CALAVO GROWERS INC - Annual Report: 2005 (Form 10-K)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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

For the fiscal year ended October 31, 2005

Commission file number: 000-33385

CALAVO GROWERS, INC.

California (State of incorporation)		33-0945304 (I.R.S. Employer Identification No.)
1141-A Cummings Road, Santa Paula, CA (Address of principal executive offices)		93060 (Zip code)

Registrant’s telephone number, including area code: (805) 525-1245
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value per Share

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

     Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

     Yes o No þ

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

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

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

     Yes þ No o

     Indicate by check mark if whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     Yes o No þ

     Based on the closing price as reported on the Nasdaq National Market, the aggregate market value of the Registrant’s Common Stock held by non-affiliates on April 30, 2005 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $114.6 million. Shares of Common Stock held by each executive officer and director and by each shareholder affiliated with a director or an executive officer have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s Common Stock as of November 30, 2005 was 14,375,833.

Documents Incorporated by Reference

     Portions of the Registrant’s Proxy Statement for the 2006 Annual Meeting of Shareholders, which we intend to hold on April 26, 2006, are incorporated by reference into Part III of this Form 10-K. The definitive Proxy Statement will be filed within 120 days after October 31, 2005.

 

 

CAUTIONARY STATEMENT

This Annual Report on Form 10-K contains statements relating to future results of Calavo Growers, Inc. (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, general economic and business conditions, energy costs and availability, 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 those set forth in Item 1A. Risk Factors and elsewhere in this Annual Report on Form 10-K 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.

PART I

Item 1. Business

General development of the business

     We engage in the procurement and marketing of avocados and other perishable foods and the preparation and distribution of 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 worldwide basis. Through our three operating facilities in Southern California and two facilities in Mexico, we sort pack and/or ripen avocados procured in California and Mexico and prepare processed avocado products. Additionally, we procure avocados internationally, principally from Chile and the Dominican Republic, and distribute other perishable foods, such as Hawaiian grown papayas. We report these operations in three different business segments: California avocados, international avocados and perishable food products, and processed products.

     On October 9, 2001, we 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 our common stock. Concurrent with this transaction, the Cooperative was merged into us with Calavo Growers, Inc. (Calavo) emerging as the surviving entity. These transactions had the effect of converting the legal structure of the business from a non profit cooperative to a for-profit corporation. All references herein to us for periods prior to the merger refer to the business and operations of the Cooperative.

     In February 2003, our Board of Directors approved a plan whereby the operations of our processed products business would be relocated. The plan called 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. This restructuring has provided for 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 and the Santa Paula and Mexicali facilities were closed in February 2003 and August 2004. During fiscal 2005, we incurred costs related to this restructuring approximating $0.4 million, which are recorded in our income statement as both cost of sales ($0.3 million) and selling, general and administrative expenses ($0.1 million). All the above amounts have been paid and we do not expect any additional operating costs related to this restructuring.

     In November 2003, we acquired all the outstanding common shares of Maui Fresh International, Inc. (Maui). Maui distributes a multi-product line of specialty produce through retail, food service and terminal market wholesale channels. Maui is currently based in Los Angeles, California, but maintains significant operations in Hawaii and Nogales, Arizona. Maui packs and distributes a diversified line comprised of more than 20 commodities, including tropical and exotic fruits, chilies and hothouse-grown items, as well as other conventional fruits and vegetables.

     In March 2005, we completed the sale of our old corporate headquarters building (located in Santa Ana) for $3.4 million. This transaction resulted in a pre-tax gain on sale of approximately $1.7 million. In conjunction with such sale, we relocated our corporate offices to Santa Paula, California in March 2005. Total expenses related to such relocation approximated $0.4 million.

     In June 2005, in order to increase our market share of California avocados and increase synergies within the marketplace, we entered into a stock purchase agreement with Limoneira Company (Limoneira). Pursuant to such agreement, we acquired approximately 15.1% of Limoneira’s outstanding common stock for $23.45 million and Limoneira acquired approximately 6.9% of our outstanding common stock for $10 million. The transaction was settled by a net cash payment by us of $13.45 million. Additionally, such agreement also provided for: (1) Calavo to lease office space from Limoneira in Santa Paula, California for a period of 10 years at an initial annual gross rental of approximately $0.2 million (subject to annual CPI increases, as defined), (2) Calavo to market Limoneira’s avocados and (3) Calavo and Limoneira to use good faith reasonable efforts to maximize avocado packing efficiencies for both parties by consolidating their fruit packing operations. Various opportunities are currently being considered, including the use of existing packing facilities, an investment in existing vacant facilities, and/or an investment in a new consolidated facility for both parties.

     Limoneira, which generated total revenues of approximately $26 million during fiscal 2004, primarily engages in growing citrus and avocados, picking and hauling citrus, and packing lemons. The issuances of the shares discussed above are exempt from registration under federal and state securities laws.

     Our principal executive offices are located at 1141-A Cummings Road, Santa Paula, California 93060; telephone (805) 525-1245.

     At October 31, 2005, we employed approximately 700 employees worldwide.

Available information

We maintain an Internet website at http://www.calavo.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, and other information related to us, are available, free of charge, on our website as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the Securities and Exchange Commission. Our Internet website and the information contained therein, or connected thereto, is not and is not intended to be incorporated into this Annual Report on Form 10-K.

California avocados

     Calavo was founded in 1924 to market California avocados. In California, the growing area stretches from San Diego County to San Luis Obispo County, with the majority of the growing areas located approximately 100 miles north and south of Los Angeles County. The storage life of fresh avocados is limited. It generally ranges from one to four weeks, depending upon the maturity of the fruit, the growing methods used, and the handling conditions in the distribution chain.

     The Hass variety is the predominant avocado variety marketed on a worldwide basis. California grown Hass avocados are available year-round, with peak production periods occurring between February through September. Other varieties have a more limited picking season and command a lower price. Approximately 2,200 growers deliver avocados to us, generally pursuant to a standard marketing agreement. Over the past several years, our share of the California avocado crop has remained strong, with approximately 35% of the 2005 California avocado crop handled by us, based on data published by the California Avocado Commission. We attribute our solid foothold in the California industry principally to the competitiveness of the per pound returns we pay and the communication we maintain with our growers.

     Avocados delivered to our packinghouses are graded, sized, packed, and cooled for delivery to customers. Our ability to estimate the size, as well as the timing of the delivery of the annual avocado crop, has a substantial impact on both our costs and the sales price we receive for the fruit. To that end, our field personnel maintain direct contact with growers and farm managers and coordinate harvest plans. The feedback from our field-managers is used by our sales department to prepare sales plans used by our direct sales force.

     A significant portion of our costs are fixed. As a result, significant fluctuations in the volume of avocados delivered have a considerable impact on the per pound packing costs of avocados we handle. Generally, larger crops will result in a lower per pound handling cost. We believe that our cost structure is geared to optimally handle larger avocado crops than we have handled in recent years. Our strategy calls for continued efforts in aggressively recruiting new growers, retaining existing growers, and procuring a larger percentage of the California avocado crop.

     Avocados delivered to us are grouped as a homogenous pool on a weekly basis based on the variety, size, and grade. The proceeds we receive from the sale of each separate avocado pool, net of a packing and marketing fee to cover our costs and a profit, are paid back to the growers once each month. The packing and marketing fee we withhold is periodically determined and revised based on our estimated per pound packing and operating costs, as well as our operating profit. Significant competitive pressures dictate that we set the packing and marketing fee at the lowest possible level to attract new and retain existing grower business. We believe that, if net proceeds paid ceased to be competitive, growers would choose to deliver their avocados to alternate competitive handlers. Consequently, we strive to deliver growers the highest return possible on avocados delivered to our packinghouses.

     The California avocado market is highly competitive with 9 major avocado handlers. A marketing order enacted by the state legislature is in effect for California grown avocados and provides the financial resource to fund generic advertising and promotional programs. Although avocados handled by us are identifiable through packaging and the Calavo brand name sticker, we believe that consumers generally do not purchase avocados based on brand loyalty. We have, however, developed a series of marketing and sales initiatives aimed at our largest customers that are designed to differentiate our products and services from those offered by our competitors. Some of these key initiatives are as follows:

•

We continue to have success with our ProRipeVIP™ avocado ripening program. This proprietary program allows us to deliver avocados with varying degrees of ripeness to our customers. We have invested in the Aweta AFS (acoustic firmness sensor) technology and equipment. ProRipeVIP™ is the next generation of selling preconditioned avocados that have firmness determined via soundwaves. This technology is not new to the produce industry, but is new to avocados. The most significant and compelling reason we choose to invest in Aweta systems is because the acoustic sensors measure firmness of the entire piece of fruit, as opposed to competitive mechanical tests that use pressure and calculated averages to measure firmness. We

			believe that ripened avocados help our customers address the consumers’ immediate needs and accelerate the sale of avocados through their stores.
	•		We have developed various display techniques and packages that appeal to consumers and, in particular, impulse buyers. Some of our techniques include the bagging of avocados and the strategic display of the bags within the produce section of retail stores. Our research has demonstrated that consumers generally purchase a larger quantity of avocados when presented in a bag as opposed to the conventional bulk displays. We also believe that the value proposition of avocados in a bag provides for a higher level of sales to grocery stores.
	•		From time to time, we market our avocados under joint promotion programs with other food manufacturers. Under these programs, we seek to increase the promotional exposure of our products by providing certain sales incentives. These incentives will be offered in conjunction with various promotional campaigns designed to advertise the products of all parties involved. We believe these programs will help us minimize our advertising costs, as they will be shared with other parties, while still achieving recognition in the marketplace.
	•		We have established one of the industry’s largest proprietary marketing databases that facilitates a review of the performance of avocados in various grocery stores located across the nation. Based on this data, we are able to assist our customers in developing programs that will increase their sales. Generally, we review the performance of stores relative to others within the same geographic area and make recommendations designed to increase both the per unit and total dollar sales of avocados within the produce section.

     We sell avocados to a diverse group of supermarket chains, wholesalers, food service and other distributors, under the Calavo and private labels. The consolidation in the supermarket industry has led to fewer, but bigger buyers. From time to time, sales are transacted via e-commerce. We believe that our largest customers will require us and our competitors to implement one or more e-commerce distribution solutions to facilitate their procurement and inventory management programs. In our judgment, the shift to e-commerce by our largest customers will favorably impact larger handlers like us, which have the ability and financial resources to support these strategies. From time to time, some of our larger customers seek short-term sales contracts that formalize their pricing and volume requirements. Generally, these contracts contain provisions that establish a price floor and/or ceiling during the contract duration. Again, in our judgment, the shift by our customers to drafting sales contracts benefits large handlers like us, which have the ability to fulfill the terms of these contracts. During fiscal year 2005, our 5 and 25 largest customers represented approximately 21% and 44% of our total consolidated revenues. During fiscal years 2005, 2004 and 2003 none of our California avocado customers represented more than 10% of total consolidated revenues.

