine months ended July 31, 2004
                                       
Net sales
  $ 122,106     $ 74,429     $ 24,386     $ (12,139 )   $ 208,782  
Cost of sales
    109,848       70,285       21,395       (12,139 )     189,389  
 
   
 
     
 
     
 
     
 
     
 
 
Gross margin
    12,258       4,144       2,991             19,393  
Selling, general and administrative
    5,173       2,875       3,456             11,504  
 
   
 
     
 
     
 
     
 
     
 
 
Operating income (loss)
    7,085       1,269       (465 )           7,889  
Other income, net
    (231 )     (71 )     (9 )           (311 )
 
   
 
     
 
     
 
     
 
     
 
 
Income (loss) before provision (benefit) for income taxes
    7,316       1,340       (456 )           8,200  
Provision (benefit) for income taxes
    2,765       507       (172 )           3,100  
 
   
 
     
 
     
 
     
 
     
 
 
Net income (loss)
  $ 4,551     $ 833     $ (284 )   $     $ 5,100  
 
   
 
     
 
     
 
     
 
     
 
 

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CALAVO GROWERS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

                                         
            International            
            avocados and            
    California   perishable food   Processed   Inter-segment    
    avocados
  products
  products
  eliminations
  Total
    (All amounts are presented in thousands)
Nine months ended July 31, 2003
                                       
Net sales
  $ 115,068     $ 51,795     $ 24,003     $ (7,885 )   $ 182,981  
Cost of sales
    102,901       48,277       19,638       (7,885 )     162,931  
 
   
 
     
 
     
 
     
 
     
 
 
Gross margin
    12,167       3,518       4,365             20,050  
Special charges
                103             103  
Selling, general and administrative
    5,161       2,290       3,789             11,240  
 
   
 
     
 
     
 
     
 
     
 
 
Operating income
    7,006       1,228       473             8,707  
Other expense (income), net
    (548 )     (75 )     8             (615 )
 
   
 
     
 
     
 
     
 
     
 
 
Income before provision for income taxes
    7,554       1,303       465             9,322  
Provision for income taxes
    3,118       538       192             3,848  
 
   
 
     
 
     
 
     
 
     
 
 
Net income
  $ 4,436     $ 765     $ 273     $     $ 5,474  
 
   
 
     
 
     
 
     
 
     
 
 
                                         
            International            
            avocados and            
    California   perishable food   Processed   Inter-segment    
    avocados
  products
  products
  eliminations
  Total
    (All amounts are presented in thousands)
Three months ended July 31, 2004
                                       
Net sales
  $ 67,469     $ 11,154     $ 9,048     $ (4,353 )   $ 83,318  
Cost of sales
    59,693       11,132       8,361       (4,353 )     74,833  
 
   
 
     
 
     
 
     
 
     
 
 
Gross margin
    7,776       22       687             8,485  
Selling, general and administrative
    1,772       857       1,148             3,777  
 
   
 
     
 
     
 
     
 
     
 
 
Operating income (loss)
    6,004       (835 )     (461 )           4,708  
Other income, net
    (63 )     (24 )     (4 )           (91 )
 
   
 
     
 
     
 
     
 
     
 
 
Income (loss) before provision (benefit) for income taxes
    6,067       (811 )     (457 )           4,799  
Provision (benefit) for income taxes
    2,265       (354 )     (172 )           1,739  
 
   
 
     
 
     
 
     
 
     
 
 
Net income (loss)
  $ 3,802     $ (457 )   $ (285 )   $     $ 3,060  
 
   
 
     
 
     
 
     
 
     
 
 
                                         
            International            
            avocados and            
    California   perishable food   Processed   Inter-segment    
    avocados
  products
  products
  eliminations
  Total
    (All amounts are presented in thousands)
Three months ended July 31, 2003
                                       
Net sales
  $ 67,921     $ 5,615     $ 9,940     $ (2,117 )   $ 81,359  
Cost of sales
    60,095       5,655       8,570       (2,117 )     72,203  
 
   
 
     
 
     
 
     
 
     
 
 
Gross margin
    7,826       (40 )     1,370             9,156  
Special charges
                5             5  
Selling, general and administrative
    1,696       771       1,452             3,919  
 
   
 
     
 
     
 
     
 
     
 
 
Operating income (loss)
    6,130       (811 )     (87 )           5,232  
Other income, net
    (292 )     (1 )     (1 )           (294 )
 
   
 
     
 
     
 
     
 
     
 
 
Income (loss) before provision (benefit) for income taxes
    6,422       (810 )     (86 )           5,526  
Provision (benefit) for income taxes
    2,653       (331 )     (35 )           2,287  
 
   
 
     
 
     
 
     
 
     
 
 
Net income (loss)
  $ 3,769     $ (479 )   $ (51 )   $     $ 3,239  
 
   
 
     
 
     
 
     
 
     
 
 

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CALAVO GROWERS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

     The following table sets forth sales by product category, by segment (in thousands):

