CALAVO GROWERS INC - Annual Report: 2006 (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, 2006

CALAVO GROWERS, INC.

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

     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. þ

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

Large accelerated filer o           Accelerated Filer þ           Non-accelerated filer o

     Indicate by check mark 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, 2006 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $119.4 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, 2006 was 14,292,833.

Documents Incorporated by Reference

     Portions of the Registrant’s Proxy Statement for the 2007 Annual Meeting of Shareholders, which we intend to hold on April 25, 2007, 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, 2006.

 

 

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, our distribution centers in Texas and New Jersey (our New Jersey facility commenced operations in the first quarter of fiscal 2007), and our 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 currently report our operations in two business segments, (1) fresh products and (2) processed products, down from three business segments disclosed in the prior year. See footnote 11 in our consolidated financial statements for further information about our business segments.

     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. We incurred no costs related to this restructuring during fiscal 2006.

     In November 2003, we acquired all the outstanding common shares of Maui Fresh International, Inc. (Maui). Maui distributes a multi-product line of produce through retail, food service and terminal market wholesale channels. Maui has significant operations in Santa Paula, California, Nogales, Arizona, and Hawaii. Maui packs and distributes a diversified line, comprised of more than 20 commodities, including tropical, speciality, 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 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.

     In August 2006, we entered into a joint venture agreement with San Rafael Distributing (SRD) for the purpose of the marketing, sale and distribution of fresh produce from the existing location of SRD at the Los Angeles Wholesale Produce Market (Terminal Market), located in Los Angeles, California. Such joint venture operates under the name of Maui Fresh International, LLC (Maui Fresh) and commenced operations in August 2006. SRD and Calavo each have an equal one-half ownership interest in Maui Fresh, ut

SRD shall have overall management responsibility for the operations of Maui Fresh at the Terminal Market. We will use the equity method to account for our investment.

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

     At October 31, 2006, we employed approximately 750 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.

Fresh products

     Calavo was founded in 1924 to market California avocados. In California, the growing area stretches from San Diego County to Monterey 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 generally command a lower price. Approximately 2,300 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 36% of the 2006 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 and service we maintain with our growers.

     California avocados delivered to our packinghouses are graded, sized, packed, cooled and, at times, ripened 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. Our strategy calls for continued efforts in aggressively recruiting new growers, retaining existing growers, and procuring a larger percentage of the California avocado crop.

     California 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. Avocados handled by us are identifiable through packaging and the Calavo brand name sticker. We have developed a series of marketing and sales initiatives primarily 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 evenly ripened to our customers’ specifications. We have invested in the Aweta AFS (acoustic firmness sensor) technology and equipment. ProRipeVIP™ is the next generation of selling conditioned avocados that have firmness determined via soundwaves. This technology 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 currently have three Aweta systems in use in the United States, which, we believe, can effectively meet our customers’ demand for conditioned fruit.
	•		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 sell avocados to a diverse group of supermarket chains, wholesalers, food service and other distributors, under the Calavo family of brand labels, as well as 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 2006, our 5 and 25 largest customers represented approximately 21% and 42% of our total consolidated revenues. During fiscal years 2006, 2005 and 2004 none of our California avocado customers represented more than 10% of total consolidated revenues.

     We leverage our expertise in the handling and marketing of California avocados to our non-California sourced avocados and perishable food products. We believe that the sales generated from these sources complement our offering of California avocados to our customers and stabilize the supply of avocados during seasons of low California production. Sales generated from these sources include avocados grown outside of California and other perishable food products, such as papayas, tomatoes, ginger, and pineapple. We primarily import and market avocados from Mexico and Chile. 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 packers and Mexican growers. Historically, we made such advances related to both pre-harvest and post-harvest activities, but our focus during fiscal 2006 was primarily related to post-harvest activities. Typically, we obtain collateral (i.e. fruit, fixed assets, etc.) that approximates the value at risk, prior to making such advances. Historical experience demonstrates that providing post-harvest advances results in our acquiring full market risk for the product, as it is possible (although unlikely) 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. In the event that we do make a pre-season advance, our ability to recover such pre-harvest advance would be largely dependent on the growers’ ability to deliver avocados to us, as well as the inherent risks of farming, such as weather and pests. We do not anticipate making significant pre-season advances during fiscal 2007.