International avocados and perishable food products

     Our international avocados and perishable food products segment leverages our expertise in the handling and marketing of California avocados. We believe that the sales generated by this segment complement our offering of California avocados to our customers and stabilize the supply of avocados during seasons of low California production. Sales generated by this segment include avocados grown outside of California and other perishable food products, such as papayas, tomatoes, ginger, and pineapple. We primarily market international avocados from Mexico, Chile, and the Dominican Republic. We handle some of these products on a consignment basis for the suppliers. Pursuant to these arrangements, from time to time, we make advances to Chilean handlers and Mexican growers. We primarily make such advances related to both pre-harvest and post-harvest activities. Our ability to recover pre-harvest advances is largely dependent on the growers’ ability to deliver avocados to us and is subject to inherent risks of farming, such as weather and pests. Historical experience demonstrates that providing post-harvest advances results in our acquiring full market risk for the product, as it is possible that our resale proceeds may be less than the amounts we paid to the grower. This is a result of the high level of volatility inherent in the avocado and perishable food markets, which are subject to significant pricing declines based on the availability of fruit in the market.

     Net sales generated by our International avocados and perishable food products business depend principally on the availability of Chilean and Mexican grown avocados in the U.S. markets. In November 2004, the United States Department of Food and Agriculture (USDA) published a rule allowing Hass avocado imports from Mexico into all 50 states year round (up from 31 states for only a six month period), except for California, Florida, and Hawaii. We expect the restriction on such states to be lifted in February 2007. For the remaining 47 states, however, Mexico was able to deliver its fruit for all of fiscal 2005. The implementation of this rule resulted in a significant increase in the sale of Mexican sourced fruit during fiscal 2005. See Item 7 for a detailed description of such increase.

     In 1998, we invested in the Mexican avocado market by building a packinghouse in Uruapan, Mexico. We believe that our continued success in marketing Mexican avocados is largely dependent upon securing a reliable, high-quality supply of avocados at reasonable prices. The Mexican avocado harvest is both complimentary and competitive with the California market, as the Mexican harvest typically runs from September to June. As a result, it is common for Mexican growers to monitor the supply of avocados for

export to the United States in order to obtain higher field prices. During 2005, we packed and distributed approximately 21% of the avocados exported from Mexico into the United States and approximately 12% of the avocados exported from Mexico to countries other than the United States, based on our estimates.

     In recent years, the volume of avocados exported by Chilean growers to the United States has continued to increase. Chilean growers continue to increase avocado plantings to capitalize on high returns available in the worldwide avocado markets. Sales of Chilean grown avocados have been significant during our 4^th and 1^st fiscal quarters. Additionally, with the Chilean harvesting season being complimentary to the California season (August through February), Chilean avocados are able to command competitive retail pricing in the market. During 2005, we distributed approximately 10% of the Chilean imports into the United States, based on our estimates.

     The Dominican Republic also exports avocados into the United States. The harvest of Dominican Republic avocados (September to January) overlaps with the Chilean and Mexican avocado harvest periods. As a result, the increased volume of avocados in the U.S. marketplace related to Dominican Republic sourced fruit has the effect of increasing pressure on sales prices. During 2005, we distributed substantially all of the Dominican Republic imports into the United States, based on our estimates.

     In recent years, our distribution of other perishable food products has generally been limited to papayas procured from a Hawaiian packing operation, which is owned by the Chairman of our Board of Directors, Chief Executive Officer and President. The acquisition of Maui, however, expanded our perishable food products to include additional papayas, tomatoes, chili peppers, pineapples, and ginger. While Maui has numerous product offerings, the aforementioned commodities account for the majority of its sales.

     Maui has operations in Arizona, California, and Hawaii. The primary focus of these operations is the growing, shipping and distribution of fresh produce. Maui primarily sources its products from the United States and Mexico. Sales for fiscal year 2005 were approximately $21.7 million. Maui has customers located primarily in the United States and Canada and these customers are principally in the retail, foodservice, and wholesale sectors. Maui does not experience significant fluctuations in sales related to seasonality.

Processed Products

     In the 1960’s and early 1970’s, we pioneered the process of freezing avocado pulp and developed a wide variety of guacamole recipes to address the diverse tastes of consumers and buyers in the food service industry. Our customers include both companies in the food service industry and the retail business. Sales are made principally through a commissioned nationwide broker network, which is supported by our regional sales managers. We believe that our marketing strength is distinguished by providing quality products, innovation, year-round product availability, strategically located warehouses, and market relationships. During fiscal year 2005, our 5 and 25 largest customers represented approximately 7% and 10% of our total consolidated revenues. During fiscal years 2005, 2004 and 2003 none of our processed product customers represented more than 10% of total consolidated revenues.

     The food service and retail industries have continued a trend of business consolidation resulting in larger customers, but a smaller number of customers for our processed products. From time to time, in order to secure the ongoing business of some of our largest customers, we enter into certain rebate programs and agreements. While we made no such payments during fiscal 2005 or 2004, we believe that customers will continue to request payment to secure either a certain volume of product or preferred status as a provider of processed products will continue.

     The processed product segment was originally conceived as a mechanism to stabilize the price of California avocados by reducing the volume of avocados available to the marketplace. With the introduction of low cost processed products delivered from Mexican based processors, however, we realigned the segment’s strategy by shifting the fruit procurement and pulp processing functions to Mexico. In 1995, we invested in a processing plant in Mexicali, Mexico to derive the benefit of competitive avocado prices available in Mexico.

     In February 2003, our Board of Directors approved a plan whereby the operations of our processed products business would be relocated. The plan called for the closing of our Santa Paula, California and Mexicali, Baja California Norte (Mexicali) processing facilities and relocating these operations to a new facility in Uruapan, Michoacan, Mexico (Uruapan). This restructuring has provided for 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 and the Santa Paula and Mexicali facilities ceased production in February 2003 and August 2004.

     Through January 2003, the primary function of our Mexicali processed operation was to produce pulp for our Santa Paula plant. Our processing facility in Santa Paula, California would receive the pulp from Mexicali, add ingredients, and package the product in

various containers. The product would then be frozen for storage with shipment to warehouses and, ultimately, to our customers. From January 2003 to August 2004, however, our Mexicali processed operations became primarily focused on our individually quick frozen (IQF) avocado half product line and one of our high-pressure lines.

     Our IQF line provides food service and retail customers with peeled avocado halves that are ripe and suitable for immediate consumption. These halves were frozen, packaged and shipped out of Mexicali to warehouses located in the U.S., and, ultimately, to our customers.

     During fiscal year 2005, we operated one high-pressure line designed to manufacture processed avocado products that are not frozen (guacamole) in Uruapan. This machine ran at about 60% capacity (with one shift) through October 2005. We anticipate that we will operate such high-pressure machine at a higher capacity during fiscal year 2006. We presently own another, much smaller, high-pressure machine, located in Uruapan, that is currently not in use. We are considering various alternatives with such machine, including trading such machine in for credit towards another high-pressure machine with similar capacity as our high-pressure machine that is currently in use in Uruapan. Utilizing avocado pulp and chunks, these high-pressure machines allow us to deliver fresh guacamole to retail and food service customers. Sales of our high-pressure product totaled approximately $8.7 million and $5.5 million for fiscal years 2005 and 2004.

     Although the additions of these product offerings are fairly recent, we believe that these high pressure machines will position our company to deliver the widest available array of processed avocado products to our customers. Consequently, we believe we are currently the only single source company supplying the complete range of processed avocado products, including frozen guacamole, ultra high pressure treated guacamole, and frozen avocado halves to foodservice and retail customers.

Sales and Other Financial Information by Business Segment and Product Category

     Sales and other financial information by business segment are provided in Note 11 to our consolidated financial statements that are included in this Annual Report.

Patents and Trademarks

     Our trademarks include the Calavo brand name and related logos. We also utilize the following trademarks in conducting our business: Avo Fresco, Bueno, Calavo Gold, Celebrate the Taste, El Dorado, Fresh Ripe, Select, Taste of Paradise, The First Name in Avocados, Tico, Mfresh, and Triggered Avocados.

Working Capital Requirements

     Generally, we make payments to our California avocado growers and other suppliers in advance of collecting all of the related accounts receivable. We generally bridge the timing between vendor payments and customer receipts by using operating cash flows and commercial bank borrowings. In addition, we provide crop loans and other advances to some of our growers, which are also funded through operating cash flows and borrowings. We generally experience larger levels of commercial bank borrowings during the California Hass avocado crop harvesting season.

     Our international avocados and perishable food products business requires working capital to finance the payment of advances to suppliers, and collection of accounts receivable. These working capital needs are also financed through the use of operating cash flows and bank borrowings and are generally concentrated during the Chilean Hass avocado crop harvesting season.

     With respect to our processed products business, we require working capital to finance the production of our processed avocado products, building and maintaining an adequate supply of finished product, and collecting our accounts receivable balances. These working capital needs are financed through the use of operating cash flows and bank borrowings.

Backlog

     Our customers do not place product orders significantly in advance of the requested product delivery dates. Customers typically order perishable products two to ten days in advance of shipment, and typically order processed products within thirty days in advance of shipment.

Research and Development

     We do not undertake significant research and development efforts. Research and development programs, if any, are limited to the continuous process of refining and developing new techniques to enhance the effectiveness and efficiency of our processed products operations and the handling, ripening, storage, and packing of fresh avocados.

Compliance with Government Regulations

     The California State Department of Food and Agriculture oversees the packing and processing of avocados and conducts tests for fruit quality and packaging standards. All of our packages are stamped with the state seal as meeting standards. Various states have instituted regulations providing differing levels of oversight with respect to weights and measures, as well as quality standards.

     The USDA regulates and reviews imported food products. In particular, the USDA regulates the distribution of Mexican avocados within 47 states in the U.S. by requiring avocado importers and handlers to execute compliance agreements. These agreements represent an acknowledgment by handlers of the distribution restrictions placed on Mexican avocados and are used as a tool to ensure compliance with existing regulations. From time to time, we have been approached by USDA representatives in their oversight of the compliance agreement process. We continue to consult with USDA representatives to ensure that our systems of internal control provide a high level of reliability in securing compliance agreements on behalf of our customers.