                                                                 
    Nine months ended July 31, 2004
  Nine months ended July 31, 2003
            International                           International        
            avocados and                           avocados and        
            perishable                           perishable        
    California   food   Processed           California   food   Processed    
    avocados
  products
  products
  Total
  avocados
  products
  Products
  Total
Third party sales:
                                                               
California avocados
  $ 112,666     $     $     $ 112,666     $ 108,066     $     $     $ 108,066  
Imported avocados
          43,096             43,096             37,375             37,375  
Papayas
          4,999             4,999             2,066             2,066  
Specialties and tropicals
          11,299             11,299             14             14  
Processed — food service
                21,200       21,200                   20,899       20,899  
Processed — retail and club
                3,156       3,156                   4,098       4,098  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total fruit and product sales to third parties
    112,666       59,394       24,356       196,416       108,066       39,455       24,997       172,518  
Freight and other charges
    8,468       8,924       288       17,680       7,118       7,726       222       15,066  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total third party sales
    121,134       68,318       24,644       214,096       115,184       47,181       25,219       187,584  
Less sales incentives
    (76 )     (48 )     (5,190 )     (5,314 )     (116 )     (144 )     (4,343 )     (4,603 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total net sales to third parties
    121,058       68,270       19,454       208,782       115,068       47,037       20,876       182,981  
Intercompany sales
    1,048       6,159       4,932       12,139             4,758       3,127       7,885  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Net sales before eliminations
  $ 122,106     $ 74,429     $ 24,386       220,921     $ 115,068     $ 51,795     $ 24,003       190,866  
 
   
 
     
 
     
 
             
 
     
 
     
 
         
Intercompany sales eliminations
                            (12,139 )                             (7,885 )
 
                           
 
                             
 
 
Consolidated net sales
                          $ 208,782                             $ 182,981  
 
                           
 
                             
 
 
                                                                 
    Three months ended July 31, 2004
  Three months ended July 31, 2003
            International                           International        
            avocados and                           avocados and        
            perishable                           perishable        
    California   food   Processed           California   food   Processed    
    avocados
  products
  products
  Total
  avocados
  products
  Products
  Total
Third party sales:
                                                               
California avocados
  $ 61,630     $     $     $ 61,630     $ 64,170     $     $     $ 64,170  
Imported avocados
          3,932             3,932             2,762             2,762  
Papayas
          1,697             1,697             786             786  
Specialties and tropicals
          3,062             3,062             14             14  
Processed — food service
                7,304       7,304                   9,021       9,021  
Processed — retail and club
                1,174       1,174                   1,582       1,582  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total fruit and product sales to third parties
    61,630       8,691       8,478       78,799       64,170       3,562       10,603       78,335  
Freight and other charges
    5,111       1,141       116       6,368       3,781       1,190       101       5,072  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total third party sales
    66,741       9,832       8,594       85,167       67,951       4,752       10,704       83,407  
Less sales incentives
    (14 )     (1 )     (1,834 )     (1,849 )     (30 )     (67 )     (1,951 )     (2,048 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total net sales to third parties
    66,727       9,831       6,760       83,318       67,921       4,685       8,753       81,359  
Intercompany sales
    742       1,323       2,288       4,353             930       1,187       2,117  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Net sales before eliminations
  $ 67,469     $ 11,154     $ 9,048       87,671     $ 67,921     $ 5,615     $ 9,940       83,476  
 
   
 
     
 
     
 
             
 
     
 
     
 
         
Intercompany sales eliminations
                            (4,353 )                             (2,117 )
 
                           
 
                             
 
 
Consolidated net sales
                          $ 83,318                             $ 81,359  
 
                           
 
                             
 
 

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CALAVO GROWERS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

3. Inventories

     Inventories consist of the following (in thousands):

                 
    July 31,   October 31,
    2004
  2003
Fresh fruit
  $ 5,945     $ 2,918  
Packing supplies and ingredients
    2,438       1,974  
Finished processed foods
    5,376       3,129  
 
   
 
     
 
 
 
  $ 13,759     $ 8,021  
 
   
 
     
 
 

     During the three and nine month periods ended July 31, 2004 and 2003, we were not required to, and did not, record any provisions to reduce our inventories to the lower of cost or market.

4. Related party transactions

     We sell papayas obtained from an entity owned by our Chairman of the Board of Directors, Chief Executive Officer and President. Sales of papayas procured from the related entity amounted to approximately $4,999,000, and $2,066,000 for the nine months ended July 31, 2004 and 2003, resulting in gross margins of approximately $618,000 and $199,000. Included in trade accounts payable and accrued liabilities are approximately $92,000 and $296,000 at July 31, 2004 and October 31, 2003 due to this entity.

     Certain members of our Board of Directors market avocados through Calavo pursuant to marketing agreements substantially similar to the marketing agreements that we enter into with other growers. During the nine months ended July 31, 2004 and 2003, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $2.3 million.

5. Other events

Dividend payment

     On January 5, 2004, we paid a $0.25 per share dividend in the aggregate amount of $3,376,000 to shareholders of record as of November 17, 2003. Included in this dividend payment was $144,000 related to dividends declared in November 2003 related to the shares issued in conjunction with the acquisition of Maui, as described in Note 1.