     Net sales generated by non-California sourced avocados 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 2006 and 2005. The implementation of this rule resulted in a significant increase in the sale of Mexican sourced fruit during fiscal 2005, as compared to fiscal 2004. 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 2006, we packed and distributed approximately 18% of the avocados exported from Mexico into the United States and approximately 5% 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/monitor avocado plantings to capitalize on returns available in the worldwide avocado markets. Sales of Chilean grown avocados have generally 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 2006, we distributed approximately 7% of the Chilean 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 and has customers located primarily in the United States and Canada. 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 2006, our 5 and 25 largest customers represented approximately 7% and 12% of our total consolidated revenues. During fiscal years 2006, 2005 and 2004 none of our processed product customers represented more than 10% of total consolidated revenues.

     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 2006, we primarily operated one high-pressure line designed to manufacture processed avocado products that are not frozen (guacamole) in Uruapan. This machine ran at about 80% capacity during fiscal 2006. We anticipate that we will

operate such high-pressure machine at a similar capacity during fiscal year 2007. We presently own another, much smaller, high-pressure machine, also located in Uruapan, that was used occasionally during fiscal 2006. We anticipate trading such smaller machine in for credit towards another large high-pressure machine (similar to the large machine that is currently in use in Uruapan), once we receive the second high-pressure machine. This second large high-pressure machine was ordered in July 2006 and is expected to be received during our second fiscal quarter of 2007. 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 $13.9 million and $8.7 million for fiscal years 2006 and 2005.

     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, and ProRipeVIP™.

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.

     Non-California sourced avocados and perishable food products often 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 California 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, 2006, we had approximately 750 employees, of which approximately 230 were located in the United States and 520 were located in Mexico. None of Calavo’s United States employees are covered by a collective bargaining agreement. Approximately 450 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, 2006.

Location		Salaried				Hourly
United States			95				135
Mexico			54				466
TOTAL			149				601

     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 are subject to competitive pressures, including the following:

•

California avocados are 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.

	•		California avocado are 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.
	•		Non-California sourced avocados and perishable food products are 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.
	•		Non-California sourced avocados and perishable food products are 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.

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 non-California sourced fruit, 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 distribution and ripening facility (our former processing facility) in California, lease one facility in New Jersey, operate in a distribution center in Texas, 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 facilities 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, storage and shipping facility for our fresh avocado operation. Additionally, it also serves to store certain processed avocado products as well. Also, effective December 2005, we sort and pack certain tropical commodities as well. We believe that the annual capacity of this facility will be sufficient to pack and ripen, if necessary, the expected annual volume of avocados and specialty commodities delivered to us.

     Our leased Swedesboro, New Jersey facility primarily ripens, sorts, packs and ships avocados. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs.

     Our distribution center located in San Antonio, Texas is neither leased nor owned, but rather operates pursuant to a usage agreement whereby we pay handling and distribution fees. This facility primarily ripens, sorts, packs and ships fresh avocados under our supervision. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs.

     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 Uruapan, Mexico packinghouse, owned by the same landlord as our former 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, 2006.

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			66			Chairman of the Board, Chief Executive Officer and President
Arthur J. Bruno			56			Chief Operating Officer, Chief Financial Officer and Corporate Secretary
Robert J. Wedin			57			Vice President, Sales and Fresh Marketing
Alan C. Ahmer			58			Vice President, Processed Product Sales and Production
Michael A. Browne			47			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 approximately 4,400 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 2006		High				Low
First Quarter		$	10.50			$	9.59
Second Quarter		$	11.00			$	9.51
Third Quarter		$	11.94			$	9.37
Fourth Quarter		$	10.24			$	9.04

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, 2006, there were approximately 1,400 stockholders of record of our common stock.

     During the year ended October 31, 2006, we did not issue any shares of common stock that were not registered under the Securities Act of 1933.

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, 2007, we paid a $0.32 per share dividend in the aggregate amount of $4,573,000 to shareholders of record on December 15, 2006.