     As a manufacturer and marketer of processed avocado products, our operations are subject to extensive regulation by various federal government agencies, including the Food and Drug Administration (FDA), the USDA and the Federal Trade Commission (FTC), as well as state and local agencies, with respect to production processes, product attributes, packaging, labeling, storage and distribution. Under various statutes and regulations, these agencies prescribe requirements and establish standards for safety, purity and labeling. In addition, advertising of our products is subject to regulation by the FTC, and our operations are subject to certain health and safety regulations, including those issued under the Occupational Safety and Health Act. Our manufacturing facilities and products are subject to periodic inspection by federal, state and local authorities.

     As a result of our agricultural and food processing activities, we are subject to numerous environmental laws and regulations. These laws and regulations govern the treatment, handling, storage and disposal of materials and waste and the remediation of contaminated properties.

     We seek to comply at all times with all such laws and regulations and to obtain any necessary permits and licenses, and we are not aware of any instances of material non-compliance. We believe our facilities and practices are sufficient to maintain compliance with applicable governmental laws, regulations, permits and licenses. Nevertheless, there is no guarantee that we will be able to comply with any future laws and regulations or requirements for necessary permits and licenses. Our failure to comply with applicable laws and regulations or obtain any necessary permits and licenses could subject us to civil remedies including fines, injunctions, recalls or seizures, as well as potential criminal sanctions.

Employees

     As of October 31, 2005, we had approximately 700 employees, of which approximately 230 were located in the United States and 470 were located in Mexico. None of Calavo’s United States employees are covered by a collective bargaining agreement. Approximately 460 of Calavo’s Mexican employees are represented by a union. We consider the relationship with our employees to be good and we have never experienced a significant work stoppage.

     The following is a summary of the number of “salaried” and “hourly” employees as of October 31, 2005.

Location		Salaried				Hourly
United States			88				144
Mexico			64				405
TOTAL			152				549

     Although agriculture is a seasonal industry, avocados have a wider window of production than most perishable commodities. Consequently, we employ hourly personnel more routinely throughout the year when compared to other agriculture-dependent companies.

Item 1A. Risk Factors

Risks Related to Our Business

We are subject to increasing competition that may adversely affect our operating results.

     The market for avocados and processed avocado products is highly competitive and affects each of our businesses. Each of our businesses is subject to competitive pressures, including the following:

	•		Our California avocado business is impacted by an increasing volume of foreign grown avocados being imported into the United States. Recently, there have been significant plantings of avocados in Mexico, Chile, New Zealand, the Dominican Republic, and other parts of the world, which have had, and will continue to have, the effect of increasing the volume of foreign grown avocados entering the United States market. Generally, an increase in foreign grown avocados in the markets we distribute in has the effect of lowering prices for California grown avocados and adversely impacting our results from operations.
	•		Our California avocado business is subject to competition from other California avocado handlers. If we are unable to consistently pay California growers a competitive price for their avocados, these growers may choose to have their avocados marketed by alternate handlers.
	•		Our international avocados and perishable food products business is impacted by competitors operating in Mexico. Generally, handlers of Mexican grown avocados operate facilities that are substantially smaller than our facility in Uruapan, Mexico. If we are unable to pack and market a sufficient volume of Mexican grown avocados, smaller handlers will have a lower per unit cost and be able to offer Mexican avocados at a more competitive price to our customers.
	•		Our international avocados and perishable food products business is also subject to competition from other California avocado handlers that market Chilean grown avocados. If we are unable to consistently pay Chilean packers a competitive price for their avocados, these packers may choose to have their avocados marketed by alternate handlers.
	•		Our processed products business is impacted by demand for our product. If we are unable to produce a sufficient volume of processed products at our existing facilities, our competitors may be able to offer processed products at a more competitive price to our customers.

We are subject to the risks of doing business internationally.

     We conduct a substantial amount of business with growers and customers who are located outside the United States. We purchase avocados from foreign growers and packers, sell fresh avocados and processed avocado products to foreign customers, and operate a packinghouse and a processing plant in Mexico. For additional information about our international business operations, see the “Business” section included in this Annual Report.

     Our current international operations are subject to a number of inherent risks, including:

	•		Local economic and political conditions, including disruptions in trading and capital markets;
	•		Restrictive foreign governmental actions, such as restrictions on transfers of funds and trade protection measures, including export duties and quotas and customs duties and tariffs;
	•		Changes in legal or regulatory requirements affecting foreign investment, loans, taxes, imports, and exports; and
	•		Currency exchange rate fluctuations which, depending upon the nature of the changes, may make our domestic-sourced products more expensive compared to foreign grown products or may increase our cost of obtaining foreign-sourced products.

We and our growers are subject to the risks that are inherent in farming.

     Our results of operations may be adversely affected by numerous factors over which we have little or no control and that are inherent in farming, including reductions in the market prices for our products, adverse weather and growing conditions, pest and disease problems, and new government regulations regarding farming and the marketing of agricultural products.

We are subject to rapidly changing USDA and FDA regulations which govern the importation of foreign avocados into the United States and the processing of processed avocado products.

     The USDA has established, and continues to modify, regulations governing the importation of avocados into the United States. Our permits that allow us to import foreign-sourced avocados into the United States generally are contingent on our compliance with these regulations. Our results of operations may be adversely affected if we are unable to comply with existing and modified regulations and are unable to secure avocado import permits in the future.

     The FDA establishes, and continues to modify, regulations governing the production of processed avocado products. Our results of operations may be adversely affected if we are unable to comply with existing and modified regulations.

Our business could be adversely affected if we lost key members of our management.

     We are dependent on the efforts and performance of our current directors and officers. If we were to lose any key members of management, our business could be adversely affected. You should read the information under “Executive Officers” in this Annual Report for additional information about our management.

The acquisition of other businesses could pose risks to our operating income.

     We intend to review acquisition prospects that would complement our business. While we are not currently a party to any agreement with respect to any acquisitions, we may acquire other businesses in the future. Future acquisitions by us could result in accounting charges, potentially dilutive issuances of equity securities, and increased debt and contingent liabilities, any of which could have a material adverse effect on our business and the market price of our common stock. Acquisitions entail numerous risks, including the assimilation of the acquired operations, diversion of management’s attention to other business concerns, risks of entering markets in which we have limited prior experience, and the potential loss of key employees of acquired organizations. We may be unable to successfully integrate businesses or the personnel of any business that might be acquired in the future, and our failure to do so could have a material adverse effect on our business and on the market price of our common stock.

Our ability to competitively serve our customers is a function of reliable and low cost transportation. Disruption of the supply of these services and/or significant increases in the cost of these services could impact our operating income.

We use multiple forms of transportation to bring our products to market. They include ocean, truck, and air-cargo. Disruption to the timely supply of these services or dramatic increases in the cost of these services for any reason including availability of fuel for such services, labor disputes, or governmental restrictions limiting specific forms of transportation could have an adverse effect on our ability to serve our customers and consumers and could have an adverse effect on our financial performance.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

     We lease our corporate headquarters building. Additionally, we own two packinghouses and one processing facility in California, lease one packinghouse in California, own one processing facility in Mexico, and lease one packinghouse in Mexico.

     In March 2005, we completed the sale of our corporate headquarters building (located in Santa Ana, CA) for $3.4 million. In conjunction with such sale, we relocated our corporate offices to Santa Paula, California in March 2005. We currently lease our corporate headquarters from Limoneira (see note 12 to the consolidated financial statements).

     Our two California packinghouses handle avocados delivered to us by California and Chilean growers. The Temecula, California facility was built in 1985 and has been improved in capacity and efficiency since then. The Santa Paula, California facility was purchased in 1955 and has had recent equipment improvements equivalent to our Temecula facility. We believe that the combined annual capacity of the two packinghouses, under normal workweek operations, is sufficient to pack the annually budgeted volume of California avocados delivered to us by our growers.

     Our Santa Paula, California processing facility was built in 1975 and had a major expansion in 1988. In conjunction with our restructuring plan, which was approved in February 2003, this facility ceased operating as a processed product avocado processing facility and now functions primarily as a ripening and storage facility for our fresh avocado operation. Additionally, it also serves to store certain processed avocado products as well. Also, effective December 2005, certain operations of our leased Vernon, California

packinghouse operation has been relocated to this facility. We believe that the annual capacity of this facility will be sufficient to pack the expected annual volume of specialty commodities delivered to us.

     Our leased Vernon, California packinghouse primarily handles avocados and tropical commodities. We are committed to leasing the facility through 2006. Presently, we are using this facility for storage and packing purposes, but are also exploring opportunities to sublet this facility as well.

     Our owned processing facility in Uruapan, Michoacan, Mexico was constructed pursuant to our restructuring plan approved in February 2003. This facility commenced operations in February 2004. We believe that the annual capacity of this facility will be sufficient to process our budgeted annual production needs.

     Our Mexicali, Mexico processing plant was built in 1995 to our specifications. In conjunction with our restructuring plan, we ceased production at this facility in August 2004. Our lease commitment for this facility ended in December 2004 and we have not extended such lease.

     Our Uruapan, Mexico packinghouse, owned by the same landlord as our Mexicali facility, was also built to our specifications. We are committed to leasing the facility through 2008 and have the option to purchase such facility at the end of the lease term. We believe that the annual capacity of this facility will be sufficient to process our budgeted annual production needs.

Item 3. Legal Proceedings

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

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

     No matters were submitted to a vote of our shareholders during the quarter ended October 31, 2005.

Executive Officers

     The following table sets forth the name, age and position of individuals who hold positions as executive officers of our company. There are no family relationships between any director or executive officer and any other director or executive officer of our company. Executive officers are elected by the Board of Directors and serve at the discretion of the Board.

Name		Age				Position
Lecil E. Cole			65			Chairman of the Board, Chief Executive Officer and President
Arthur J. Bruno			55			Chief Operating Officer, Chief Financial Officer and Corporate Secretary
Robert J. Wedin			56			Vice President, Sales and Fresh Marketing
Alan C. Ahmer			57			Vice President, Processed Product Sales and Production
Michael A. Browne			46			Vice President, Fresh Operations

     Lecil E. Cole has been a member of our board of directors since February 1982 and has served as Chairman of the Board since 1988. Mr. Cole has also served as our Chief Executive Officer and President since February 1999. He served as an executive of Safeway Stores from 1964 to 1976 and as Chairman of Central Coast Federal Land Bank from 1986 to 1996. Mr. Cole has served as Chairman and President of Hawaiian Sweet, Inc. and Tropical Hawaiian Products, Inc. since 1996. Mr. Cole farms a total of 4,430 acres in California and Hawaii on which avocados, papayas, and cattle are produced and raised.

