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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended July 31, 2002

OR

Commission file number: 000-33385

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   [   ]

Registrant’s number of shares of common stock outstanding as of July 31, 2002 was 11,834,909.

Table of Contents

CALAVO GROWERS, INC.

INDEX

				PAGE
PART I.  FINANCIAL INFORMATION
Item 1.		Financial Statements (unaudited):
		Consolidated Condensed Balance Sheets — July 31, 2002 and October 31, 2001		3
		Consolidated Condensed Statements of Income — Three Months and Nine Months Ended July 31, 2002 and 2001		4
		Consolidated Condensed Statements of Cash Flows — Nine Months Ended July 31, 2002 and 2001		5
		Notes to Consolidated Condensed Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		20
Item 4.		Controls and Procedures		20
PART II.  OTHER INFORMATION
Item 1.		Legal Proceedings		21
Item 6.		Exhibits and Reports on Form 8-K		21
		Signatures and Certifications		22

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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,
				2002				2001
Assets
Current assets:
	Cash and cash equivalents			$	72			$	2,057
	Accounts receivable, net of allowance for doubtful accounts of $25 (2002) and $9 (2001)				26,948				19,797
	Inventories, net				16,476				9,075
	Prepaid expenses and other current assets				3,195				3,209
	Loans to growers				603				1,119
	Advances to suppliers				3,079				2,372
	Income taxes receivable				—				144
	Deferred income taxes				553				553
		Total current assets			50,926				38,326
Property, plant, and equipment, net					8,877				9,442
Investments held to maturity					1,952				1,874
Other assets					4,378				2,726
				$	66,133			$	52,368
Liabilities and shareholders’ equity
Current liabilities:
	Payable to growers			$	19,067			$	6,909
	Trade accounts payable				1,417				1,529
	Accrued expenses				6,253				3,848
	Short-term borrowings				8,500				15,800
	Current portion of long-term obligations				207				441
		Total current liabilities			35,444				28,527
Long-term liabilities:
	Long-term obligations, less current portion				3,137				3,429
	Deferred income taxes				383				383
		Total long-term liabilities			3,520				3,812
Commitments and contingencies
Shareholders’ equity:
	Common stock, $0.001 par value; 100,000 shares authorized; 11,835 (2002) and 9,967 (2001) issued and outstanding				12				10
	Additional paid-in capital				19,476				10,158
	Notes receivable from shareholders				(5,720	)			—
	Retained earnings				13,401				9,861
		Total shareholders’ equity			27,169				20,029
				$	66,133			$	52,368

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,
		2002				2001				2002				2001
Net sales		$	76,409			$	60,348			$	178,250			$	151,662
Cost of sales			67,498				54,062				158,646				137,241
Gross margin			8,911				6,286				19,604				14,421
Selling, general and administrative			3,314				2,979				9,566				9,102
Operating income			5,597				3,307				10,038				5,319
Other expense (income), net			(184	)			(30	)			(337	)			(221	)
Income before provision for income taxes			5,781				3,337				10,375				5,540
Provision for income taxes			2,657				1,519				4,668				2,310
Net income		$	3,124			$	1,818			$	5,707			$	3,230
Net income per share:
Basic		$	0.26			$	0.17			$	0.50			$	0.31
Diluted		$	0.26			$	0.17			$	0.50			$	0.31
Number of shares used in per share computation:
Basic			11,836				10,461				11,312				10,450
Diluted			11,906				10,461				11,342				10,450

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,
						2002				2001
Cash Flows from Operating Activities:
Net income						$	5,707			$	3,230
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
		Depreciation and amortization					1,458				1,432
		Gain on disposal of property, plant, and equipment					—				(305	)
		Provision for losses on accounts receivable					20				68
Effect on cash of changes in operating assets and liabilities:
			Accounts receivable				(7,171	)			(1,026	)
			Inventories, net				(7,401	)			(4,828	)
			Deferred Income Taxes				—				537
			Income taxes receivable				144				—
			Prepaid expenses and other assets				(1,638	)			(1,286	)
			Advances to suppliers				(707	)			(1,104	)
			Loans to growers				516				387
			Payable to growers				12,158				8,442
			Trade accounts payable and accrued expenses				2,293				(628	)
				Net cash provided by operating activities			5,379				4,919
Cash Flows from Investing Activities:
Acquisitions of property, plant, and equipment							(893	)			(1,982	)
Proceeds from insurance settlement on facility damage							—				305
Purchases of investments							(78	)			(227	)
				Net cash used in investing activities			(971	)			(1,904	)
Cash Flows from Financing Activities:
Payment of dividend to shareholders							—				(4,973	)
Proceeds (repayments) from/of short-term borrowings, net							(7,300	)			2,415
Proceeds from issuance of common stock							—				86
Collection on notes receivable							1,021				—
Payments on long-term obligations							(526	)			(496	)
Exercise of stock options							412				—
				Net cash used in financing activities			(6,393	)			(2,968	)
Net increase (decrease) in cash and cash equivalents							(1,985	)			47
Cash and cash equivalents, beginning of period							2,057				1,492
Cash and cash equivalents, end of period						$	72			$	1,539
Supplemental Information -
	Cash paid during the year for:
		Interest				$	293			$	641
		Income taxes				$	3,166			$	2,015
Noncash Investing and Financing Activities:
	5% Stock dividend					$	2,167			$	—
	Acquisition of capital lease					$	—			$	53
	Stock purchase using promissory notes					$	1,952			$	—
	Exercise of stock options using promissory notes					$	4,789			$	—

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 or the Company) engages in the procurement and marketing of avocados and other perishable foods and the preparation and distribution of processed avocado products. The Company’s expertise in packing, distributing, and marketing avocados, processed avocados, and other perishable foods allows it 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 Calavo’s three operating facilities in Southern California and two facilities in Mexico, the Company sorts and packs avocados procured in California and Mexico and prepares processed avocado products. Additionally, the Company procures avocados internationally, principally from Chile and New Zealand and distributes other perishable foods, such as Hawaiian grown papayas. These operations are reported by the Company in three different business segments: California avocados, international avocados and perishable food products, and processed products.

