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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended April 30, 2004

OR

     
o   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
(State of incorporation)
  33-0945304
(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 o

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

Yes x    No o

Registrant’s number of shares of common stock outstanding as of April 30, 2004 was 13,506,833.




 


Table of Contents

CALAVO GROWERS, INC.

INDEX

             
        PAGE
PART I. FINANCIAL INFORMATION        
  Financial Statements (unaudited):        
 
  Consolidated Condensed Balance Sheets — April 30, 2004 and October 31, 2003     3  
 
  Consolidated Condensed Statements of Income — Three Months and Six Months Ended April 30, 2004 and 2003     4  
 
  Consolidated Condensed Statements of Cash Flows — Six Months Ended April 30, 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  
PART II. OTHER INFORMATION        
  Legal Proceedings     24  
  Submission of Matters to a Vote of Security Holders     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)

                 
    April 30,   October 31,
    2004   2003
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 682     $ 5,375  
Accounts receivable, net of allowances of $1,626 (2004) and $1,219 (2003)
    27,563       16,560  
Inventories, net
    12,612       8,021  
Prepaid expenses and other current assets
    3,924       4,487  
Loans to growers
    291       353  
Advances to suppliers
    430       624  
Deferred income taxes
    1,379       1,379  
 
   
 
     
 
 
Total current assets
    46,881       36,799  
Property, plant, and equipment, net
    16,781       13,121  
Goodwill
    3,591        
Other assets
    4,053       3,769  
 
   
 
     
 
 
 
  $ 71,306     $ 53,689  
 
   
 
     
 
 
Liabilities and shareholders’ equity
               
Current liabilities:
               
Payable to growers
  $ 15,783     $ 3,446  
Trade accounts payable
    1,579       1,534  
Accrued expenses
    8,402       7,777  
Income taxes payable
    214       51  
Short-term borrowings
    1,000        
Dividend payable
          3,232  
Current portion of long-term obligations
    24       24  
 
   
 
     
 
 
Total current liabilities
    27,002       16,064  
Long-term liabilities:
               
Long-term obligations, less current portion
    42       61  
Deferred income taxes
    764       417  
 
   
 
     
 
 
Total long-term liabilities
    806       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
    28,797       24,727  
Notes receivable from shareholders
    (3,179 )     (3,563 )
Retained earnings
    17,866       15,970  
 
   
 
     
 
 
Total shareholders’ equity
    43,498       37,147  
 
   
 
     
 
 
 
  $ 71,306     $ 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   Six months ended
    April 30,   April 30,
    2004   2003   2004   2003
Net sales
  $ 76,421     $ 57,393     $ 125,464     $ 101,622  
Cost of sales
    68,625       50,422       114,556       90,728  
 
   
 
     
 
     
 
     
 
 
Gross margin
    7,796       6,971       10,908       10,894  
Special charges
          98             98  
Selling, general and administrative
    4,012       4,130       7,727       7,321  
 
   
 
     
 
     
 
     
 
 
Operating income
    3,784       2,743       3,181       3,475  
Other income, net
    (106 )     (206 )     (220 )     (321 )
 
   
 
     
 
     
 
     
 
 
Income before provision for income taxes
    3,890       2,949       3,401       3,796  
Provision for income taxes
    1,556       1,214       1,361       1,561  
 
   
 
     
 
     
 
     
 
 
Net income
  $ 2,334     $ 1,735     $ 2,040     $ 2,235  
 
   
 
     
 
     
 
     
 
 
Net income per share:
                               
Basic
  $ 0.17     $ 0.13     $ 0.15     $ 0.17  
 
   
 
     
 
     
 
     
 
 
Diluted
  $ 0.17     $ 0.13     $ 0.15     $ 0.17  
 
   
 
     
 
     
 
     
 
 
Number of shares used in per share computation:
                               
Basic
    13,507       12,930       13,488       12,892  
 
   
 
     
 
     
 
     
 
 
Diluted
    13,589       12,960       13,571       12,922  
 
   
 
     
 
     
 
     
 
 

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)

                 
    Six months ended April 30,
    2004   2003
Cash Flows from Operating Activities:
               
Net income
  $ 2,040     $ 2,235  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    1,065       987  
Write-off of fixed assets
          27  
Stock based compensation
    21        
Provision for losses on accounts receivable
    25       19  
Effect on cash of changes in operating assets and liabilities:
               