Commitments

     In June 2003, in order to facilitate the operations of one of our processed avocado product suppliers, we entered into a contract guaranteeing payment of certain invoices rendered to such supplier. The term of this guarantee is from June 2003 through December 2004, but can be cancelled at any time at our discretion. Additionally, the maximum amount subject to guarantee at any one time cannot exceed $90,000. As of July 31, 2004, no amounts or orders were outstanding and all amounts owed by such supplier related to this guarantee have been remitted.

Corporate headquarters building

     In August 2004, we entered into an agreement to sell our corporate headquarters building located in Santa Ana, California for $3,400,000. Escrow related to such transaction is expected to close near the end of fiscal 2004, but we have negotiated with the purchaser to lease the premises until the expected relocation date in January 2005 at no additional expense. This transaction will result in a pre-tax gain on sale of approximately $1.7 million, plus the fair value of the rent-free use of the premises, at closing. We currently plan to relocate our corporate offices in or near Santa Paula, California. We expect to complete the move of our corporate headquarters in January 2005.

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CALAVO GROWERS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Renewal of Credit Facilities

     In January 2004, we renewed our two short-term, non-collateralized, revolving credit facilities. These credit facilities expire in January 2006 and April 2006 and are with separate banks. Under the terms of these agreements, we are advanced funds for working capital purposes. Total credit available under the combined short-term borrowing agreements was $24,000,000 at July 31, 2004, with interest at a weighted-average rate of 2.3% at July 31, 2004. The credit facilities contain various financial covenants with which we were in compliance at July 31, 2004.

6. Processed product segment restructuring

     In February 2003, our Board of Directors approved a plan whereby the operations of our processed products business would be relocated. The plan calls for the closing of our Santa Paula, California and Mexicali, Baja California Norte processing facilities and the relocation of these operations to a new facility in Uruapan, Michoacan, Mexico. We believe that this restructuring will provide cost savings in the elimination of certain transportation costs, duplicative overhead structures, and savings in the overall cost of labor and services. The Uruapan facility commenced operations in February 2004.

     We expect to pay additional employee separation costs in connection with our planned future closure of our Mexicali, Baja California Norte production facility, which will be recognized when incurred. Those costs have not yet been quantified and are expected to be accrued for and paid later in fiscal year 2004. As of July 31, 2004, we have not accrued for any charges relating to the production assets being held at our Mexicali, Baja California Norte production facility as it is anticipated that all such assets will be re-commissioned at our new facility in Uruapan, Michoacan or their carrying value is less than their net realizable value.

     Additional restructuring related expenses are expected to be incurred during fiscal 2004, but such amounts are not yet determinable.

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

     This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the year ended October 31, 2003 of Calavo Growers, Inc. (we, Calavo, or the Company).

Recent Developments

Dividend payment

     On January 5, 2004, we paid a $0.25 per share dividend in the aggregate amount of $3,376,000 to shareholders of record as of November 17, 2003. Included in this dividend payment was $144,000 related to dividends declared in November 2003 related to the shares issued in conjunction with the acquisition of Maui, as described in Note 1.

Renewal of credit facilities

     In January 2004, we renewed our two short-term, non-collateralized, revolving credit facilities. These credit facilities expire in January 2006 and April 2006 and are with separate banks. Under the terms of these agreements, we are advanced funds for working capital purposes. Total credit available under the combined short-term borrowing agreements was $24,000,000 at July 31, 2004, with interest at a weighted-average rate of 2.3% at July 31, 2004. The credit facilities contain various financial covenants with which we were in compliance at July 31, 2004.

Acquisition

     In order to diversify our product lines and increase synergies within the marketplace, we acquired all the outstanding common shares of Maui Fresh International, Inc. (Maui) for 576,924 shares of our common stock valued at $4.05 million in November 2003, plus acquisition costs of $65,000. Maui, which generated approximately $20 million in revenues during its fiscal year ended December 31, 2002, is a specialty produce company servicing a wide array of retail, food service, and terminal market wholesale customers with over 25 different specialty commodities. The value of our common stock issued in conjunction with the acquisition was based on the average quoted market price of our common stock for three days before and after the announcement date.

     As security for certain potential contingencies, such as unrecorded liabilities, we are entitled to hold approximately 58,000 shares issued in conjunction with such acquisition for one full year from the acquisition date. In the event that these contingencies resolve as we expect them to, we will be obligated to return these shares.

     The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The differences from the previously reported amounts of goodwill and intangible assets of $867,000 resulted from the finalization of our valuation information in the second quarter of fiscal 2004.