     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, 2006 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
		2006				2005				2004				2003				2002
		(In thousands, except per share data)
Income Statement Data: (1)
Net sales		$	273,910			$	258,822			$	274,218			$	246,761			$	242,671
Gross margin			29,271				21,734				25,404				25,465				25,823
Net income			5,788				3,322				6,210				7,160				6,915
Basic and diluted net income per share		$	0.40			$	0.24			$	0.46			$	0.55			$	0.60
Balance Sheet Data as of End of Period:
Working capital		$	12,023			$	17,618			$	20,353			$	20,735			$	18,833
Total assets(4)			107,494				108,482				67,398				53,689				55,132
Short-term debt(4)			1,308				1,313				22				24				3,222
Long-term debt, less current portion(2)(4)			10,406				11,719				34				61				3,180
Shareholders’ equity(4)			58,943				64,746				43,937				37,147				30,556
Cash Flows Provided by (Used in):
Operations		$	7,819			$	5,568			$	4,460			$	15,222			$	8,135
Investing(3)(4)			(4,663	)			(11,941	)			(8,474	)			(4,475	)			(2,078	)
Financing(4)			(4,239	)			6,870				(725	)			(6,293	)			(7,193	)
Other Data:
Dividends per share		$	0.32			$	0.32			$	0.30			$	0.25			$	0.20
Net book value per share		$	4.12			$	4.51			$	3.25			$	2.87			$	2.38
Pounds of California avocados sold			218,460				104,950				152,725				122,950				158,187
Pounds of non-California avocados sold			70,063				103,830				69,410				70,348				69,512
Pounds of processed avocados products sold			20,489				15,628				13,317				14,707				14,248

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. During the second quarter of fiscal 2006, we examined our California avocados and international avocados and perishable food products reporting segments. We concluded that these two reporting segments have similar economic characteristics, production processes, customers and distribution methods. Therefore, in accordance with the aggregation criteria of FASB Statement No. 131, Disclosures about Segments of an Enterprise and Related Information, we combined these two operating segments into one reportable segment, fresh products. As a result, we now report our operations in two different business segments: (1) fresh products and (2) processed products. See footnote 11 in our consolidated financial statements for further discussion. 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 August 2006, we entered into a joint venture agreement with San Rafael Distributing (SRD) for the purpose of marketing, sale and distribution of fresh produce from the existing location of SRD at the Los Angeles Wholesale Produce Market (Terminal Market), located in Los Angeles, California. Such joint venture operates under the name of Maui Fresh International, LLC (Maui Fresh) and commenced operations in August 2006. SRD and Calavo each have an equal one-half ownership interest in Maui Fresh, but SRD shall have overall management responsibility for the operations of Maui Fresh at the Terminal Market. Therefore, pursuant to Accounting Principle Board (APB) 18 and Emerging Issues Task Force (EITF) 03-16, we believe that our level of economic influence is that of “significant.” As such, we will use the equity method to account for our investment. See note 16 to our consolidated financial statements for additional information.

     Our Fresh Products business grades, sizes, packs, cools, and ripens (if desired) avocados grown in California for delivery to our customers. We presently operate three packinghouses in Southern California. These packinghouses handled approximately 36% of the California avocado crop during the 2006 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.

     Additionally, our Fresh products business also procures avocados grown in Mexico and Chile, as well as other various commodities, including papayas, tomatoes, chili peppers, pineapples, and ginger. We operate a packinghouse in Mexico that, together with certain co-packers that we frequently purchase fruit from, handled approximately 18% of the Mexican avocado crop bound for the United States market and approximately 5% of the avocados exported from Mexico to countries other than the United States, during the 2005-2006 Mexican season, based on our estimates. Additionally, during the 2005-2006 Chilean avocado season, we handled approximately 7% of the Chilean avocado crop, based on our estimates. Our strategy is to procure and sell non-Californian 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 Fresh Products business is highly seasonal and is characterized by 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 2007, we paid a $0.32 per share dividend in the aggregate amount of $4.6 million to shareholders of record on December 15, 2006.

Short-term borrowings

     In October 2006, we renewed and extended one of our short-term, non-collateralized, revolving credit facilities. This credit facility now expires in February 2010. Under the terms of this agreement, we are advanced funds for working capital purposes. Total credit available under this short-term borrowing agreement was $12 million, with an average interest rate of 6.2% at October 31, 2006. Under this credit facility, we had no amounts outstanding as of October 31, 2006. The credit facility contains various financial covenants, the most significant relating to working capital, tangible net worth (as defined), and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (as defined). We were in compliance with all such covenants at October 31, 2006, except for the working capital covenants with which we obtained appropriate waivers.