Accounts receivable
    (11,028 )     (5,799 )
Inventories, net
    (4,591 )     (799 )
Prepaid expenses and other assets
    1,146       923  
Loans to growers
    62       49  
Advances to suppliers
    194       521  
Income taxes receivable
          (202 )
Payable to growers
    12,337       6,012  
Trade accounts payable and accrued expenses
    560       (1,440 )
Income taxes payable
    163        
 
   
 
     
 
 
Net cash provided by operating activities
    1,994       2,533  
Cash Flows from Investing Activities:
               
Direct costs of Maui acquisition
    (65 )      
Acquisitions of and deposits on property, plant, and equipment
    (4,611 )     (2,085 )
 
   
 
     
 
 
Net cash used in investing activities
    (4,676 )     (2,085 )
Cash Flows from Financing Activities:
               
Payment of dividend to shareholders
    (3,376 )     (2,567 )
Proceeds from short-term borrowings, net
    1,000       1,100  
Additional costs related to the rights offering
          (41 )
Collection on notes receivable from shareholders
    384       856  
Payments on long-term obligations
    (19 )     (338 )
Exercise of stock options
          475  
 
   
 
     
 
 
Net cash used in financing activities
    (2,011 )     (515 )
 
   
 
     
 
 
Net decrease in cash and cash equivalents
    (4,693 )     (67 )
Cash and cash equivalents, beginning of period
    5,375       921  
 
   
 
     
 
 
Cash and cash equivalents, end of period
  $ 682     $ 854  
 
   
 
     
 
 
Supplemental Information -
               
Cash paid during the year for:
               
Interest
  $ 45     $ 118  
 
   
 
     
 
 
Income taxes
  $ 1,089     $ 1,545  
 
   
 
     
 
 
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  
Long term liabilities
    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 3 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 relate to the finalization of our valuation information.

         
    April
(in thousands)   2004
Fixed assets
  $ 114  
Goodwill
    3,591  
Intangible assets
    867  
 
   
 
 
Total assets acquired
    4,572  
Current liabilities
    110  
Long term 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, brandname intangibles of $275,000 and other identified intangibles totaling $2,000. The customer-related intangibles and other identified intangibles are being amortized

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

over 5 and 2 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 generally 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 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 3-year period, has an exercise price of $7.00 per share, and has a term of 5 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 six month period ended April 30, 2004, we recognized $21,000 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   Six months ended
    April 30,   April 30,
    2004   2003   2004   2003
Net Income:
                               
As reported
  $ 2,334     $ 1,735     $ 2,040     $ 2,235  
Add: Total stock-based compensation expense determined under APB 25 and related interpretations, net of tax effects
    5             8        
Deduct: Total stock based compensation expense determined under fair value based method for all awards, net of tax effects
    (5 )           (8 )      
 
   
 
     
 
     
 
     
 
 
Pro forma
  $ 2,334     $ 1,735     $ 2,040     $ 2,235  
 
   
 
     
 
     
 
     
 
 
Net income per share, as reported:
                               
Basic
  $ 0.17     $ 0.13     $ 0.15     $ 0.17  
Diluted
  $ 0.17     $ 0.13     $ 0.15     $ 0.17  
Net income per share, pro forma:
                               
Basic
  $ 0.17     $ 0.13     $ 0.15     $ 0.17  
Diluted
  $ 0.17     $ 0.13     $ 0.15     $ 0.17  

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

     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 2004 has been estimated at the date of grant using the Black-Scholes 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 Black-Scholes and Binary option valuation models were 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.

Recent Accounting Standards

     In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 46, “Consolidation of Variable Interest Entities,” which was amended in December 2003. We adopted FIN 46 in our second quarter ending April 30, 2004, with no impact on our financial position or results of operations.