         
    April
(in thousands)   2004
Fixed assets
  $ 114  
Goodwill
    3,591  
Intangible assets
    867  
 
   
 
 
Total assets acquired
    4,572  
Current liabilities
    110  
Deferred tax liabilities
    347  
 
   
 
 
Net assets acquired
  $ 4,115  
 
   
 
 

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Included in other assets in the accompanying consolidated condensed financial statements are the following intangible assets: customer-related intangibles of $590,000 (accumulated amortization of $59,000 at July 31, 2004), brandname intangibles of $275,000 and other identified intangibles totaling $2,000 (accumulated amortization of $1,000 at July 31, 2004). The customer-related intangibles and other identified intangibles are being amortized over five and two years. The intangible asset related to the brandname currently has an indefinite remaining useful life and, as a result, is not currently subject to amortization. Goodwill is also not subject to amortization and is not expected to be deductible for tax purposes. Goodwill and the brandname intangible will be tested for impairment at least annually and more frequently if an event occurs which indicates that goodwill or the brandname intangible may be impaired. We have not identified impairment indicators related to goodwill or the brandname intangible. We anticipate that amortization related to amortizing intangibles will be approximately $89,000 for the year ended October 31, 2004. We anticipate recording amortization expense of approximately $119,000 per annum from fiscal 2005 through fiscal 2008, with the remaining amortization expense of approximately $29,000 recorded in fiscal 2009. Pro forma statement of operations information is not presented, as the acquisition was not deemed to be a material business combination.

Processed product segment restructuring

     In February 2003, our Board of Directors approved a plan whereby the operations of our processed products business would be relocated. The plan calls for the closing of our Santa Paula, California and Mexicali, Baja California Norte processing facilities and the relocation of these operations to a new facility in Uruapan, Michoacan, Mexico. We believe that this restructuring will provide cost savings in the elimination of certain transportation costs, duplicative overhead structures, and savings in the overall cost of labor and services. The Uruapan facility commenced operations in February 2004.

     We expect to pay additional employee separation costs in connection with our planned future closure of our Mexicali, Baja California Norte production facility, which will be recognized when incurred. Those costs have not yet been quantified and are expected to be accrued for and paid later in fiscal year 2004. As of July 31, 2004, we have not accrued for any charges relating to the production assets being held at our Mexicali, Baja California Norte production facility as it is anticipated that all such assets will be re-commissioned at our new facility in Uruapan, Michoacan or their carrying value is less than their net realizable value.

     Additional restructuring related expenses are expected to be incurred during fiscal 2004, but such amounts are not yet determinable.

Corporate headquarters building

     In August 2004, we entered into an agreement to sell our corporate headquarters building located in Santa Ana, California for $3,400,000. Escrow related to such transaction is expected to close near the end of fiscal 2004, but we have negotiated with the purchaser to lease the premises until the expected relocation date in January 2005 at no additional expense. This transaction will result in a pre-tax gain on sale of approximately $1.7 million, plus the fair value of the rent-free use of the premises, at closing. We currently plan to relocate our corporate offices in or near Santa Paula, California. We expect to complete the move of our corporate headquarters in January 2005.

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Net Sales

     The following table summarizes our net sales by business segment for each of the three and nine month periods ended July 31, 2004 and 2003:

                                                 
    Three months ended July 31,
  Nine months ended July 31,
(in thousands)
  2004
  Change
  2003
  2004
  Change
  2003
Net sales to third parties:
                                               
California avocados
  $ 66,727       (1.8 )%   $ 67,921     $ 121,058       5.2 %   $ 115,068  
International avocados and perishable food products
    9,831       109.8 %     4,685       68,270       45.1 %     47,037  
Processed products
    6,760       (22.8 )%     8,753       19,454       (6.8 )%     20,876  
 
   
 
             
 
     
 
             
 
 
Total net sales
  $ 83,318       2.4 %   $ 81,359     $ 208,782       14.1 %   $ 182,981  
 
   
 
             
 
     
 
             
 
 
As a percentage of net sales:
                                               
California avocados
    80.1 %             83.5 %     58.0 %             62.9 %
International avocados and perishable food products
    11.8 %             5.8 %     32.7 %             25.7 %
Processed products
    8.1 %             10.7 %     9.3 %             11.4 %
 
   
 
             
 
     
 
             
 
 
 
    100.0 %             100.0 %     100.0 %             100.0 %
 
   
 
             
 
     
 
             
 
 

     Net sales for the third quarter of fiscal 2004 compared to fiscal 2003 increased by $2.0 million, or 2.4%; whereas net sales for the nine months ended July 31, 2004 compared to fiscal 2003, increased by $25.8 million, or 14.1%. Consistent with the historical seasonality of the California avocado harvest season, our California avocado business generated 80.1% of our consolidated net sales for the third quarter, as compared to 83.5% for the same prior year period. For the three and nine month periods, our net sales growth reflects an increasing percentage of our business being generated from our international avocados and perishable food products segment. This increase was driven primarily by additional sales related to the acquisition of Maui, as well as increases in the volume and/or price per carton of avocados being imported from Mexico and the Dominican Republic. Such increases, however, were partially offset by decreases in Chilean and New Zealand sourced fruit. Net sales generated by our processed products business are not generally subject to the seasonal effect experienced by our other operating segments. For the nine month period, the decrease in net sales to third parties delivered by our processed products business was due primarily to a decrease in total pounds of product sold, partially offset by marginal increases in average selling prices. We anticipate that sales generated from our California avocados and international avocados and perishable food products segments will continue to represent the majority of total net sales and the percentage of total net sales generated from these segments may increase in the future.