     Arthur J. Bruno has served as our Chief Financial Officer and Corporate Secretary since October 2003. During fiscal 2004, Mr. Bruno also assumed the title and responsibilities of Chief Operating Officer. From 1988 to 2003, Mr. Bruno served as the president and co-founder of Maui Fresh International, Inc. Mr. Bruno is a Certified Public Accountant.

     Robert J. Wedin has served as our Vice President since 1993. Mr. Wedin joined us in 1973 at our then Santa Barbara packinghouse. Beginning in 1990, Mr. Wedin served as a director of the California Avocado Commission for a period of ten years. Mr. Wedin currently is a board member of Producesupply.org and serves as a member of that organization’s executive committee.

     Alan C. Ahmer has served as our Vice President since 1989. Mr. Ahmer joined us in 1979 as a regional sales manager in our processed products business. In September 2003, Mr. Ahmer’s new title became Vice-President, Processed Products Sales and Production.

     Michael A. Browne has served as our Vice President since 2005. From 1997 until joining us, Mr. Browne served as the founder and co-owner of Fresh Directions International, a closely held multinational fresh produce company, which marketed fresh avocados from Mexico, Chile, and the Dominican Republic. Mr. Browne joined us in May 2005.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     In March 2002, our common stock began trading on the OTC Bulletin Board under the symbol “CVGW.” In July 2002, our common stock began trading on the Nasdaq National Market under the symbol “CVGW.”

     The following tables set forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the Nasdaq National Market.

Fiscal 2004		High				Low
First Quarter		$	11.60			$	9.75
Second Quarter		$	10.90			$	9.80
Third Quarter		$	13.00			$	10.08
Fourth Quarter		$	12.27			$	10.50

Fiscal 2005		High				Low
First Quarter		$	12.38			$	10.10
Second Quarter		$	11.81			$	9.76
Third Quarter		$	10.92			$	10.00
Fourth Quarter		$	10.25			$	8.66

     As of October 31, 2005, there were approximately 1,400 stockholders of record of our common stock.

     During the year ended October 31, 2005, we did not issue any shares of common stock that were not registered under the Securities Act of 1933, save for the shares issued to Limoneira Company (see Note 12 in consolidated financial statements). The issuance of the shares discussed in the preceding sentence was exempt from registration by reason of the exemption provided by Section 4(2) of the Securities Act of 1933 for offers and sales of securities that do not involve a public offering.

Issuer Purchases of Equity Shares

										Total Number of
										Shares Purchased as				Approximate Dollar Value of
		Total Number				Average				Part of Publicly				Shares that May Yet Be
		Of Shares				Price Paid				Announced				Purchased under the
		Purchased				Per Share				Plans or Programs				Plans or Programs
Month #1 (August 2005)			200,000			$	10.00				—			$	—
Month #2 (September 2005)			—								—				—
Month #3 (October 2005)			—								—				—
Total			200,000			$	10.00				—			$	—

     From time to time, our Board of Directors will authorize the repurchase of shares opportunistically. Such repurchases may be in the open market or in private transactions. The repurchase shown above relates to a private transaction and is from a related party. See Note 9 in consolidated financial statements.

Dividend Policy

     Our dividend policy is to provide for an annual dividend payment, as determined by the Board of Directors. We anticipate that dividends will be paid in the first quarter of our fiscal year.

     On January 3, 2005, we paid a $0.30 per share dividend in the aggregate amount of $4,052,000 to shareholders of record on November 15, 2004.

     On January 3, 2006, we paid a $0.32 per share dividend in the aggregate amount of $4,564,000 to shareholders of record on December 15, 2005.

Item 6. Selected Financial Data

SELECTED CONSOLIDATED FINANCIAL DATA

     The following summary consolidated financial data (other than pounds information) for each of the years in the five-year period ended October 31, 2005 are derived from the audited consolidated financial statements of Calavo Growers, Inc. and our predecessor, Calavo Growers of California.

     Historical results are not necessarily indicative of results that may be expected in any future period. The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto that are included elsewhere in this Annual Report.

		Fiscal Year Ended October 31,2005
		2005				2004				2003				2002				2001
		(In thousands, except per share data)
Income Statement Data: (1)
Net sales		$	258,822			$	274,218			$	246,761			$	242,671			$	217,704
Gross margin			21,734				25,404				25,465				25,823				18,808
Net income			3,322				6,210				7,160				6,915				3,838
Basic and diluted net income per share(2)		$	0.24			$	0.46			$	0.55			$	0.60			$	0.37
Balance Sheet Data as of End of Period:
Working capital		$	17,618			$	20,353			$	20,735			$	18,833			$	9,799
Total assets(5)			108,482				67,398				53,689				55,132				52,368
Short-term debt(5)			1,313				22				24				3,222				16,241
Long-term debt, less current portion(3)(5)			11,719				34				61				3,180				3,429
Shareholders’ equity			64,746				43,937				37,147				30,556				20,029
Cash Flows Provided by (Used in):
Operations		$	5,964			$	4,460			$	15,222			$	8,135			$	1,161
Investing(4)(5)			(22,337	)			(8,474	)			(4,475	)			(2,078	)			(2,029	)
Financing(5)			16,870				(725	)			(6,293	)			(7,193	)			1,433
Other Data:
Dividends per share (2)		$	0.32			$	0.30			$	0.25			$	0.20			$	0.50
Net book value per share		$	4.51			$	3.25			$	2.87			$	2.38			$	2.01
Pounds of California avocados sold			104,950				152,725				122,950				158,187				163,891
Pounds of international avocados sold			103,830				69,410				70,348				69,512				44,935
Pounds of processed avocados products sold			15,628				13,317				14,707				14,248				14,788

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

     You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto that appear elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, those presented under “Risks related to our business” included in Item 1A and elsewhere in this Annual Report.

Overview

     We are a leader in the distribution of avocados, processed avocado products, and other perishable food products throughout the United States and elsewhere in the world. Our history and expertise in handling California grown avocados has allowed us to develop a reputation of delivering quality products, at competitive prices, while providing a competitive return to our growers. This reputation has enabled us to expand our product offering to include avocados sourced on an international basis, processed avocado products, and other perishable foods. We report these operations in three business segments: California avocados, international avocados and other perishable food products and processed products. We report our financial results on a November 1 to October 31 fiscal year basis to coincide with the California avocado harvest season.

     On October 9, 2001, we completed a series of transactions whereby common and preferred shareholders of Calavo Growers of California, an agricultural marketing cooperative association, exchanged all of their outstanding shares for shares of our common stock. Concurrently with this transaction, the Cooperative was merged into us with Calavo emerging as the surviving entity. These transactions had the effect of converting the legal structure of the business from a non-profit cooperative to a for-profit corporation. The merger and the conversion were approved on an overwhelming basis by both the Cooperative’s shareholders and our board of directors. Prior to the merger, the Cooperative reported results of operations as constituting either member (the packing and distribution of avocados procured from either members or associate members) or non-member business (non-member business included both the processed product business and the sourcing and distribution of all crops that were not procured from the Cooperative’s members).

     In June 2005, in order to increase our market share of California avocados and increase synergies within the marketplace, we entered into a stock purchase agreement with Limoneira Company (Limoneira). Pursuant to such agreement, we acquired approximately 15.1% of Limoneira’s outstanding common stock for $23.45 million and Limoneira acquired approximately 6.9% of our outstanding common stock for $10 million. The transaction was settled by a net cash payment by us of $13.45 million. Additionally, such agreement also provided for: (1) Calavo to lease office space from Limoneira in Santa Paula, California for a period of 10 years at an initial annual gross rental of approximately $0.2 million (subject to annual CPI increases, as defined), (2) Calavo to market Limoneira’s avocados and (3) Calavo and Limoneira to use good faith reasonable efforts to maximize avocado packing efficiencies for both parties by consolidating their fruit packing operations. Various opportunities are currently being considered, including the use of existing packing facilities, an investment in existing vacant facilities, and/or an investment in a new consolidated facility for both parties.

     Limoneira, which generated total revenues of approximately $26 million during fiscal 2004, primarily engages in growing citrus and avocados, picking and hauling citrus, and packing lemons.

     Our California avocado business grades, sizes, packs and cools avocados grown in California for delivery to our customers. We presently operate three packinghouses in Southern California. These packinghouses handled approximately 35% of the California avocado crop during the 2005 fiscal year, based on data obtained from the California Avocado Commission. Our operating results and the returns we pay our growers are highly dependent on the volume of avocados delivered to our packinghouses, as a significant portion of our costs are fixed. Our strategy calls for continued efforts in retaining existing growers, aggressively recruiting new growers, and procuring a larger percentage of the California avocado crop to improve our results from operations.

     Our international and perishable food products business procures avocados grown in Mexico, Chile, and the Dominican Republic, as well as other various commodities, including papayas, tomatoes, chili peppers, pineapples, and ginger. We operate a packinghouse in Mexico that handled approximately 21% of the Mexican avocado crop bound for the United States market during the 2004-2005 Mexican harvest season, based on our estimates. Additionally, during the 2004-2005 Chilean avocado harvest season, we handled approximately 10% of the Chilean avocado crop, based on our estimates. Our strategy is to procure and sell the internationally grown avocados to complement our distribution efforts of California grown avocados. We believe that the introduction of these avocados, although competitive at times with California grown avocados, provides a level of supply stability that may, over time, help solidify the demand for avocados among consumers in the United States and elsewhere in the world. We believe our efforts in distributing our other various commodities, such as those shown above, complement our offerings of avocados. From time to time, we continue to explore distribution of other crops that provide reasonable returns to the business.

     Our processed products business procures avocados, processes avocados into a wide variety of guacamole products, and distributes the processed product to our customers. In February 2003, our Board of Directors approved a plan whereby the operations of our processed products business would be relocated. The plan called 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. This restructuring has provided for 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 and the Santa Paula and Mexicali facilities were closed in February 2003 and August 2004. During fiscal 2005, we incurred costs related to this restructuring approximating $0.4 million, which are recorded in our income statement as both cost of sales ($0.3 million) and selling, general and administrative expenses ($0.1 million). All the above amounts have been paid and we do not expect any additional operating costs related to this restructuring.

     Processed products customers include both food service industry and retail businesses. Our strategy calls for the development of new guacamole recipes and other processed avocado products that address the diverse taste of today’s consumers. We also seek to expand our relationships with major food service companies and develop alliances that will allow our products to reach a larger percentage of the marketplace.