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)
Six months ended April 30, 2004
                                       
Net sales
  $ 54,637     $ 63,275     $ 15,338     $ (7,786 )   $ 125,464  
Cost of sales
    50,155       59,153       13,034       (7,786 )     114,556  
 
   
 
     
 
     
 
     
 
     
 
 
Gross margin
    4,482       4,122       2,304             10,908  
Selling, general and administrative
    3,401       2,018       2,308             7,727  
 
   
 
     
 
     
 
     
 
     
 
 
Operating income (loss)
    1,081       2,104       (4 )           3,181  
Other income, net
    (168 )     (47 )     (5 )           (220 )
 
   
 
     
 
     
 
     
 
     
 
 
Income before provision for income taxes
    1,249       2,151       1             3,401  
Provision for income taxes
    500       861                   1,361  
 
   
 
     
 
     
 
     
 
     
 
 
Net income
  $ 749     $ 1,290     $ 1     $     $ 2,040  
 
   
 
     
 
     
 
     
 
     
 
 

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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)
Six months ended April 30, 2003
                                       
Net sales
  $ 47,147     $ 46,180     $ 14,063     $ (5,768 )   $ 101,622  
Cost of sales
    42,806       42,622       11,068       (5,768 )     90,728  
 
   
 
     
 
     
 
     
 
     
 
 
Gross margin
    4,341       3,558       2,995             10,894  
Special charges
                98             98  
Selling, general and administrative
    3,465       1,519       2,337             7,321  
 
   
 
     
 
     
 
     
 
     
 
 
Operating income
    876       2,039       560             3,475  
Other expense (income), net
    (256 )     (74 )     9             (321 )
 
   
 
     
 
     
 
     
 
     
 
 
Income before provision for income taxes
    1,132       2,113       551             3,796  
Provision for income taxes
    465       869       227             1,561  
 
   
 
     
 
     
 
     
 
     
 
 
Net income
  $ 667     $ 1,244     $ 324     $     $ 2,235  
 
   
 
     
 
     
 
     
 
     
 
 
                                         
            International            
            avocados and            
    California   perishable food   Processed   Inter-segment    
    avocados   products   products   eliminations   Total
    (All amounts are presented in thousands)
Three months ended April 30, 2004
                                       
Net sales
  $ 44,409     $ 28,387     $ 8,278     $ (4,653 )   $ 76,421  
Cost of sales
    40,055       26,463       6,760       (4,653 )     68,625  
 
   
 
     
 
     
 
     
 
     
 
 
Gross margin
    4,354       1,924       1,518             7,796  
Selling, general and administrative
    1,799       1,022       1,191             4,012  
 
   
 
     
 
     
 
     
 
     
 
 
Operating income
    2,555       902       327             3,784  
Other income, net
    (85 )     (19 )     (2 )           (106 )
 
   
 
     
 
     
 
     
 
     
 
 
Income before provision for income taxes
    2,640       921       329             3,890  
Provision for income taxes
    1,056       369       131             1,556  
 
   
 
     
 
     
 
     
 
     
 
 
Net income
  $ 1,584     $ 552     $ 198     $     $ 2,334  
 
   
 
     
 
     
 
     
 
     
 
 
                                         
            International            
            avocados and            
    California   perishable food   Processed   Inter-segment    
    avocados   products   products   eliminations   Total
    (All amounts are presented in thousands)
Three months ended April 30, 2003
                                       
Net sales
  $ 34,962     $ 17,891     $ 7,509     $ (2,969 )   $ 57,393  
Cost of sales
    31,283       16,138       5,970       (2,969 )     50,422  
 
   
 
     
 
     
 
     
 
     
 
 
Gross margin
    3,679       1,753       1,539             6,971  
Special charges
                98             98  
Selling, general and administrative
    1,948       838       1,344             4,130  
 
   
 
     
 
     
 
     
 
     
 
 
Operating income
    1,731       915       97             2,743  
Other income, net
    (148 )     (58 )                 (206 )
 
   
 
     
 
     
 
     
 
     
 
 
Income before provision for income taxes
    1,879       973       97             2,949  
Provision for income taxes
    771       402       41             1,214  
 
   
 
     
 
     
 
     
 
     
 
 
Net income
  $ 1,108     $ 571     $ 56     $     $ 1,735  
 
   
 
     
 
     
 
     
 
     
 
 

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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):

                                                                 
    Six months ended April 30, 2004   Six months ended April 30, 2003
            International                           International        
            avocados                           avocados        
            and                           and        
            perishable                           perishable        
    California   food   Processed           California   food   Processed    
    avocados   products   products   Total   avocados   products   Products   Total
Third-party sales:
                                                               