     Net sales to third parties by segment exclude value-added services billed by our Uruapan packinghouse, Uruapan processing plant and Mexicali processing plant to the parent company. All intercompany sales are eliminated in our consolidated results of operations.

California avocados

     Net sales delivered by the business decreased by approximately $1.2 million, or 1.8%, for the third quarter of fiscal 2004 when compared to the same period for fiscal 2003. The decrease in sales reflects a decrease in our average selling prices, partially offset by a 30% increase in pounds of avocados sold, when compared to the same prior year period. The increase in pounds is consistent with the expected increase in the overall harvest of the California avocado crop for the 2003/2004 season. Our market share of California avocados increased slightly to 33.4% in the third quarter of fiscal 2004, when compared to a 31.7% market share for the same prior year period.

     Net sales delivered by the business increased by approximately $6.0 million, or 5.2%, for the first nine months of fiscal 2004, compared to the same fiscal 2003 period. The increase in sales reflects an 11.2% increase in pounds of avocados sold, partially offset by a decrease in our average selling prices when compared to the same prior year

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period. This increase in delivered pounds is consistent with the expected increase in the overall harvest of the California avocado crop for the 2003/2004 season. Our market share of California avocados remained fairly consistent at 33.9% for the nine months ended July 31, 2004, compared to 33.4% for the same period in the prior year.

     Average selling prices, on a per carton basis, for California avocados for the third quarter and the nine months of fiscal 2004 were 26.2% and 6.2% lower when compared to the same prior year periods. This pricing structure primarily reflects the impact of a larger California avocado harvest.

     We anticipate that our California avocado business will experience a seasonal decrease during the fourth fiscal quarter of 2004. In addition, we believe that the introduction of imported avocados in the U.S. marketplace will negatively impact average selling prices, principally as a result of an increase in volume.

International and perishable food products

     For the quarter ended July 31, 2004, when compared to the same period for fiscal 2003, sales to third-party customers increased by approximately $5.1 million, or 109.8%. For the quarters ended July 31, 2004 and 2003, net sales exclude approximately $1.3 million and $0.9 million of value-added services billed by our Mexican subsidiaries to the parent company, which are eliminated from our consolidated financial results.

     For the nine months of fiscal 2004, when compared to the same period for fiscal 2003, sales to third-party customers increased by approximately $21.2 million, or 45.1%. For the nine months of fiscal 2004 and 2003, net sales exclude approximately $6.2 million and $4.8 million of value-added services billed by our Mexican subsidiaries to the parent company, which are eliminated from our consolidated financial results.

     The increased sales to third-parties by our international and perishable food products business are primarily driven by the additional sales related to the acquisition of Maui in November 2003, as well as increased sales of Mexican and Dominican Republic grown avocados in the U.S., Japanese, and/or European marketplace.

     For the quarter ended July 31, 2004, the additional sales related to the acquisition of Maui totaled approximately $4.1 million. Additionally, sales of Mexican sourced fruit increased $740,000 for the quarter ended July 31, 2004, when compared to the same prior period, primarily as a result of a 24.7% increase in pounds of Mexican fruit handled.

     For the nine months ended July 31, 2004, the additional sales related to the acquisition of Maui totaled approximately $14.1 million. Additionally, sales of Mexican and Dominican Republic sourced fruit increased $5,503,000 and $6,560,000 for the nine months ended July 31, 2004, when compared to the same prior period, primarily as a result of a 21.3% and 100% increase in pounds of Mexican and Dominican Republic fruit handled. Such increases, however, were partially offset by decreases in Chilean fruit sales. For the nine months ended July 31, 2004, sales of Chilean sourced fruit decreased $6,516,000, when compared to the same prior period. This was primarily the result of a 53.8% decrease in the volume of Chilean fruit handled, when compared to the same prior year period.

     For the fourth fiscal quarter, we anticipate sales for this segment to increase gradually. This is consistent with the seasonal nature of the availability of foreign sourced avocados in the U.S marketplace. We believe Chilean avocados will begin to be sold in late August or early September and this will continue well into the first quarter of fiscal 2005. In addition, we plan on strong demand for Mexican avocados from the Japanese market for the entire fourth fiscal quarter. Mexican avocados will begin to be sold into the United States marketplace by mid-October and should continue well into the second fiscal quarter of 2005, as permitted by the existing rules on the importation of Mexican sourced fruit. We are reviewing the assessment issued by the U.S. Department of Agriculture which, if adopted as drafted, would lift current import limits on Hass avocados from Mexico into the United States.

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Processed products

     For the quarter ended July 31, 2004, when compared to the same period for fiscal 2003, sales to third-party customers decreased by approximately $2.0 million, or 22.8%. This decrease is primarily related to a decrease in pounds of product sold of approximately 1.0 million pounds, or 21.4%, which primarily relates to a lack of inventory to meet customer demand. For the quarter ended July 31, 2004, when compared to the same period for fiscal 2003, we did not experience a significant fluctuation in our net selling prices. For the quarters ended July 31, 2004 and 2003, net sales exclude approximately $2.3 million and $1.2 million of value-added services billed by our Mexican subsidiaries to the parent company, which are eliminated from our consolidated financial results.