     Our California avocado and international and perishable food product businesses are highly seasonal and are characterized by rapid crop volume and price changes. Furthermore, the operating results of all of our businesses, including our processed products business, have been, and will continue to be, affected by substantial quarterly and annual fluctuations and market downturns due to a number of factors, such as pests and disease, weather patterns, changes in demand by consumers, the timing of the receipt, reduction, or cancellation of significant customer orders, the gain or loss of significant customers, market acceptance of our products, our ability to develop, introduce, and market new products on a timely basis, availability and cost of avocados and supplies from growers and vendors, new product introductions by our competitors, change in the mix of avocados and processed products we sell, and general economic conditions. We believe, however, that we are currently positioned to address these risks and deliver favorable operating results for the foreseeable future.

Recent Developments

Dividend Payment

     In January 2006, we paid a $0.32 per share dividend in the aggregate amount of $4,564,000 to shareholders of record on December 15, 2005.

Corporate headquarters building

     In March 2005, we completed the sale of our old corporate headquarters building (located in Santa Ana) for $3.4 million. This transaction resulted in a pre-tax gain on sale of approximately $1.7 million. In conjunction with such sale, we relocated our corporate offices to Santa Paula, California in March 2005. Total expenses related to such relocation approximated $0.4 million.

Stock Option Grant

     In August 2005, our Board of Directors approved the issuance of options to acquire a total of 400,000 shares of our common stock to various employees of the Company. The options vest if the closing price of our common stock is at least $11.00 per share at any time throughout the life of the option. At no time, however, may any options vest within one year from the date of grant. Additionally, such options have an exercise price of $9.10 per share and a term of 5 years from the grant date. The market price of our common stock at the grant date was $9.10.

Term loan agreement

     In July 2005, we entered into a non-collateralized term loan agreement with Farm Credit West, PCA to finance the purchase of our Limoneira Stock. Pursuant to such agreement, we borrowed $13.0 million, which is to be repaid in 10 annual installments of $1.3 million. Such annual installments begin July 2006 and continue through July 2015. Interest is to be paid monthly, in arrears, beginning August 2005 through the life of the loan. Such loan bears interest at a fixed rate of 5.70%.

     Such loan contains various financial covenants, which are substantially identical to existing covenants, with which we were in compliance at October 31, 2005. The most significant financial covenants relate to working capital, tangible net worth (as defined), and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (as defined) requirements.

Useful lives of property, plant and equipment

     Effective May 1, 2005, based on a review performed by us, we changed our estimate of useful lives of certain property, plant and equipment. The principal estimated useful lives were: buildings and improvements — 7 to 30 years; leasehold improvements — the lesser of the term of the lease or 7 years; equipment — 7 years; information systems hardware and software — 3 to 5 years. The revised estimated useful lives are: buildings and improvements — 7 to 50 years; leasehold improvements — the lesser of the term of the lease or 7 years; equipment — 7 to 25 years; information systems hardware and software — 3 to 15 years. The change in estimated useful lives increased our operating income by approximately $0.4 million during the six months ended October 31, 2005 when compared to the old useful lives.

Retirement of Common Stock

     In August 2005, we repurchased 200,000 shares of our common stock at an average price per share of $10.00 from the estate of a deceased former member of our Board of Directors. In December 2005, we repurchased another 120,000 shares of our common stock at an average price per share of $10.00 from the same estate.

Critical Accounting Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we re-evaluate all of our estimates, including those related to the areas of customer and grower receivables, inventories, useful lives of property, plant and equipment, promotional allowances, income taxes, retirement benefits, and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions as additional information becomes available in future periods.

     Management has discussed the development and selection of critical accounting estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure relating to critical accounting estimates in this Annual Report.

     We believe the following are the more significant judgments and estimates used in the preparation of our consolidated financial statements.

     Promotional allowances. We provide for promotional allowances at the time of sale, based on our historical experience. Our estimates are generally based on evaluating the average length of time between the product shipment date and the date on which we pay the customer the promotional allowance. The product of this lag factor and our historical promotional allowance payment rate is the basis for the promotional allowance included in accrued expenses on our balance sheet. Actual amounts may differ from these estimates and such differences are recognized as an adjustment to net sales in the period they are identified.

     Goodwill and acquired intangible assets. The purchase method of accounting for business combinations requires us to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill is tested for impairment annually, or when a possible impairment is indicated, using the fair value based test prescribed by Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. The impairment test requires us to compare the fair value of business reporting units to carrying value, including goodwill. We primarily use an “income approach” (which considers the present value of future cash flows) in combination with a “market approach” (which considers what other purchasers in the marketplace have paid for similar businesses) to determine fair value. Future cash flows typically include operating cash flows for the business for five years and an estimated terminal value. Management judgment is required in the estimation of future operating results and to determine the appropriate terminal values. Future operating results and terminal values could differ from the estimates and could require a provision for impairment in a future period.

     Allowance for accounts receivable. We provide an allowance for estimated uncollectible accounts receivable balances based on historical experience and the aging of the related accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

     Revenue recognition. Sales of products and related costs of products sold are recognized when persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is fixed or determinable and collectibility is reasonably assured. Service revenue, including freight, ripening, storage, bagging and palletization charges, is recorded when services are performed and sales of the related products are delivered.

Results of Operations

     The following table sets forth certain items from our consolidated statements of income, expressed as percentages of our total net sales, for the periods indicated:

			Year ended October 31, 2005
			2005				2004				2003
Net sales			100.0	%			100.0	%			100.0	%
Gross margins			8.4	%			9.3	%			10.3	%
Selling, general and administrative			7.2	%			5.8	%			6.0	%
Operating income			1.2	%			3.4	%			4.3	%
Other income, net			0.9	%			0.2	%			0.4	%
Net income			1.3	%			2.3	%			2.9	%

Net Sales

     We believe that the fundamentals for our products continue to be favorable. Government census studies continue to indicate a shift in the demographics of the U.S. population in which larger portions of the population descend from a Hispanic origin. Avocados are considered a staple item purchased by Hispanic consumers and their acceptance as part of American cuisine continues to spur demand for our products. We anticipate avocado products will further penetrate the United States marketplace driven by growth in the Hispanic community and general acceptance in American cuisine. As the largest marketer of avocado products in the United States, we believe that we are well positioned to leverage this trend and to grow all segments of our business. Additionally, we also believe that avocados and avocado based products will further penetrate other marketplaces that we currently operate in, as interest in avocados continues to expand.

     Sales of products and related costs of products sold are recognized when persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is fixed or determinable and collectibility is reasonably assured. Service revenue, including freight, ripening, storage, bagging and palletization charges, is recorded when services are performed and sales of the related products are delivered. We provide for sales returns and promotional allowances at the time of shipment, based on our experience. The following table summarizes our net sales by business segment:

		2005				Change				2004				Change				2003
		(Dollars in thousands)
Net sales:
California avocados		$	116,308				(28.9	)%		$	163,486				9.3	%		$	149,635
International avocados and perishable food products			129,831				37.5	%			94,423				25.3	%			75,347
Processed products			34,699				6.0	%			32,749				1.2	%			32,360
Eliminations			(22,016	)							(16,440	)							(10,581	)
Total net sales		$	258,822				(5.6	)%		$	274,218				11.1	%		$	246,761
As a percentage of net sales:
California avocados			43.3	%							59.0	%							60.6	%
International avocados and perishable food products			45.7	%							31.6	%							28.0	%
Processed products			11.0	%							9.4	%							11.4	%
			100.0	%							100.0	%							100.0	%

     Net sales for the year ended October 31, 2005, when compared to 2004, decreased by approximately $15.4 million, or 5.6%, principally as a result of a decrease in our California avocados segment, partially offset by an increase in our and International avocados and perishable food products segment. The decrease in sales related to our California avocados segment was primarily driven by a smaller overall harvest of the California avocado crop for the 2004/2005 season, while the increase in our international avocados and perishable food products segment was driven primarily by an increase in the volume of avocados being imported from Mexico.

     Net sales generated by our International avocados and perishable food products business depend principally on the availability of Chilean and Mexican grown avocados in the U.S. markets. In November 2004, the USDA published a rule allowing Hass avocado imports from Mexico into all 50 states year round (up from 31 states for only a six month period), except for California, Florida, and Hawaii. We expect the restriction on such states to be lifted in February 2007. For the remaining 47 states, however, Mexico was able to deliver its fruit for all of fiscal 2005. The implementation of this rule resulted in a significant increase in the sale of Mexican sourced fruit during fiscal 2005.

     The following tables set forth sales by product category, freight and other charges and sales incentives, by segment (dollars in thousands):

		Year ended October 31, 2005																Year ended October 31, 2004
						International																International
						avocados and																avocados and
						perishable																perishable
		California				food				Processed								California				food				Processed
		avocados				products				products				Total				avocados				products				products				Total
Third-party sales:
California avocados		$	104,481			$	—			$	—			$	104,481			$	150,159			$	—			$	—			$	150,159
Imported avocados			—				81,756				—				81,756				—				54,589				—				54,589
Papayas			—				6,251				—				6,251				—				6,846				—				6,846
Specialities and tropicals			—				13,777				—				13,777				—				14,233				—				14,233
Processed — food service			—				—				28,307				28,307				—				—				27,352				27,352
Processed — retail and club			—				—				6,766				6,766				—				—				4,285				4,285
Total fruit and product sales to third-parties			104,481				101,784				35,073				241,338				150,159				75,668				31,637				257,464
Freight and other charges			7,699				16,430				258				24,387				11,946				10,968				534				23,448
Total gross sales to third-parties			112,180				118,214				35,331				265,725				162,105				86,636				32,171				280,912
Less sales incentives			(103	)			(2	)			(6,798	)			(6,903	)			(131	)			(48	)			(6,515	)			(6,694	)
Total net sales to third-parties			112,077				118,212				28,533				258,822				161,974				86,588				25,656				274,218
Intercompany sales			4,231				11,619				6,166				22,016				1,512				7,835				7,093				16,440
Net sales		$	116,308			$	129,831			$	34,699				280,838			$	163,486			$	94,423			$	32,749				290,658
Intercompany sales eliminations															(22,016	)															(16,440	)
Consolidated net sales														$	258,822															$	274,218