California avocados
  $ 51,036     $     $     $ 51,036     $ 43,897     $     $     $ 43,897  
Imported avocados
          39,164             39,164             34,613             34,613  
Papayas
          3,302             3,302             1,280             1,280  
Specialties and Tropicals
          8,237             8,237                          
Processed— food service
                13,896       13,896                   11,878       11,878  
Processed— retail and club.
                1,982       1,982                   2,516       2,516  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total fruit and product sales to third-parties
    51,036       50,703       15,878       117,617       43,897       35,893       14,394       94,184  
Freight and other charges
    3,357       7,783       172       11,312       3,336       6,536       122       9,994  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total third-party sales
    54,393       58,486       16,050       128,929       47,233       42,429       14,516       104,178  
Less sales incentives
    (62 )     (47 )     (3,356 )     (3,465 )     (86 )     (77 )     (2,393 )     (2,556 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total net sales to
    54,331       58,439       12,694       125,464       47,147       42,352       12,123       101,622  
third-parties Intercompany sales
    306       4,836       2,644       7,786             3,828       1,940       5,768  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Net sales before eliminations
  $ 54,637     $ 63,275     $ 15,338       133,250     $ 47,147     $ 46,180     $ 14,063       107,390  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Intercompany sales eliminations
                            (7,786 )                             (5,768 )
 
                           
 
                             
 
 
Consolidated net sales
                          $ 125,464                             $ 101,622  
 
                           
 
                             
 
 
                                                                 
    Three months ended April 30, 2004   Three months ended April 30, 2003
            International                           International        
            avocados                           avocados        
            and                           and        
            perishable                           perishable        
    California   food   Processed           California   food   Processed    
    avocados   products   products   Total   avocados   products   Products   Total
Third-party sales:
                                                               
California avocados
  $ 41,481     $     $     $ 41,481     $ 32,479     $     $     $ 32,479  
Imported avocados
          15,619             15,619             11,779             11,779  
Papayas
          1,662             1,662             678             678  
Specialties and Tropicals
          4,258             4,258                          
Processed— food service
                7,342       7,342                   6,609       6,609  
Processed— retail and club.
                1,032       1,032                   1,265       1,265  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total fruit and product sales to third-parties
    41,481       21,539       8,374       71,394       32,479       12,457       7,874       52,810  
Freight and other charges
    2,655       4,058       104       6,817       2,525       3,427       66       6,018  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total third-party sales
    44,136       25,597       8,478       78,211       35,004       15,884       7,940       58,828  
Less sales incentives
    (33 )     (1 )     (1,756 )     (1,790 )     (42 )     (46 )     (1,347 )     (1,435 )
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Total net sales to third-parties
    44,103       25,596       6,722       76,421       34,962       15,838       6,593       57,393  
Intercompany sales
    306       2,791       1,556       4,653             2,053       916       2,969  
 
   
 
     
 
     
 
     
 
     
 
     
 
     
 
     
 
 
Net sales before eliminations
  $ 44,409     $ 28,387     $ 8,278       81,074     $ 34,962     $ 17,891     $ 7,509       60,362  
 
   
 
     
 
     
 
             
 
     
 
     
 
         
Intercompany sales eliminations
                            (4,653 )                             (2,969 )
 
                           
 
                             
 
 
Consolidated net sales
                          $ 76,421                             $ 57,393  
 
                           
 
                             
 
 

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

3. Inventories

     Inventories consist of the following (in thousands):

                 
    April 30,   October 31,
    2004   2003
Fresh fruit
  $ 7,314     $ 2,918  
Packing supplies and ingredients
    2,153       1,974  
Finished processed foods
    3,145       3,129  
 
   
 
     
 
 
 
  $ 12,612     $ 8,021  

     During the three and six month periods ended April 30, 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 $3,302,000, and $1,280,000 for the six months ended April 30, 2004 and 2003, resulting in gross margins of approximately $427,000 and $127,000. Included in trade accounts payable and accrued liabilities are approximately $192,000 and $296,000 at April 30, 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 six months ended April 30, 2004 and 2003, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $0.9 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 May 2003, we entered into a commitment to purchase approximately 1.3 million pounds of processed avocado products from a supplier for a cost of approximately $1.5 million over a 12-month period. Through April 2004, we have received substantially all products subject to this commitment.