Retirement of Common Stock

     In December 2005, we repurchased 120,000 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.

Operating Lease

     In August 2006, we entered into an operating lease agreement with Columbia New Jersey Commodore Industrial, LLC to rent approximately 30,000 square feet of building space in Swedesboro, New Jersey. This lease enables us to not only invest in our ProRipeVIP^TM avocado ripening program, but also expand our refrigeration and storage capabilities. The lease has a term of approximately 15 years and includes scheduled rent increases. Pursuant to FASB Technical Bulletin 85-3, our straight-line rent expense for such lease will approximate $13,000 per month for the duration of such lease. This facility commenced operations during the first quarter of fiscal 2007.

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.

     Income Taxes. Our effective income tax rate and the tax bases of assets and liabilities are based on estimates of taxes which will ultimately be payable. Deferred taxes are recorded to give recognition to temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. Valuation allowances are established when it is deemed, more likely than not, that the benefit of deferred tax assets will not be realized.

     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,
		2006				2005				2004
Net sales			100.0	%			100.0	%			100.0	%
Gross margins			10.7	%			8.4	%			9.3	%
Selling, general and administrative			7.3	%			7.2	%			5.8	%
Operating income			3.4	%			1.2	%			3.4	%
Interest Income			0.1	%			0.1	%			0.1	%
Interest Expense			(0.3	)%			(0.2	)%			0.0	%
Other income, net			0.2	%			0.9	%			0.1	%
Net income			2.1	%			1.3	%			2.3	%

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:

		2006				Change				2005				Change				2004
		(Dollars in thousands)
Net sales:
Fresh products		$	236,889				2.9	%		$	230,289				(7.4	)%		$	248,562
Processed products			37,021				29.7	%			28,533				11.2	%			25,656
Total net sales		$	273,910				5.8	%		$	258,822				(5.6	)%		$	274,218
As a percentage of net sales:
Fresh products			86.5	%							89.0	%							90.6	%
Processed products			13.5	%							11.0	%							9.4	%
			100.0	%							100.0	%							100.0	%

     Net sales for the year ended October 31, 2006, when compared to 2005, increased by approximately $15.1 million, or 5.8%, principally as a result of an increase in both our fresh products and processed products segments. The increase in sales for both segments was primarily driven by a significant increase in total pounds sold.

     Net sales generated by Fresh products segment are significantly impacted by 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, 2006												Year ended October 31, 2005
		Fresh				Processed								Fresh				Processed
		products				products				Total				products				products				Total
Third-party sales:
California avocados		$	140,995			$	—			$	140,995			$	104,481			$	—			$	104,481
Imported avocados			51,211				—				51,211				81,756				—				81,756
Papayas			4,811				—				4,811				6,251				—				6,251
Specialities and tropicals			9,724				—				9,724				13,777				—				13,777
Processed — food service			—				34,021				34,021				—				28,307				28,307
Processed — retail and club			—				10,454				10,454				—				6,766				6,766
Total fruit and product sales to third-parties			206,741				44,475				251,216				206,265				35,073				241,338
Freight and other charges			30,156				637				30,793				24,129				258				24,387
Total gross sales to third-parties			236,897				45,112				282,009				230,394				35,331				265,725
Less sales incentives			(8	)			(8,091	)			(8,099	)			(105	)			(6,798	)			(6,903	)
Total net sales to third-parties			236,889				37,021				273,910				230,289				28,533				258,822
Intercompany sales			9,532				6,227				15,759				15,850				6,166				22,016
Net sales		$	246,421			$	43,248				289,669			$	246,139			$	34,699				280,838
Intercompany sales eliminations											(15,759	)											(22,016	)
Consolidated net sales										$	273,910											$	258,822

		Year ended October 31, 2005												Year ended October 31, 2004
		Fresh				Processed								Fresh				Processed
		products				products				Total				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			206,265				35,073				241,338				225,827				31,637				257,464
Freight and other charges			24,129				258				24,387				22,914				534				23,448
Total gross sales to third-parties			230,394				35,331				265,725				248,741				32,171				280,912
Less sales incentives			(105	)			(6,798	)			(6,903	)			(179	)			(6,515	)			(6,694	)
Total net sales to third-parties			230,289				28,533				258,822				248,562				25,656				274,218
Intercompany sales			15,850				6,166				22,016				9,347				7,093				16,440
Net sales		$	246,139			$	34,699				280,838			$	257,909			$	32,749				290,658
Intercompany sales eliminations											(22,016	)											(16,440	)
Consolidated net sales										$	258,822											$	274,218

     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.