     For the first nine months of fiscal 2004, when compared to the same period for fiscal 2003, sales to third-party customers decreased by approximately $1.4 million, or 6.8%. This decrease is primarily related to a decrease in pounds of product sold of approximately 0.9 million pounds, or 8.3%, which primarily relates to a lack of inventory to meet customer demand. For the first nine months ended July 31, 2004, when compared to the same period for fiscal 2003, we did not experience a significant fluctuation in our net selling prices. For the first nine months of fiscal 2004 and 2003, net sales exclude approximately $4.9 million and $3.1 million of value-added services billed by our Mexican subsidiaries to the parent company, which are eliminated from our consolidated financial results.

     Our ultra high pressure products continue to experience solid demand. For the three and nine month period ending July 31, 2004, sales of high pressure product totaled approximately $1.6 million and $4.2 million, as compared to $1.0 and $1.9 million for the same prior year period. Such sales, however, relate solely to our single ultra high pressure machine in Mexicali. We believe that when the second, much larger, high pressure machine, in our new facility in Uruapan, Michoacan, Mexico, comes online, which is expected to take place in the fourth fiscal quarter of 2004, sales related to our high pressure product will increase even further. We believe that this product line will, in the long-term, successfully address a growing market segment.

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Gross Margins

     The following table summarizes our gross margins and gross profit percentages by business segment for each of the three and nine month periods ended July 31, 2004 and 2003:

                                                 
    Three months ended July 31,
  Nine months ended July 31,
(in thousands)
  2004
  Change
  2003
  2004
  Change
  2003
Gross margins:
                                               
California avocados
  $ 7,776       (0.6 )%   $ 7,826     $ 12,258       0.7 %   $ 12,167  
International avocados and perishable food products
    22       (155.0 )%     (40 )     4,144       17.8 %     3,518  
Processed products
    687       (49.9 )%     1,370       2,991       (31.5 )%     4,365  
 
   
 
             
 
     
 
             
 
 
Total gross margins
  $ 8,485       (7.3 )%   $ 9,156     $ 19,393       (3.3 )%   $ 20,050  
 
   
 
             
 
     
 
             
 
 
Gross profit percentages:
                                               
California avocados
    11.7 %             11.5 %     10.1 %             10.6 %
International avocados and perishable food products
    0.2 %             (0.9 )%     6.1 %             7.5 %
Processed products
    10.2 %             15.7 %     15.4 %             20.9 %
Consolidated
    10.2 %             11.3 %     9.3 %             11.0 %

     Our cost of goods sold consists predominantly of fruit costs, packing materials, freight and handling, labor and overhead (including depreciation) associated with preparing food products and other direct expenses pertaining to products sold. Consolidated gross margin, as a percent of sales, decreased 1.1% and 1.7% for the three and nine month periods ended July 31, 2004. These decreases were principally attributable to decreased profitability in our international avocados and perishable food products operating segment, as well as our processed product segment.

     The gross profit percentages generated by our international avocados and perishable food products (international) business were negatively impacted by an increase in fruit costs. This increase in fruit costs had the effect of increasing our per pound costs, which, as a result, adversely affected gross margins. Further, our international segment experienced an increase in sales of non-exported fruit, which typically generate lower margins then exported fruit. These decreases, however, were partially offset by increases in fruit volume, which had the effect of reducing our per pound packing costs. The processed products gross profit percentages decreased primarily as a result of inefficiencies being experienced in the start-up process of our newly constructed facility in Uruapan, Mexico and the winding down of the operations at our Mexicali, Mexico facility. Such inefficiencies primarily relate to subcontracting costs and duplicative overhead costs. Additionally, our processed product segment experienced higher fruit costs, as well as an increase in the sale of products that generate a lower gross margin then those sold in the prior year. We anticipate that the gross profit percentage for our processed product segment will continue to experience significant fluctuations during the next fiscal quarter primarily due to the aforementioned inefficiencies and the uncertainty of fruit costs that will be used in the production process.

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Selling, General and Administrative

                                                 
    Three months ended July 31,
  Nine months ended July 31,
(in thousands)
  2004
  Change
  2003
  2004
  Change
  2003
                                                 
Selling, general and administrative
  $ 3,777       (3.6 )%   $ 3,919     $ 11,504       2.3 %   $ 11,240  
Percentage of net sales
    4.5 %             4.8 %     5.5 %             6.1 %

     Selling, general and administrative expenses include costs of marketing and advertising, sales expenses and other general and administrative costs. Selling, general and administrative expenses decreased $0.1 million, or 3.6%, for the three months ended July 31, 2004, when compared to the same period for fiscal 2003. This decrease was primarily related to lower employee compensation expenses of approximately $175,000, primarily due to fewer high salaried employees, partially offset by selling, general and administrative expenses related to the acquisition of Maui and additional corporate costs. For the first nine months ended July 31, 2004 selling, general and administrative expenses increased by $0.3 million, or 2.3%, compared to the same period for fiscal 2003. The increased general and administrative costs related principally to selling, general and administrative expenses incurred by Maui and additional corporate costs, partially offset by reduced employee compensation expenses of approximately $679,000. Maui’s selling, general and administrative expenses totaled approximately $160,000 and $600,000 for the three and nine month periods ended July 31, 2004.