     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 April 30, 2004, no amounts or orders were outstanding and all amounts owed by such supplier related to this guarantee have been remitted.

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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 $23,000,000 at April 30, 2004, with interest at a weighted-average rate of 2.2% at April 30, 2004. The credit facilities contain various financial covenants with which we were in compliance at April 30, 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 April 30, 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 $23,000,000 at April 30, 2004, with interest at a weighted-average rate of 2.2% at April 30, 2004. The credit facilities contain various financial covenants with which we were in compliance at April 30, 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 3 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 relate to the finalization of our valuation information.

         
    April
(in thousands)   2004
Fixed assets
  $ 114  
Goodwill
    3,591  
Intangible assets
    867  
 
   
 
 
Total assets acquired
    4,572  
Current liabilities
    110  
Long term 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, brandname intangibles of $275,000 and other identified intangibles totaling $2,000. The customer-related intangibles and other identified intangibles are being amortized over 5 and 2 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 generally 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 anticipate that amortization related to amortizing intangibles will be approximately $89,000 for the year ended October 31, 2004. 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 April 30, 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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Net Sales

     The following table summarizes our net sales by business segment for each of the three and six month periods ended April 30, 2004 and 2003:

                                                 
    Three months ended April 30,   Six months ended April 30,
(in thousands)   2004   Change   2003   2004   Change   2003
Net sales to third-parties:
                                               
California avocados
  $ 44,103       26.1 %   $ 34,962     $ 54,331       15.2 %   $ 47,147  
International avocados and perishable food products.
    25,596       61.6 %     15,838       58,439       38.0 %     42,352  
Processed products
    6,722       2.0 %     6,593       12,694       4.7 %     12,123  
 
   
 
             
 
     
 
             
 
 
Total net sales
  $ 76,421       33.2 %   $ 57,393     $ 125,464       23.5 %   $ 101,622  
 
   
 
             
 
     
 
             
 
 
As a percentage of net sales:
                                               
California avocados
    57.7 %             60.9 %     43.3 %             46.4 %
International avocados and perishable food products.
    33.5 %             27.6 %     46.6 %             41.7 %
Processed products
    8.8 %             11.5 %     10.1 %             11.9 %
 
   
 
             
 
     
 
             
 
 
 
    100.0 %             100.0 %     100.0 %             100.0 %
 
   
 
             
 
     
 
             
 
 

     Net sales for the second quarter of fiscal 2004 compared to fiscal 2003 increased by $19.0 million, or 33.2%; whereas net sales for the six months ended April 30, 2004 compared to fiscal 2003 increased by $23.8 million, or 23.5%. Consistent with the historical seasonality of the California avocado harvest season, our California avocado business generated 57.7% of our consolidated net sales for the second quarter, as compared to 60.9% for the same prior year period. For the three and six 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 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 six month period, the increase in net sales to third parties delivered by our processed products business was due primarily to an increase in total pounds of product sold, combined with an increase in average 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 increased by approximately $9.1 million, or 26.1%, for the second quarter of fiscal 2004 when compared to the same period for fiscal 2003. The increase in sales reflects a 12.2% increase in pounds of avocados sold, as well as an improvement in our average selling prices 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 first grade Hass variety avocados remained consistent at 31.6% in the second 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 $7.2 million, or 15.2%, for the first six months of fiscal 2004, compared to the same fiscal 2003 period. The increase in sales reflects a 5.4% increase in pounds of

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avocados sold, as well as an improvement in our average selling prices when compared to the same prior year 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. Similar to our quarterly results, our market share of first grade Hass avocados remained fairly consistent at 32.7% for the six months ended April 30, 2004, compared to 33.9% for the same period in the prior year.

     Average selling prices, on a per carton basis, for first grade Hass variety avocados for the second quarter and the six months of fiscal 2004 were 12.2% and 5.4% higher when compared to the same prior year periods. We attribute some of the increase in these average selling prices to increasing demand for California grown avocados prevailing in the U.S. marketplace. We believe that our investments in focused marketing activities combined with promotional programs established by the California Avocado Commission have generally had a positive effect on average sales prices. Our strategy is to continue to develop marketing opportunities that favorably position avocados packed by Calavo with our customers by emphasizing existing value-added services, such as fruit bagging and ripening. We believe these and other value-added strategies are critical elements in sustaining competitive average selling prices.