Fresh Products

     Net sales delivered by the business increased by approximately $6.6 million, or 2.9%, from fiscal 2005 to 2006. This increase is primarily related to an increase in California avocados sales, partially offset by a decrease in Mexican and Chilean avocado sales.

     Sales of California sourced avocados increased $36.5 million for fiscal 2006, when compared to the same prior period. This increase was primarily related a 108.1% increase in pounds of avocados sold, partially offset by a decrease in our average selling prices. This increase in pounds sold was consistent with the expected increase in the overall harvest of the California avocado crop for the 2005/2006 season. Our market share of California avocados remained consistent at 35.6% for the year ended October 31, 2006, compared to 34.4% 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 2006/2007 season to be substantially smaller than the 2005/2006 crop.

     For fiscal year 2006, average selling prices, on a per carton basis, for California avocados were 35.6% lower when compared to the same prior year period. This pricing structure primarily reflects the impact of a larger California avocado harvest, as well as a 7.0% increase in the sale of grade two Hass avocados in proportion to grade one Hass avocados sales. Grade two Hass avocados generally sell for significantly less than grade one Hass avocados. For fiscal year 2007, we believe that the demand for California avocados will remain strong in the U.S. marketplace, and, as a result, such is expected to have a positive impact on sales prices. California avocados are primarily sold in the U.S. marketplace.

     Sales of Mexican sourced avocados decreased $13.0 million for fiscal year 2006, when compared to the same prior year period. This decrease was primarily related to a 19.7% decrease in pounds of Mexican avocados sold, due primarily to the large California crop discussed above. Our average selling prices, on a per carton basis, of Mexican avocados experienced a marginal decrease of 3.9% for fiscal 2006 when compared to the same prior period.

     Sales of Chilean sourced avocados decreased $13.6 million for fiscal year 2006, when compared to the same prior year period. This decrease was primarily related to a 67.7% decrease in pounds of Chilean avocados sold. This decrease was primarily related to

the size of the Chilean avocado crop, as well as the timing of the delivery to the United States. Our average selling prices, on a per carton basis, of Chilean avocados experienced a marginal increase of 4.0% for fiscal 2006 when compared to the same prior period.

     Mexican and Chilean grown avocados are primarily sold in the U.S., Japanese, and/or European marketplace. We anticipate that sales of Mexican grown avocados will increase in fiscal 2007 primarily as a result of the smaller California avocado crop discussed above. We are unable to predict, however, the impact related to the USDA published rule that will allow Hass avocado imports from Mexico into all 50 states (up from 47 states) effective February 2007. In any case, we intend to leverage our position as the largest packer of Mexican grown avocados for export markets to improve the overall performance of these sales.

     Sales of papayas decreased $1.4 million for fiscal year 2006, when compared to the same prior year period. This decrease was primarily related to a 38.6% decrease in the volume of papaya fruit sold. This decrease was primarily related to adverse weather conditions negatively affecting the current year papaya crop. Such decrease, however, was partially offset by an increase in average selling prices of papayas, on a per carton basis, which increased approximately 44.5% when compared to the same prior year period. We attribute some of this increase in average selling prices to significantly fewer pounds sold in the U.S. marketplace. We anticipate our papaya results to increase in fiscal 2007, as we expect an increase in the related papaya crop.

     Net sales delivered by the business decreased by approximately $18.3 million, or 7.4%, from fiscal 2004 to 2005. This decrease is primarily related to a decrease in California avocados sales, partially offset by an increase in Mexican and Chilean avocado sales.

     Sales of California sourced avocados decreased $49.9 million for fiscal 2005, when compared to the same prior period. This decrease was primarily related a 31.3% decrease in pounds of avocados sold, partially offset by an increase in our average selling prices. This decrease in pounds sold was 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.

     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 reflected the impact of a smaller California avocado harvest, partially offset by an increase in foreign-sourced fruit in the U.S. marketplace.