		Year ended October 31, 2004																Year ended October 31, 2003
						International																International
						avocados and																avocados and
						perishable																perishable
		California				food				Processed								California				food				Processed
		avocados				products				products				Total				avocados				products				products				Total
Third-party sales:
California avocados		$	150,159			$	—			$	—			$	150,159			$	140,795			$	—			$	—			$	140,795
Imported avocados			—				54,589				—				54,589				—				56,306				—				56,306
Papayas			—				6,846				—				6,846				—				2,920				—				2,920
Specialities and tropicals			—				14,233				—				14,233				—				30				—				30
Processed — food service			—				—				27,352				27,352				—				—				28,545				28,545
Processed — retail and club			—				—				4,285				4,285				—				—				5,165				5,165
Total fruit and product sales to third-parties			150,159				75,668				31,637				257,464				140,795				59,256				33,710				233,761
Freight and other charges			11,946				10,968				534				23,448				8,997				10,079				290				19,366
Total gross sales to third-parties			162,105				86,636				32,171				280,912				149,792				69,335				34,000				253,127
Less sales incentives			(131	)			(48	)			(6,515	)			(6,694	)			(157	)			(251	)			(5,958	)			(6,366	)
Total net sales to third-parties			161,974				86,588				25,656				274,218				149,635				69,084				28,042				246,761
Intercompany sales			1,512				7,835				7,093				16,440				—				6,263				4,318				10,581
Net sales		$	163,486			$	94,423			$	32,749				290,658			$	149,635			$	75,347			$	32,360				257,342
Intercompany sales eliminations															(16,440	)															(10,581	)
Consolidated net sales														$	274,218															$	246,761

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

California Avocados

     Net sales delivered by the business decreased by approximately $49.9 million, or 30.8%, from fiscal 2004 to 2005. The decrease in sales primarily reflects a 31.3% decrease in pounds of avocados sold, partially offset by an increase in our average selling prices when compared to the same prior period. This decrease in pounds sold is consistent with the expected decrease in the overall harvest of the California avocado crop for the 2004/2005 season. Our market share of California avocados remained consistent at 34.4% for the year ended October 31, 2005, compared to 34.7% for the same period in the prior year. Based on estimates generated from the California Avocado Commission, we expect the California avocado crop for the 2005/2006 season to be substantially larger than the 2004/2005 crop.

     For fiscal year 2005, average selling prices, on a per carton basis, for California avocados were 6.7% higher when compared to the same prior year period. This pricing structure primarily reflects the impact of a smaller California avocado harvest, partially offset by an increase in foreign-sourced fruit in the U.S. marketplace. For fiscal year 2006, we believe that the anticipated increase of avocados in the U.S. marketplace, primarily related to an expected larger California avocado crop discussed above, will put increasing pressure on sales prices.

     Net sales delivered by the business increased by approximately $12.3 million, or 8.2%, from fiscal 2003 to 2004. This increase in sales reflects a 24.2% increase in pounds of avocados sold, partially offset by a decrease in our average selling prices when compared to the same prior year period. This increase in pounds sold was consistent with the increase in the overall harvest of the California

avocado crop for the 2003/2004 season. Our market share of California avocados remained consistent at 34.7% for fiscal year 2004, compared to 34.2% for the same period in the prior year.

     For fiscal year 2004, average selling prices, on a per carton basis, for California avocados were 18.0% lower when compared to the same prior year period. This pricing structure primarily reflects the impact of a larger California avocado harvest.

     In October 2002, the USDA announced the creation of a Hass Avocado Board to promote the sale of Hass variety avocados in the U.S. marketplace. This board provides a basis for a unified funding of promotional activities based on an assessment on all avocados sold in the U.S. marketplace, including imported and California grown fruit. The California Avocado Commission, which receives its funding from California avocado growers, has historically shouldered the promotional and advertising costs supporting avocado sales. We believe that the incremental funding of promotional and advertising programs in the U.S. will, in the long term, positively impact average selling prices and will favorably impact our California avocado and international avocado businesses. During fiscal 2005, 2004 and 2003, we remitted approximately $2.4 million, $3.3 million and $2.4 million to the Hass Avocado Board representing our share of such marketing expenses.

International and Perishable Food Products

     For fiscal year 2005, when compared to the same period in the prior year, sales to third-party customers increased by approximately $31.6 million, or 36.5%, from $86.6 million to $118.2 million. The increased sales to third-parties by our international and perishable food products business were primarily driven by the additional sales related to Mexican and Chilean grown avocados in the U.S., Japanese, and/or European marketplace. These increases, however, were partially offset by decreased sales of Dominican Republic grown avocados. While we believe that sales of Mexican grown avocados will continue to show a growing trend, we do not expect a trend as strong as we experienced in fiscal 2005, which was primarily related to the aforementioned USDA rule allowing Hass avocado imports from Mexico into 50 states year round (subject to certain restrictions—see comment above). We intend to leverage our position as the largest packer of Mexican grown avocados for export markets to improve the overall performance of this business.

     Sales of Mexican and Chilean sourced fruit increased $24.7 million and $6.1 million for fiscal year 2005, when compared to the same prior year period, primarily as a result of a 62.8% and 65.7% increase in pounds of Mexican and Chilean fruit handled. Such increases, however, were partially offset by decreases in Dominican Republic fruit sales. For fiscal year 2005, sales of Dominican Republic sourced fruit decreased $4.3 million when compared to the same prior period. This was primarily the result of a 52.4% decrease in the volume of Dominican Republic fruit handled, when compared to the same prior year period. Pricing during fiscal year 2005 was stable when compared to fiscal 2004.

     For fiscal year 2004, when compared to the same period in the prior year, sales to third-party customers increased by approximately $17.5 million, or 25.3%, from $69.1 million to $86.6 million. The increased sales to third-parties by our international and perishable food products business were 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. These increases, however, were partially offset by decreased sales of Chilean grown avocados.

     For fiscal year 2004, the additional sales related to the acquisition of Maui totaled approximately $19.8 million (approximately $1.5 million of such sales were related to California avocados). Also, sales of Mexican and Dominican Republic sourced fruit increased $4.1 million and $6.9 million for fiscal year 2004, when compared to the same prior year period, primarily as a result of a 9.8% and 100% increase in pounds of Mexican and Dominican Republic fruit handled. Such increases, however, were partially offset by decreases in Chilean fruit sales. For fiscal year 2004, sales of Chilean sourced fruit decreased $12.3 million when compared to the same prior period. This was primarily the result of a 42.1% decrease in the volume of Chilean fruit handled, when compared to the same prior year period. Pricing during fiscal year 2004 was fairly stable as well, when compared to fiscal 2003.

Processed Products

     Net sales to third-party customers increased by approximately $2.9 million, or 11.2%, from $25.7 million for fiscal year 2004 to $28.5 million for fiscal year 2005. The increase in net sales to third-party customers is primarily attributable to an increase of 2.3 million pounds of product sold, or 17.4%, net of a decrease in sales incentives and promotions paid, totaling $0.07 per pound of product sold, or 14.3%. Such increase, however, was partially offset by a decrease in the sales price per product pound sold of $0.09, or 4.7%. During fiscal year 2005, the increase in pounds sold primarily relates to an increase in the sale of our high-pressure guacamole product, which increased 56.2% when compared to the same prior year period. The decrease in our average selling price and sales incentives and promotional activities paid primarily relates to a change in our product mix.

     Net sales to third-party customers decreased by approximately $2.3 million, or 8.5%, from $28.0 million for fiscal year 2003 to $25.7 million for fiscal year 2004. The decrease in net sales to third-party customers is primarily attributable to a decrease in 1.4 million pounds of product sold, or 9.5%, and an increase in sales incentives and promotional activities paid of $0.6 million, or 8.5%, partially offset by an increase in the sales price per product pound sold of $0.09, or 3.9%. During fiscal year 2004, the decrease in pounds sold primarily relates to a lack of inventory to meet customer demand. Such lack of inventory was primarily related to reduced production capabilities during construction of our new processed facility. As a result, and, in order to maintain good customer relationships, we increased our sales incentives and promotional activities paid.

     During fiscal year 2005, we operated one high-pressure line designed to manufacture processed avocado products that are not frozen (guacamole) in Uruapan. This machine ran at about 60% capacity (with one shift) through October 2005. We anticipate that we will operate such high-pressure machine at a higher capacity during fiscal year 2006. We presently own another, much smaller, high-pressure machine, located in Uruapan, that is currently not in use. We are considering various alternatives with such machine, including trading such machine in for credit towards another high-pressure machine with similar capacity as our high-pressure machine that is currently in use in Uruapan. Utilizing avocado pulp and chunks, these high-pressure machines allow us to deliver fresh guacamole to retail and food service customers. Sales of our high-pressure product totaled approximately $8.7 million and $5.5 million for fiscal years 2005 and 2004.

Gross Margins

     The following table summarizes our gross margins and gross profit percentages by business segment:

		2005				Change				2004				Change				2003
		(Dollars in thousands)
Gross Margins:
California avocados		$	10,502				(38.6	)%		$	17,102				15.0	%		$	14,873
International avocados and perishable food products			6,569				32.5	%			4,958				(9.1	)%			5,457
Processed products			4,663				39.4	%			3,344				(33.3	)%			5,017
Total gross margins		$	21,734				(14.4	)%		$	25,404				0.2	%		$	25,347
Gross profit percentages:
California avocados			9.4	%							10.6	%							9.9	%
International avocados and perishable food products			5.6	%							5.7	%							7.9	%
Processed products			16.3	%							13.0	%							17.9	%
Consolidated			8.4	%							9.3	%							10.3	%

____________

     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 0.9% for fiscal year 2005 when compared to fiscal year 2004. This decrease was principally attributable to decreased profitability in our California avocado segment, partially offset by increased profitability in our international avocados and perishable food products and our processed product operating segments. Consolidated gross margin, as a percent of sales, decreased 1.0% for fiscal year 2004 when compared to fiscal year 2003. This decrease was principally attributable to decreased profitability in our international avocados and perishable food products operating segment and our processed product segment, partially offset by increased profitability in our California avocado segment.

     Gross margins and gross profit percentages for our California avocado business are largely dependent on production yields achieved at our packinghouses, current market prices of avocados, and the volume of avocados packed. The decrease in our gross margin percentage during fiscal year 2005 was primarily related to a significant decrease in pounds of fruit sold. During fiscal year 2005, when compared to fiscal year 2004, we experienced a 31.3% decrease in pounds of avocados sold. This had the effect of increasing our per pound costs, which, as a result, negatively impacted gross margins. Such higher per pound cost was partially offset, however, by an increase in our packing and marketing fee (which is charged to cover our costs and a profit).

     The increase in our gross margin percentage during fiscal year 2004 was primarily related to a significant increase in pounds of fruit handled. During fiscal year 2004, when compared to fiscal year 2003, fruit handled by our California packinghouses increased approximately 31.4%. This had the effect of reducing our per pound costs, which, as a result, positively impacted gross margins.