     We anticipate that our California avocado business will experience a seasonal increase during the third fiscal quarter of 2004. In addition, we believe that the absence of imported avocados in the U.S. marketplace will positively impact average selling prices during the third fiscal quarter of 2004.

International and perishable food products

     For the quarter ended April 30, 2004, when compared to the same period for fiscal 2003, sales to third-party customers increased by approximately $9.8 million, or 61.6%. For the quarters ended April 30, 2004 and 2003, net sales exclude approximately $2.8 million and $2.1 million of value-added services billed by our Mexican subsidiaries to the parent company, which are eliminated from our consolidated financial results.

     For the six months of fiscal 2004, when compared to the same period for fiscal 2003, sales to third-party customers increased by approximately $16.1 million, or 38.0%. For the six months of fiscal 2004 and 2003, net sales exclude approximately $4.8 million and $3.8 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 April 30, 2004, the additional sales related to the acquisition of Maui totaled approximately $5.2 million. Additionally, the volume of Mexican and Dominican Republic fruit handled increased by 2.8 million pounds, or 18.3%, and 3.1 million pounds, or 100.0%, when compared to the same prior year period. Such increases, however, were partially offset by decreases in Chilean sourced fruit. For the six months ended April 30, 2004, the volume of Chilean fruit handled decreased by 0.2 million pounds, or 25.4%, when compared to the same prior year period.

     For the six months ended April 30, 2004, the additional sales related to the acquisition of Maui totaled approximately $10.1 million. Additionally, the volume of Mexican and Dominican Republic fruit handled increased by 5.5 million pounds, or 20.8%, and 8.1 million pounds, or 100.0%, when compared to the same prior year period. Such increases, however, were partially offset by decreases in Chilean fruit. For the three months ended April 30, 2004, the volume of Chilean fruit handled decreased by 10.7 million pounds, or 53.8%, when compared to the same prior year period.

     We anticipate that net sales for this segment will decrease in the third fiscal quarter of 2004 as compared to the second fiscal quarter of 2004. This is consistent with the cyclical nature of the availability of foreign sourced avocados in the U.S. marketplace. We terminated the packing and importing of Mexican grown avocados into the

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U.S. on April 15, 2004, as required by current rules established by the U.S. Department of Agriculture. We are, however, reviewing the updated assessment issued by the U.S. Department of Agriculture, which, if adopted as drafted, would lift current import limits on Hass avocados from Mexico. We do not anticipate significant sales related to New Zealand or Dominican Republic sourced fruit for the remainder of fiscal 2004.

Processed products

     For the quarter ended April 30, 2004, when compared to the same period for fiscal 2003, sales to third-party customers increased by approximately $0.1 million, or 2.0%. This increase is primarily related to a nominal increase in net sales prices. For the quarters ended April 30, 2004 and 2003, net sales exclude approximately $1.6 million and $1.0 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 six months of fiscal 2004, when compared to the same period for fiscal 2003, sales to third-party customers increased by approximately $0.6 million, or 4.7%. The increase in third-party sales is attributable to increases in both volume and in sales prices. During the first six months of fiscal 2004, we experienced an increase in pounds of product sold of approximately 60,000 pounds, or 0.1%. The average sales price increased by $0.06 per pound, representing an improvement of approximately 3.2%. For the first six months of fiscal 2004 and 2003, net sales exclude approximately $2.6 million and $1.9 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 six month period ending April 30, 2004, sales of high pressure product totaled approximately $1.3 million and $2.6 million, as compared to $0.7 and $0.9 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, sales related to our high pressure product will increase even further shortly thereafter. 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 six month periods ended April 30, 2004 and 2003:

                                                 
    Three months ended April 30,   Six months ended April 30,
(in thousands)   2004   Change   2003   2004   Change   2003
Gross margins:
                                               
California avocados
  $ 4,354       18.3 %   $ 3,679     $ 4,482       3.2 %   $ 4,341  
International avocados and perishable food products
    1,924       9.8 %     1,753       4,122       15.9 %     3,558  
Processed products
    1,518       (1.4 )%     1,539       2,304       (23.1 )%     2,995  
 