     Sales of Mexican sourced avocados increased $24.7 million for fiscal year 2005, when compared to the same prior year period. This increase was primarily related to a 62.8% increase in pounds of Mexican avocados sold. This increase was primarily related to the smaller California crop discussed above, as well as the USDA published rule that allowed Hass avocado imports from Mexico into 47 U.S. states, up from 31 U.S. states, effective February 2005. Pricing during fiscal 2005 was stable when compared to fiscal 2004.

     Sales of Chilean sourced avocados increased $6.1 million for fiscal year 2005, when compared to the same prior year period. This increase was primarily related to a 65.7% increase in pounds of Chilean avocados sold. This increase was primarily related to the size of the Chilean avocado crop. Pricing during fiscal 2005 was stable when compared to fiscal 2004.

     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 2006, 2005 and 2004, on behalf of avocado growers, we remitted approximately $1.7 million, $1.5 million and $2.9 million to the California Avocado Commission. During fiscal 2006, 2005 and 2004, we remitted approximately $4.7 million, $2.4 million and $3.3 million to the Hass Avocado Board.

Processed Products

     Net sales increased by approximately $8.5 million, or 29.7% for fiscal 2006, when compared to the same prior period. The increase in net sales is primarily attributable to an increase of 4.9 million pounds of product sold, or 31.1%. Such increase was partially offset, however, by a decrease in the net selling price totaling $0.02 per product pound sold, or 1.1%. During fiscal year 2006, the increase in pounds sold primarily relates to an increase in the sale of our high-pressure guacamole product, which increased approximately 37% when compared to the same prior year period. The decrease in our net average selling price primarily relates to a change in our product mix.

     Net sales increased by approximately $2.9 million, or 11.2% for fiscal 2005, when compared to the same prior year period. The increase was 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 related 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 related to a change in our product mix.

     During fiscal year 2006, we primarily operated one high-pressure line designed to manufacture processed avocado products that are not frozen (guacamole) in Uruapan. This machine ran at about 80% capacity during fiscal 2006. We anticipate that we will operate such high-pressure machine at a similar capacity during fiscal year 2007. We presently own another, much smaller, high-pressure machine, also located in Uruapan, that was used occasionally during fiscal 2006. We anticipate trading such smaller machine in for credit towards another large high-pressure machine (similar to the large machine that is currently in use in Uruapan), once we receive the second high-pressure machine. This second large high-pressure machine was ordered in July 2006 and is expected to be received during our second fiscal quarter of 2007. 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 $13.9 million and $8.7 million for fiscal years 2006 and 2005.

Gross Margins

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

		2006				Change				2005				Change				2004
		(Dollars in thousands)
Gross Margins:
Fresh products		$	18,673				9.4	%		$	17,071				(22.6	)%		$	22,060
Processed products			10,598				127.3	%			4,663				39.4	%			3,344
Total gross margins		$	29,271				34.7	%		$	21,734				(14.4	)%		$	25,404
Gross profit percentages:
Fresh products			7.9	%							7.4	%							8.9	%
Processed products			28.6	%							16.3	%							13.0	%
Consolidated			10.7	%							8.4	%							9.3	%

     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, increased 2.3% for fiscal year 2006 when compared to fiscal year 2005. This increase was principally attributable to increased profitability in fresh products segment, as well as our processed product segment. 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 fresh products segment, partially offset by increased profitability in our processed product segment.

     Gross margins and gross profit percentages related to California avocados are largely dependent on production yields achieved at our packinghouses, current market prices of avocados, and the volume of avocados packed. The increase in our gross margin percentage during fiscal year 2006 was primarily related to a significant increase in pounds of fruit sold, partially offset by an increase in the cost of fruit. During fiscal year 2006, when compared to fiscal year 2005, we experienced a 108.1% increase in pounds of avocados sold. This had the effect of decreasing our per pound costs, which, as a result, positively impacted gross margins.

     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 gross margin and gross profit percentage for consignment sales, including primarily Chilean avocados, as well as Hawaiian grown papayas, is dependent on the volume of fruit we handle and the competitiveness of the returns that we provide to third-party packers. The gross margin we earn is generally based on a commission agreed to with each packer. Accordingly, the gross margin results for these products are a function of the volume handled and the competitiveness of the sales prices that we realize. 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 2006, 2005, and 2004, we generated gross margins of $1.2 million, $1.7 million, and $1.8 million from the sale of fresh produce products that were packed by third parties.