     During fiscal 2005, freight and handling costs decreased by approximately $1.9 million, from $5.0 million in fiscal 2004 to $3.1 million during fiscal 2005, primarily related to volume fluctuations. During fiscal 2004, freight and handling costs increased by approximately $1.5 million, from $3.5 million in fiscal 2003 to $5.0 million during fiscal 2004. We continue to review our packinghouse processes for potential improvements in packing efficiencies and more favorable production yields.

     The gross margin and gross profit percentage for our international avocado and perishable food products business are dependent on the volume of fruit we handle and the competitiveness of the returns that we provide to third-party domestic packers. For example, the gross margins we earn on avocados procured from Chile and the Dominican Republic, as well as papayas grown in Hawaii, are generally based on a commission agreed to with each packer that is subject to incentive provisions. These provisions provide for us to deliver returns to these packers that are competitive with those delivered by other handlers. Accordingly, the gross margin results for this business are a function of the volume handled and the competitiveness of the sales prices that we realize as compared to others. Although we generally do not take legal title to such avocados and perishable products, we do assume responsibilities (principally assuming credit risk, inventory loss and delivery risk, and limited pricing risk) that are consistent with acting as a principal in the transaction. Accordingly, our results of operations include sales and cost of sales from the sale of avocados and perishable products procured under consignment arrangements. For fiscal year 2005, we generated gross margins of $1.4 million from the sale of fresh produce products that were packed by third parties, whereas gross margins for fiscal year 2004 were $1.5 million. For fiscal year 2004, we generated gross margins of $1.5 million from the sale of fresh produce products that were packed by third parties, whereas gross margins for fiscal year 2003 were $2.3 million.

     Our business with Mexican growers differs in that we operate a packinghouse in Mexico and purchase avocados directly from the field. Consequently, the gross margin and gross profit percentages generated by our Mexican operations are significantly impacted by the volume of avocados handled by our packinghouse and the cost of the fruit. During fiscal year 2005, our gross margins generated from the sale of Mexican avocados increased from approximately $1.5 million in fiscal year 2004 to $3.8 million in fiscal year 2005. We did not experience a significant fluctuation in our gross margin percentage for fiscal 2005 as compared to fiscal 2004 related to our Mexican operations. During fiscal year 2004, our gross margins, and related gross margin percentages, generated from the sale of Mexican avocados deteriorated from approximately $2.2 million in fiscal year 2003 to $1.5 million in fiscal year 2004, principally as a result of an increase in fruit costs. This increase in fruit costs had the effect of increasing our per pound costs, which, as a result, adversely affected gross margins. Further, we experienced an increase in sales of non-exported fruit, which typically generate lower margins then exported fruit. These decreases, however, were partially offset by increases in fruit volume during fiscal year 2004, which had the effect of reducing our per pound costs.

     Gross margins and gross profit percentages for our processed products business are largely dependent on the pricing of our final product and the cost of avocados used in preparing guacamole. During fiscal year 2005, the processed products gross profit percentages increased primarily as a result of efficiencies related to the relocation of production from Santa Paula, California and Mexicali, Mexico to our newly acquired facility in Uruapan, Mexico. Such efficiencies include the elimination of duplicative overhead, as well as lower production costs. Additionally, our processed product segment experienced lower fruit costs. Such improvements, however, were partially offset by an increase in the sale of products that generate a lower gross margin then those sold in the prior year. During fiscal year 2004, the processed products gross profit percentages decreased primarily as a result of inefficiencies experienced in the start-up process of our newly constructed facility in Uruapan, Mexico and the winding down of the operations at our Mexicali, Mexico facility. Such inefficiencies primarily relate to subcontracting costs and duplicative overhead costs. Additionally, our processed product segment experienced higher fruit costs, as well as an increase in the sale of products that generate a lower gross margin then those sold in the prior year. We anticipate that the gross profit percentage for our processed product segment will continue to experience fluctuations primarily due to the uncertainty of fruit costs that will be used in the production process.

Selling, General and Administrative

		2005				Change				2004				Change				2003
		(Dollars in thousands)
Selling, general and administrative		$	18,588				16.8	%		$	15,920				8.7	%		$	14,651
Percentage of net sales			7.2	%							5.8	%							5.9	%

____________

     Selling, general and administrative expenses include costs of marketing and advertising, sales expenses, and other general and administrative costs. For fiscal year 2005, selling, general and administrative expenses increased by $2.7 million, or 16.8%, compared to the same period for fiscal 2004. This increase was primarily related to higher corporate costs, including, but not limited to, costs related to implementing provisions required under section 404 of the Sarbanes-Oxley Act (totaling approximately $2.2 million), an increase in bad debt expense (totaling approximately $0.5 million), and corporate moving expenses (totaling approximately $0.4 million). Such higher corporate costs were partially offset by a decrease in employee compensation costs (totaling approximately $0.7 million).

     For fiscal year 2004, selling, general and administrative expenses increased by $1.3 million, or 8.7%, compared to fiscal year 2003. The increased general and administrative costs related principally to selling, general and administrative expenses incurred by Maui. Maui’s selling, general and administrative expenses totaled approximately $0.7 million for fiscal year 2004. Additionally, we also experienced higher costs of corporate functions, such as accounting, information systems, and human resources (totaling

approximately $0.8 million). These increased costs were partially offset by reduced employee compensation expenses of approximately $0.5 million, which was primarily related to a reduction in bonuses during fiscal year 2004 as compared to fiscal year 2003.

Other Income, Net

		2005				Change				2004				Change				2003
		(Dollars in thousands)
Other income, net		$	2,357				393.1	%		$	478				(46.2	)%		$	889
Percentage of net sales			0.9	%							0.2	%							0.4	%

____________

     Other income, net includes interest income and expense generated primarily in connection with our financing activities, as well as certain other transactions that are outside of the course of normal operations. During fiscal year 2005, other income, net includes the gain on the sale of our corporate facility totaling approximately $1.7 million. During fiscal years 2005, 2004 and 2003, other income, net includes interest accrued on notes receivable from directors and officers of approximately $0.2 million, $0.2 million and $0.3 million.

Provision for Income Taxes

		2005				Change				2004				Change				2003
		(Dollars in thousands)
Provision for income taxes		$	2,181				(38.9	)%		$	3,567				(17.4	)%		$	4,319
Percentage of income before provision for income taxes			39.6	%							36.5	%							37.6	%

____________

     The effective income tax rate for fiscal year 2005 and 2004 is higher than the federal statutory rate principally due to state taxes. Our effective income tax rate increased from 36.5% in fiscal year 2004 to 39.6% in fiscal year 2005 primarily as a result of an unfavorable increase in our foreign tax rates during fiscal year 2005 when compared to fiscal year 2004. Our effective income tax rate decreased from 37.6% in fiscal year 2003 to 36.5% in fiscal year 2004 primarily as a result of a favorable reduction in our foreign tax rates during fiscal year 2004 when compared to fiscal year 2003.

Quarterly Results of Operations

     The following table presents our operating results for each of the eight fiscal quarters in the period ended October 31, 2005. The information for each of these quarters is derived from our unaudited interim financial statements and should be read in conjunction with our audited consolidated financial statements included in this Annual Report. In our opinion, all necessary adjustments, which consist only of normal and recurring accruals, have been included to fairly present our unaudited quarterly results.

		Three months ended
		Oct. 31,				July 31,				Apr. 30,				Jan. 31,				Oct. 31,				July 31,				Apr. 30,				Jan. 31,
		2005				2005				2005				2005				2004				2004				2004				2004
		(in thousands, except per share amounts)
Statement of Operations Data
Net sales		$	62,246			$	88,699			$	60,206			$	47,671			$	65,436			$	83,318			$	76,421			$	49,043
Cost of sales			58,013				79,505				53,851				45,719				59,425				74,833				68,625				45,931
Gross margin			4,233				9,194				6,355				1,952				6,011				8,485				7,796				3,112
Selling, general and administrative			4,943				4,825				4,307				4,513				4,416				3,777				4,012				3,715
Restructuring charge																			185
Operating income (loss)			(710	)			4,369				2,048				(2,561	)			1,410				4,708				3,784				(603	)
Other income, net			213				153				1,909				82				167				91				106				114
Income before provision (benefit) for income taxes			(497	)			4,522				3,957				(2,479	)			1,577				4,799				3,890				(489	)
Provision (benefit) for income taxes			20				1,603				1,490				(932	)			467				1,739				1,556				(195	)
Net income (loss)		$	(517	)		$	2,919			$	2,467			$	(1,547	)		$	1,110			$	3,060			$	2,334			$	(294	)
Net income (loss) per share:
Basic		$	(0.04	)		$	0.21			$	0.18			$	(0.11	)		$	0.08			$	0.23			$	0.17			$	(0.02	)
Diluted		$	(0.04	)		$	0.21			$	0.18			$	(0.11	)		$	0.08			$	0.23			$	0.17			$	(0.02	)
Number of shares used in per share computation:
Basic			14,371				14,171				13,507				13,507				13,507				13,507				13,507				13,469
Diluted			14,432				14,237				13,580				13,507				13,591				13,594				13,589				13,469

Liquidity and Capital Resources

     Operating activities for fiscal 2005, 2004 and 2003 provided cash flows of $5.6 million, $4.5 million, and $15.2 million. Fiscal year 2005 operating cash flows reflect our net income of $3.3 million, net noncash charges (depreciation and amortization, gains, losses, and stock compensation expense) of $1.8 million and a net increase in the non-cash components of our working capital of approximately $0.5 million.

     Fiscal year 2005 increases in operating cash flows, caused by working capital changes, include a increase in trade accounts payable and accrued expenses of $3.2 million, an decrease in accounts receivable of $1.4 million, an decrease in inventory of $1.3 million, and an increase in advance to suppliers of $1.3 million, partially offset by a net decrease in payable to growers of $4.0 million, a net decrease in deferred income taxes of $1.9 million, and an increase in prepaid expenses and other assets of $0.8 million.

     Decreases in our accounts receivable balance as of October 31, 2005, when compared to October 31, 2004, primarily reflect a significantly lower volume of California avocado sales recorded in the month of October 2005, as compared to October 2004, partially offset by additional international avocados and perishable food product sales for the same period. Similarly, the amounts payable to our growers also reflects the decrease in the volume of California avocados marketed in the month of October 2005, as compared to October 2004. These volume level fluctuations are consistent with the harvests experienced in previous years. Additionally, decreases in our inventory balance as of October 31, 2005, when compared to October 31, 2004, primarily reflect a significant decrease in the manufacture of finished, non-high-pressure processed products. Such decrease was primarily related to higher fruit-prices near our fiscal year end, as well as a shift in manufacturing to our high-pressure products. Due to the high turnover rate of our high-pressure products, we do not accumulate such inventory on a basis consistent with that of other products.