   
 
             
 
     
 
             
 
 
Total gross margins
  $ 7,796       11.8 %   $ 6,971     $ 10,908       0.1 %   $ 10,894  
 
   
 
             
 
     
 
             
 
 
Gross profit percentages:
                                               
California avocados
    9.8 %             10.5 %     8.2 %             9.2 %
International avocados and perishable food products
    7.5 %             11.1 %     7.1 %             8.4 %
Processed products
    22.6 %             23.3 %     18.2 %             24.7 %
Consolidated
    10.2 %             12.1 %     8.7 %             10.7 %

     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 1.9% and 2.0% for the three and six month period ended April 30, 2004. These decreases were principally attributable to decreased profitability in all of our operating segments.

     Our California avocados segment experienced a lower gross profit percentage principally as a result of higher fruit costs incurred by our Santa Paula and Temecula packinghouses. This increase in fruit costs had the effect of increasing our per pound packing costs, which, as a result, adversely affected gross margins. Similar to our California avocado segment, the gross profit percentages generated by our international avocados and perishable food products business were also negatively impacted by an increase in fruit costs. These increases in fruit costs, 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 related to the relocation of production from Santa Paula, California and Mexicali, Mexico to our newly acquired facility in Uruapan, Mexico, as well as higher fruit costs. Such inefficiencies primarily relate to subcontracting costs and duplicative overhead costs. 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 April 30,   Six months ended April 30,
(in thousands)   2004   Change   2003   2004   Change   2003
Selling, general and administrative
  $ 4,012       (2.9 )%   $ 4,130     $ 7,727       5.5 %   $ 7,321  
Percentage of net sales
    5.2 %             7.2 %     6.2 %             7.2 %

     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 2.9%, for the three months ended April 30, 2004 when compared to the same period for fiscal 2003. This decrease was primarily related to lower employee compensation expenses of approximately $565,000, partially offset by selling, general and administrative expenses related to the acquisition of Maui and additional corporate costs. For the first six months ended April 30, 2004 selling, general and administrative expenses increased by $0.4 million, or 5.5%, 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 $504,000. Maui’s selling, general and administrative expenses totaled approximately $222,000 and $440,000 for the three and six month periods ended April 30, 2004.

Other Income, net

                                                 
    Three months ended April 30,   Six months ended April 30,
(in thousands)   2004   Change   2003   2004   Change   2003
Other income, net
  $ (106 )     (48.5 )%   $ (206 )   $ (220 )     (31.5 )%   $ (321 )
Percentage of net sales
    (0.1 )%             (0.4 )%     (0.2 )%             (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 six months ended April 30, 2004, other income, net includes interest accrued on notes receivable from directors and employees of approximately $0.1 million.

Provision for Income Taxes

                                                 
    Three months ended April 30,   Six months ended April 30,
(in thousands)   2004   Change   2003   2004   Change   2003
Provision for income taxes.
  $ 1,556       28.2 %   $ 1,214     $ 1,361       (12.8 )%   $ 1,561  
Percentage of income before provision for income taxes
    40.0 %             41.2 %     40.0 %             41.1 %

     For the first six months of fiscal 2004, our provision for income taxes was $1.4 million, as compared to $1.6 million recorded for the comparable prior year period. We expect our effective tax rate to approximate 40.0% during fiscal 2004.

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Liquidity and Capital Resources

     Cash provided by operating activities was $2.0 million for the six months ended April 30, 2004, compared to $2.5 million for the similar period in fiscal 2003. Operating cash flows for the six-months ended April 30, 2004 reflect our net income of $2.0 million, net non-cash charges (depreciation and amortization, stock based compensation and provision for losses on accounts receivable) of $1.1 million and a net decrease in the noncash components of our working capital of approximately $1.1 million.

     These working capital decreases include an increase in accounts receivable of $11.0 million and an increase in inventory of $4.6 million, partially offset by an increase in payable to growers of $12.3 million, an increase in prepaid expenses and other assets of $1.1 million, an increase in trade accounts payable and accrued expenses of 0.6 million, a decrease in advance to suppliers of $0.2 million, an increase in income taxes payable of $0.2 million, and a decrease in loans to growers of $0.1 million.