Conversion to a for-profit corporation

On October 9, 2001, the Company completed a series of transactions whereby common and preferred shareholders of Calavo Growers of California (the Cooperative), an agricultural marketing cooperative association, exchanged all of their outstanding shares for shares of the Company’s common stock. Concurrent with this transaction, the Cooperative was merged into the Company, with Calavo emerging as the surviving entity (the Merger). These transactions had the effect of converting the legal structure of the business from a not-for-profit cooperative to a for-profit corporation. Accordingly, the accompanying consolidated condensed financial statements give retroactive effect, for the nine months ended July 31, 2001, to the Merger as a combination of entities with common shareholders, accounted for in a manner similar to a pooling of interests.

The Cooperative’s historical statements of operations and member proceeds, previously prepared on a basis consistent with practices applicable to marketing cooperatives, have been revised to reflect the Company’s new legal structure as a for-profit corporation. Accordingly, the accompanying income statements for the nine months ended July 31, 2001 reflect the reclassification of proceeds distributed to growers and other related accounts maintained by the Cooperative to cost of goods sold, consistent with the operations of a for-profit corporation.

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 the Company’s financial position, results of operations, and cash flows. Such adjustments consist of adjustments of a normal recurring nature. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2001.

Recent Accounting Standards

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 is effective immediately and SFAS No. 142 will be effective on November 1, 2002. The new standards are not expected to have a significant impact on our financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes previous guidance on financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. Adoption of SFAS No. 144 is required no later than the beginning of fiscal 2003. We do not expect the adoption of SFAS No. 144 to have a significant impact on our financial position or results of operations. However, future impairment reviews may result in charges against earnings to write down the value of long-lived assets.

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CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections. Adoption of SFAS No. 145 is required no later than the beginning of fiscal 2003, with certain provisions effective May 2002. The adoption of SFAS No. 145 did not have a significant impact on our financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Adoption of SFAS No. 146 is required no later than January 1, 2003. The adoption of SFAS No. 146 is not expected to have a significant impact on our financial position or results of operations.

Reclassifications

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

2. Stock-based compensation

On November 20, 2001, the Board of Directors approved two new stock-based compensation plans.

The Directors’ Stock Option Plan

Participation in the directors’ stock option plan is limited to members of the Company’s Board of Directors. The plan makes available to the Board of Directors or a plan administrator the right to grant options to purchase up to 3,000,000 shares of common stock. In connection with the adoption of the plan the Board of Directors approved an award of fully vested options to purchase 1,240,000 shares of common stock at an exercise price of $5.00 per share.

The plan currently provides that the fair value of the common stock be determined by the Board of Directors based on current trading patterns in the common stock and other analyses of fair value. Based on its review of such data, the Board of Directors determined that the fair value of the common stock subject to the above awards at the date of grant was $3.95 per share.

On January 31, 2002, members of the Board of Directors elected to exercise 1,005,000 stock options. The exercise price was paid by delivery of full-recourse promissory notes with a face value of $4,789,000 and by cash payments of $236,000. These notes and the related security agreements provide, among other things, that each director pledge as collateral the shares acquired upon exercise of the stock option, as well as additional common stock of the Company held by the directors with a value equal to 10% of the loan amount if the exercise price was paid by means of a full-recourse note. The notes, which bear interest at 7% per annum, provide for annual interest payments with a final principal payment due March 1, 2007. Directors will be allowed to withdraw shares from the pledged pool of common stock prior to repayment of their notes, as long as the fair value of the remaining pledged shares is at least equal to 120% of the outstanding note balance. The notes have been presented as a reduction of shareholders’ equity as of July 31, 2002.

A summary of stock option activity follows (shares in thousands):

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CALAVO GROWERS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

The following table summarizes stock options outstanding and exercisable at July 31, 2002 (shares in thousands):

As permitted under SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock-based awards to employees. Under APB Opinion 25, the Company generally recognizes no compensation expense with respect to awards granted with exercise prices equal to or greater than the fair value of the Company’s common stock on the date of grant.

Pro forma information regarding net income and earnings per share is required by SFAS 123. This information is required to be determined as if the Company had accounted for stock-based awards to its employees under the fair value method of that statement. Had compensation cost for stock option awards been determined based on the fair value at the grant date for awards, consistent with the provisions of SFAS 123, the Company’s net income and net income per share would have been the pro forma amounts indicated below (in thousands, except per share amounts):

For purposes of pro forma disclosures under SFAS 123, the estimated fair value of the options is assumed to be amortized to expense over the options’ vesting period. The fair value of the options granted has been estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

The Black-Scholes 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 employees and 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 the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of these options.

The Employee Stock Purchase Plan

The employee stock purchase plan was approved by the Board of Directors and the shareholders of the Company. Participation in the employee stock purchase plan is limited to employees of the Company. The plan provides the Board of Directors, or a plan administrator, the right to make available up to 2,000,000 shares of common stock at a price not less than fair market value. On March 28, 2002, the Board of Directors awarded selected employees the opportunity to purchase up to 474,000 shares of common stock at $7.00 per share, the closing price of the Company’s co