     Decreases in advances to suppliers as of October 31, 2005, when compared to October 31, 2004, primarily relates to an earlier start of the Chilean avocado harvest, which resulted in quicker collections on our advances. Increases in our trade accounts payable and accrued expenses as of October 31, 2005, when compared to October 31, 2004, primarily reflect additional accrual of expenses related to implementing certain provisions of the Sarbanes-Oxley Act, as well as accruals related to purchased fruit. The increase in prepaid expenses and other assets as of October 31, 2005, when compared to October 31, 2004, was primarily a result of additional miscellaneous receivables as of our fiscal year end.

     Cash used in investing activities was $11.9 million, $8.5 million, and $4.5 million for fiscal years 2005, 2004, and 2003. Fiscal year 2005 cash flows used in investing activities include the acquisition of Limoneira common stock, net of our common stock issued, totaling $13.5 million and capital expenditures of $1.9 million, principally related to the construction of coolers for our ProRipeVIP™ avocado ripening program, partially offset by the proceeds related to the sale of our corporate facility located in Santa Ana, California totaling $3.4 million.

     Cash provided by financing activities was $6.9 million for fiscal year 2005, while cash used in financing activities was $0.7 million, and $6.3 million for fiscal years 2004 and 2003. Cash provided during fiscal year 2005 primarily includes proceeds from the issuance of long-term debt to finance our purchase of Limoneira common stock, totaling $13.0 million. Such proceeds were partially offset, however, by the payment of a dividend totaling $4.1 million, as well as a $2.0 million payment to retire 200,000 shares of our common stock.

     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 October 31, 2005 and 2004 totaled $1.1 million and $0.6 million. Our working capital at October 31, 2005 was $17.6 million compared to $20.4 million at October 31, 2004. The overall working capital decrease primarily reflects additional debt related to our Limoneira common stock purchase and additional accrued expenses, partially offset by a decrease in payable to growers and trade accounts payable.

     We believe that cash flows from operations and available credit facilities 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. During calendar year 2005, we renewed our two short-term, non-collateralized, revolving credit facilities. These credit facilities expire in February 2007 and April 2008 and are with separate banks. Under the terms of these agreements, we are advanced funds for working capital purposes. Total credit available under the combined short-term borrowing agreements was $24 million, with a weighted-average interest rate of 4.8% and 2.9% at October 31, 2005 and 2004. Under these credit facilities, we had $1.4 million and $2.0 million outstanding as of October 31, 2005 and 2004. The credit facilities contain various financial covenants with which we were in compliance at October 31, 2005. The most significant financial covenants relate to working capital, tangible net worth (as defined), and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (as defined) requirements.

     The following table summarizes contractual obligations pursuant to which we are required to make cash payments. The information is presented as of our fiscal year ended October 31, 2005:

		Payments due by period
Contractual Obligations		Total				Less than 1 year				1-3 years				4-5 years				More than 5 years
Long-term debt obligations (including interest)		$	13,782			$	1,388			$	4,149			$	2,748			$	5,497
Short-term borrowings			1,424				1,424				—				—				—
Defined benefit plan			510				55				165				110				180
Operating lease commitments			3,706				1,068				1,550				414				674
Total		$	19,422			$	3,935			$	5,864			$	3,272			$	6,351

     The California avocado industry is subject to a state marketing order whereby handlers are required to collect assessments from the growers and remit such assessments to the California Avocado Commission (CAC). The assessments are primarily for advertising and promotions. The amount of the assessment is based on the dollars paid to the growers for their fruit, and, as a result, is not determinable until the value of the payments to the growers has been calculated.

     We did not have any significant commitments for capital expenditures as of October 31, 2005.

Impact of Recently Issued Accounting Pronouncements

     See Note 2 of Notes to Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     Our financial instruments include cash and cash equivalents, accounts receivable, 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 October 31, 2005.

		Expected maturity date October 31,
(All amounts in thousands)		2006				2007				2008				2009				2010				Thereafter				Total				Fair Value
Assets
Cash and cash equivalents (1)		$	1,133			$	—			$	—			$	—			$	—			$	—			$	1,133			$	1,133
Accounts receivable (1)			19,253				—				—				—				—				—				19,253				19,253
Notes receivable from shareholders (2)			175				2,461				—				—				—				—				2,636				2,529
Liabilities
Payable to growers (1)		$	1,753			$	—			$	—			$	—			$	—			$	—			$	1,753			$	1,753
Accounts payable (1)			1,892				—				—				—				—				—				1,892				1,892
Current borrowings pursuant to credit facilities (1)			1,424				—				—				—				—				—				1,424				1,424
Fixed-rate long-term obligations (3)			1,313				1,309				1,308				1,302				1,300				6,500				13,032				13,032

(1)

We believe the carrying amounts of cash and cash equivalents, accounts receivable, 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)

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 9.25%. 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 $46,000.

(3)

Fixed-rate long-term obligations bear interest rates ranging from 3.3% to 8.2% with a weighted-average interest rate of 6.5%. We believe that loans with a similar risk profile would currently yield a return of 6.5%. We project the impact of an increase or decrease in interest rates of 100 basis points would result in a change of fair value of approximately $534,000.

     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. Additionally, 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, 2005 do not exceed $0.1 million.

Item 8. Financial Statements and Supplementary Data

CALAVO GROWERS, INC.
CONSOLIDATED BALANCE SHEETS

		October 31,
		2005				2004
Assets
Current assets:
Cash and cash equivalents		$	1,133			$	636
Accounts receivable, net of allowances of $2,688 (2005) and $1,087 (2004)			19,253				21,131
Inventories, net			10,096				11,375
Prepaid expenses and other current assets			5,879				4,807
Advances to suppliers			1,141				2,413
Income taxes receivable			893				803
Deferred income taxes			2,651				1,775
Total current assets			41,046				42,940
Property, plant, and equipment, net			16,897				17,427
Building held for sale			—				1,658
Investment in Limoneira			45,634				—
Goodwill			3,591				3,591
Other assets			1,314				1,782
		$	108,482			$	67,398
Liabilities and shareholders’ equity
Current liabilities:
Payable to growers		$	1,753			$	5,789
Trade accounts payable			1,892				2,490
Accrued expenses			12,482				8,234
Short-term borrowings			1,424				2,000
Dividend payable			4,564				4,052
Current portion of long-term obligations			1,313				22
Total current liabilities			23,428				22,587
Long-term liabilities:
Long-term obligations, less current portion			11,719				34
Deferred income taxes			8,589				840
Total long-term liabilities			20,308				874
Commitments and contingencies (Note 8) Shareholders’ equity:
Common stock ($0.001 par value, 100,000 shares authorized; 14,362 and 13,507 shares outstanding at October 31, 2005 and 2004)			14				14
Additional paid-in capital			37,240				28,822
Notes receivable from shareholders			(2,636	)			(2,883	)
Accumulated other comprehensive income			13,386				—
Retained earnings			16,742				17,984
Total shareholders’ equity			64,746				43,937
		$	108,482			$	67,398

See accompanying notes to consolidated financial statements.

CALAVO GROWERS, INC.
CONSOLIDATED STATEMENTS OF INCOME

		Year Ended October 31,
		2005				2004				2003
Net sales		$	258,822			$	274,218			$	246,761
Cost of sales			237,088				248,814				221,414
Gross margin			21,734				25,404				25,347
Selling, general and administrative			18,588				15,920				14,651
Restructuring charge			—				185				106
Operating income			3,146				9,299				10,590
Other income, net			2,357				478				889
Income before provision for income taxes			5,503				9,777				11,479
Provision for income taxes			2,181				3,567				4,319
Net income		$	3,322			$	6,210			$	7,160
Net income per share:
Basic		$	0.24			$	0.46			$	0.55
Diluted		$	0.24			$	0.46			$	0.55
Number of shares used in per share computation:
Basic			13,892				13,497				12,911
Diluted			13,985				13,582				12,944

See accompanying notes to consolidated financial statements.

CALAVO GROWERS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		Year ended
		October 31,
		2005				2004				2003
Net income		$	3,322			$	6,210			$	7,160
Other comprehensive income, before tax:
Unrealized holding gains arising during period			22,184				—				—
Income tax expense related to items of other comprehensive income			(8,798	)			—				—
Other comprehensive income, net of tax			13,386				—				—
Comprehensive income		$	16,708			$	6,210			$	7,160

See accompanying notes to consolidated financial statements.

CALAVO GROWERS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

														Notes				Accumulated
										Additional				Receivable				Other
		Common Stock								Paid-in				From				Comprehensive				Retained
		Shares				Amount				Capital				Shareholders				Income				Earnings				Total
Balance, October 31, 2002			12,835			$	13			$	24,221			$	(5,720	)		$	—			$	12,042			$	30,556
Exercise of stock options and income tax benefit of $72			95				—				547				—				—				—				547
Collections on shareholder notes receivable			—				—				—				2,157				—				—				2,157
Additional costs related to Rights Offering			—				—				(41	)			—				—				—				(41	)
Dividend declared to shareholders			—				—				—				—				—				(3,232	)			(3,232	)
Net income			—				—				—				—				—				7,160				7,160
Balance, October 31, 2003			12,930				13				24,727				(3,563	)			—				15,970				37,147
Purchase acquisition			577				1				4,049				—				—				—				4,050
Stock compensation expense			—				—				46				—				—				—				46
Collections on shareholder notes receivable			—				—				—				680				—				—				680
Dividend declared to shareholders			—				—				—				—				—				(4,196	)			(4,196	)
Net income			—				—				—				—				—				6,210				6,210
Balance, October 31, 2004			13,507				14				28,822				(2,883	)			—				17,984				43,937
Exercise of stock options and income tax benefit of $59			55				—				334				—				—				—				334
Stock compensation expense			—				—				84				—				—				—				84
Issuance of stock to Limoneira			1,000				1				9,999				—				—				—				10,000
Unrealized gain on Limoneira investment			—				—				—				—				13,386				—				13,386
Retirement of common stock			(200	)			(1	)			(1,999	)			—				—				—				(2,000	)
Collections on shareholder notes receivable			—				—				—				247				—				—				247
Dividend declared to shareholders			—				—				—				—				—				(4,564	)			(4,564	)
Net income			—				—				—				—				—				3,322				3,322
Balance, October 31, 2005			14,362			$	14			$	37,240			$	(2,636	)		$	13,386			$	16,742			$	64,746