     Increases in our accounts receivable balance as of April 30, 2004, when compared to October 31, 2003, reflect a significantly higher volume of California avocado sales recorded in the month of April 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 April 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 $4.7 million for the six months ended April 30, 2004 and related principally to the purchase of capital equipment of $4.6 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 $2.0 million for the six months ended April 30, 2004 related principally to $3.4 million of cash outflows from the payment of a dividend, partially offset by additional short-term borrowings of $1.0 million, and collections on notes receivable of $0.4 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 April 30, 2004 and October 31, 2003, totaled $0.7 million and $5.4 million. Our working capital at April 30, 2004 was $19.9 million compared to $20.7 million at October 31, 2003. The overall working capital decrease is primarily related to an increase in accounts receivable and inventory, and the payment of our dividend payable. Such decreases were partially offset by an increase in payable to growers and proceeds from short-term borrowings.

     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 $23,000,000 at April 30, 2004. We also do not have significant long-term debt as of April 30, 2004.

Impact of Recently Issued Accounting Pronouncements

     See footnote 1 to the consolidated condensed financial statements that are included in this Quarterly Report on Form 10-Q.

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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 April 30, 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)
  $ 682     $     $     $     $     $     $ 682     $ 682  
Accounts receivable, net (1)
    27,563                                     27,563       27,563  
Loans to growers (1)
    291                                     291       291  
Long-term loans to growers (2)
          180                               180       182  
Notes receivable from shareholders (3)
    3       211       211       2,754                   3,179       3,294  
Liabilities:
                                                               
Payable to growers (1)
  $ 15,783     $     $     $     $     $     $ 15,783     $ 15,783  
Accounts payable (1)
    1,579                                     1,579       1,579  
Current borrowings pursuant to credit facilities (1)
    1,000                                     1,000       1,000  
Fixed-rate long-term obligations (4)
    24       20       10       8       4             66       68  

(1)   We believe the carrying amounts of cash and cash equivalents, accounts receivable, short-term loans to growers, payable to growers, accounts payable, and current borrowings pursuant to credit facilities 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 4.3%. 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 6.25%. 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 $151,000.

(4)   Fixed-rate long-term obligations bear interest rates ranging from 3.3% to 8.2% with a weighted-average interest rate of 5.4%. We believe that loans with a similar risk profile would currently yield a return of 3.5%. 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 $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 six month periods ended April 30, 2004 and April 30, 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

     We are involved in litigation in the ordinary course of business, none of which we believe will have a material adverse impact on our financial position or results from operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On April 19, 2004, we held the annual meeting of shareholders of Calavo Growers, Inc. at our corporate headquarters. At the meeting, the holders of our outstanding common stock acted on the following matters:

     (1.) The shareholders voted on a cumulative basis for eleven directors, each to serve for a term of one year. Due to the death of director nominee Roy V. Keenan before the annual meeting, however, only ten individuals were elected as directors. Each nominee received the following votes:

                 
    Votes   Votes
Name of Nominee   For   Withheld
Lecil E. Cole
    26,741,019       50,994  
George H. Barnes
    6,857,037       238,145  
Michael D. Hause
    6,594,498       172,673  
Donald M. Sanders
    10,064,189       155,873  
Fred J. Ferrazzano
    9,370,574       285,085  
Roy V. Keenan
    6,707,048       292,677  
Alva V. Snider
    8,035,386       316,569  
Scott Van Der Kar
    8,576,911       17,252  
J. Link Leavens
    11,639,035       149,858  
Dorcas H. McFarlane
    6,641,469       217,972  
John M. Hunt
    8,337,082       170,158  

(2.) The shareholders voted for the ratification of the appointment of Deloitte & Touche LLP as our independent accountants for fiscal 2004. Votes cast were as follows:

         
For
    10,069,495  
Against
    55,091  
Abstain
    23,071  

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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 March 29, 2004, we filed a Current Report on Form 8-K to report under Item 7 (Exhibits) and Item 12 (Results of Operations and Financial Conditions), a press release (attached as Exhibit 99.1) regarding our financial results for the fiscal quarter ended January 31, 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: June 11, 2004
  By   /s/ Lecil E. Cole
     
 
      Lecil E. Cole
Chairman of the Board of Directors, Chief Executive Officer and President
(Principal Executive Officer)
         
Date: June 11, 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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