Other Income, net

                                                 
    Three months ended July 31,
  Nine months ended July 31,
(in thousands)
  2004
  Change
  2003
  2004
  Change
  2003
                                                 
Other income, net
  $ (91 )     (69.0 )%   $ (294 )   $ (311 )     (49.4 )%   $ (615 )
Percentage of net sales
    (0.1 )%             (0.4 )%     (0.1 )%             (0.3 )%

     Other income, net includes interest income and expense generated in connection with our financing and operating activities, as well as certain other transactions that are outside of the course of normal operations. For the three and nine months ended July 31, 2004, other income, net includes interest accrued on notes receivable from directors and employees of approximately $0.1 and $0.2 million.

Provision for Income Taxes

                                                 
    Three months ended July 31,
  Nine months ended July 31,
(in thousands)
  2004
  Change
  2003
  2004
  Change
  2003
                                                 
Provision for income taxes
  $ 1,739       (24.0 )%   $ 2,287     $ 3,100       (19.4 )%   $ 3,848  
Percentage of income before provision for income taxes
    36.2 %             41.4 %     37.8 %             41.3 %

     For the first nine months of fiscal 2004, our provision for income taxes was $3.1 million, as compared to $3.8 million recorded for the comparable prior year period. We expect our effective tax rate to approximate 38.0% during fiscal 2004. The decrease in our effective tax rate for fiscal 2004 is primarily related to an expected favorable reduction in our foreign tax rate.

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Liquidity and Capital Resources

     Cash provided by operating activities was $3.7 million for the nine months ended July 31, 2004, compared to $10.4 million for the similar period in fiscal 2003. Operating cash flows for the nine months ended July 31, 2004 reflect our net income of $5.1 million, net non-cash charges (depreciation and amortization, stock based compensation and provision for losses on accounts receivable) of $1.9 million and a net decrease in the noncash components of our working capital of approximately $3.3 million.

     These working capital decreases include an increase in accounts receivable of $11.2 million, an increase in inventory of $5.7 million, and a increase in advance to suppliers of $1.8 million, partially offset by an increase in payable to growers of $11.5 million, an increase in prepaid expenses and other assets of $0.9 million, an increase in trade accounts payable and accrued expenses of $1.6 million, an increase in income taxes payable of $1.1 million, and a decrease in loans to growers of $0.3 million.

     Increases in our accounts receivable balance as of July 31, 2004, when compared to October 31, 2003, reflect a significantly higher volume of California avocado sales recorded in the month of July 2004, as compared to October 2003. Similarly, the amounts payable to our growers also reflects the increase in the volume of California avocados marketed in the month of July 2004, as compared to October 2003. These volume increases are consistent with the harvest levels experienced in previous years.

     Cash used in investing activities was $5.5 million for the nine months ended July 31, 2004 and related principally to the purchase of capital equipment of $5.4 million. Such equipment was primarily acquired in connection with the construction of our new processed operations facility in Uruapan, Michoacan, Mexico.

     Cash used in financing activities was $2.7 million for the nine months ended July 31, 2004 related principally to $3.4 million of cash outflows from the payment of a dividend, partially offset by collections on notes receivable of $0.7 million.

     Our principal sources of liquidity are our existing cash reserves, cash generated from operations, and amounts available for borrowing under our existing credit facilities. Cash and cash equivalents as of July 31, 2004 and October 31, 2003, totaled $0.8 million and $5.4 million. Our working capital at July 31, 2004 was $23.2 million compared to $20.7 million at October 31, 2003. The overall working capital increase is primarily related to an increase in accounts receivable, inventory, advance to suppliers and the payment of our dividend payable. Such increases were partially offset by an increase in payable to growers and accounts payable and accrued expenses.

     We believe that our available credit facilities, as well as expected cash flows from operations, will be sufficient to satisfy our future capital expenditures, grower recruitment efforts, working capital and other financing requirements. We will continue to evaluate grower recruitment opportunities and exclusivity arrangements with food service companies to fuel growth in each of our business segments. We recently renewed our two short-term, non-collateralized, revolving credit facilities. These credit facilities expire in January 2006 and April 2006 and are with separate banks. Under the terms of these agreements, we are advanced funds for working capital purposes. Total credit available under the combined short-term borrowing agreements was $24,000,000 at July 31, 2004. We also do not have significant long-term debt as of July 31, 2004.

     We do not believe that the move of corporate headquarters will have a significant impact on liquidity, as the net proceeds from the sale of our current corporate headquarters is currently believed to be in excess of any anticipated moving expenses and costs of improvements.

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CAUTIONARY STATEMENT

     This Quarterly Report on Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by those sections. Forward-looking statements frequently are identifiable by the use of words such as “believe,” “anticipate,” “expect,” “intend,” “will,” and other similar expressions. Our actual results may differ materially from those projected as a result of certain risks and uncertainties. These risks and uncertainties include, but are not limited to: increased competition, conducting substantial amounts of business internationally, pricing pressures on agricultural products, adverse weather and growing conditions confronting avocado growers, new governmental regulations, as well as other risks and uncertainties, including but not limited to those set forth in Part I., Item 1 under the caption “Certain Business Risks” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2003, and those detailed from time to time in our other filings with the Securities and Exchange Commission. These forward-looking statements are made only as of the date hereof, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our financial instruments include cash and cash equivalents, accounts receivable, short and long-term loans to growers, notes receivable from shareholders, payable to growers, accounts payable, current borrowings pursuant to our credit facilities with financial institutions, and long-term, fixed-rate obligations. All of our financial instruments are entered into during the normal course of operations and have not been acquired for trading purposes. The table below summarizes interest rate sensitive financial instruments and presents principal cash flows in U.S. dollars, which is our reporting currency, and weighted-average interest rates by expected maturity dates, as of July 31, 2004.

                                                                 
    Expected maturity date April 30,
(All amounts in thousands)
  2004
  2005
  2006
  2007
  2008
  Thereafter
  Total
  Fair Value
Assets:
                                                               
Cash and cash equivalents (1)
  $ 848     $     $     $     $     $     $ 848     $ 848  
Accounts receivable, net (1)
    27,749                                     27,749       27,749  
Loans to growers (1)
    65                                     65       65  
Long-term loans to growers (2)
          178                               178       179  
Advances to supplies (1)
    2,396                                     2,396       2,396  
Notes receivable from shareholders (3)
          210       211       2,462                   2,883       2,952  
Liabilities:
                                                               
Payable to growers (1)
  $ 14,949     $     $     $     $     $     $ 14,949     $ 14,949  
Accounts payable (1)
    3,599                                     3,599       3,599  
Fixed-rate long-term obligations (4)
    23       15       8       8       6             60       62  

(1)   We believe the carrying amounts of cash and cash equivalents, accounts receivable, short-term loans to growers, advances to supplies, payable to growers, and accounts payable approximate their fair value due to the short maturity of these financial instruments.
 
(2)   Loans to growers bear fixed interest rates of approximately 5.0%. We believe that a portfolio of loans with a similar risk profile would currently yield a return of 4.5%. We project the impact of an increase or decrease in interest rates of 100 basis points would result in a change of fair value of approximately $3,000.
 
(3)   Notes receivable from shareholders bear interest at 7.0%. We believe that a portfolio of loans with a similar risk profile would currently yield a return of 6.5%. We project the impact of an increase or decrease in interest rates of 100 basis points would result in a change of fair value of approximately $135,000.
 
(4)   Fixed-rate long-term obligations bear interest rates ranging from 3.3% to 8.2% with a weighted-average interest rate of 5.1%. We believe that loans with a similar risk profile would currently yield a return of 3.7%. We project the impact of an increase or decrease in interest rates of 100 basis points would result in a change of fair value of approximately $2,000.

     We were not a party to any derivative instruments during the fiscal year. It is currently our intent not to use derivative instruments for speculative or trading purposes. Consequently, we do not use any hedging or forward contracts to offset market volatility.

     Our Mexican-based operations transact business in Mexican pesos. Funds are transferred by our corporate office to Mexico on a weekly basis to satisfy domestic cash needs. Consequently, the spot rate for the Mexican peso has a moderate impact on our operating results. However, we do not believe that this impact is sufficient to warrant the use of derivative instruments to hedge the fluctuation in the Mexican peso. Total foreign currency gains and losses for each of the three years in the period ended October 31, 2003, and nine month periods ended July 31, 2004 and July 31, 2003, do not exceed $0.1 million.

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ITEM 4. CONTROLS AND PROCEDURES

     Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), the Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

     From time to time, we become involved in legal proceedings that are related to our business operations. We are not currently a party to any legal proceedings that could have a material adverse effect upon our financial position or results of operations.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits:

     
31.1
  Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Principal Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Principal Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b)   Reports on Form 8-K

     On June 9, 2004, we filed a Current Report on Form 8-K to report under Item 7 (Exhibits) and Item 12 (Results of Operations and Financial Condition), a press release (attached as Exhibit 99.1) regarding our financial results for the fiscal quarter ended April 30, 2004.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

         
    Calavo Growers, Inc.
(Registrant)
 
       
Date: September 9, 2004
  By   /s/ Lecil E. Cole
     
      Lecil E. Cole
      Chairman of the Board of Directors,
      Chief Executive Officer and President
      (Principal Executive Officer)
 
       
Date: September 9, 2004
  By   /s/ Arthur J. Bruno
     
      Arthur J. Bruno
      Vice President, Finance and Corporate Secretary
      (Principal Financial Officer)

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INDEX TO EXHIBITS

     
Exhibit    
Number
  Description
31.1
  Certification of Chief Executive Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Principal Financial Officer Pursuant to 15 U.S.C. § 7241, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Principal Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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