     Our business with Mexican growers differs in that we operate a packinghouse in Mexico and purchase avocados directly from the field. Alternatively, we may also purchase Mexican avocados directly from co-packers located in Mexico as well. In either case, 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 2006, our gross margins generated from the sale of Mexican avocados decreased from approximately $3.8 million in fiscal year 2005 to $0.8 million in fiscal year 2006. Such decrease is primarily related to both the significant decrease in the volume of Mexican avocados sold, totaling 19.7% (primarily related to the large California crop discussed above), as well as an increase in Mexican fruit costs. Collectively, these items contributed to a higher per pound cost, which negatively affected gross margins.

     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.

     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 2006, the processed products gross profit percentages increased primarily as a result of lower fruit costs and increases in total pounds produced, both of which had the effect of reducing our per pound costs. 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.

Selling, General and Administrative

		2006				Change				2005				Change				2004
		(Dollars in thousands)
Selling, general and administrative		$	19,954				7.3	%		$	18,588				16.8	%		$	15,920
Percentage of net sales			7.3	%							7.2	%							5.8	%

     Selling, general and administrative expenses include costs of marketing and advertising, sales expenses, and other general and administrative costs. For fiscal year 2006, selling, general and administrative expenses increased by $1.4 million, or 7.3%, compared to the same period for fiscal 2005. This increase was primarily related to higher corporate costs, including, but not limited to, costs related to an increase in stock-based compensation (totaling approximately $0.6 million), an increase in management bonuses (totaling approximately $1.1 million), and an increase in employee compensation costs (totaling approximately $0.5 million). Such higher corporate costs were partially offset by a decrease in auditing/Sarbanes-Oxley costs (totaling approximately $0.2 million), a decrease in bad debt expense (totaling approximately $0.5 million), and a decrease in corporate moving expenses (totaling approximately $0.3 million).

     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).

Interest income

		2006				Change				2005				Change				2004
		(Dollars in thousands)
Interest income		$	356				2.3	%		$	348				(10.3	)%		$	388
Percentage of net sales			0.1	%							0.1	%							0.1	%

     Interest income is primarily generated from overnight investments, loans to growers, and our notes receivable from shareholders. During fiscal years 2006, 2005 and 2004, interest income includes interest accrued on notes receivable from directors and officers of approximately $0.2 million for each year presented.

Interest expense

		2006				Change				2005				Change				2004
		(Dollars in thousands)
Interest expense		$	(943	)			136.3	%		$	(399	)			504.5	%		$	(66	)
Percentage of net sales			(0.3	)%							(0.2	)%							0.0	%

     Interest expense is primarily generated from our short-term borrowings as well as our term loan agreement with Farm Credit West, PCA. The increase in interest expense is primarily related to the non-collateralized term loan agreement with Farm Credit West, PCA that we entered into in July 2005 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 began July 2006 and continue through July 2015. Interest is paid monthly, in arrears, and began in August 2005, and will continue through the life of the loan. Such loan bears interest at a fixed rate of 5.70%.

Other Income, Net

		2006				Change				2005				Change				2004
		(Dollars in thousands)
Other income, net		$	599				(75.1	)%		$	2,408				1,443.6	%		$	156
Percentage of net sales			0.2	%							0.9	%							0.1	%

     Other income, net includes dividend income, as well as certain other transactions that are outside of the course of normal operations. During fiscal 2006 and 2005, we received $0.4 million and $0.2 million as dividend income from Limoneira. During fiscal year 2005, other income, net includes the gain on the sale of our corporate facility totaling approximately $1.7 million.

Provision for Income Taxes

		2006				Change				2005				Change				2004
		(Dollars in thousands)
Provision for income taxes		$	3,620				66.0	%		$	2,181				(38.9	)%		$	3,567
Percentage of income before provision for income taxes			38.5	%							39.6	%							36.5	%

     The effective income tax rate for fiscal year 2006 and 2005 is higher than the federal statutory rate principally due to state taxes. Our effective income tax rate decreased from 39.6% in fiscal year 2005 to 38.5% in fiscal year 2006 primarily as a result of a favorable decrease in our foreign tax rates during fiscal year 2006 when compared to fiscal year 2005. 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.

Quarterly Results of Operations

     The following table presents our operating results for each of the eight fiscal quarters in the period ended October 31, 2006. 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. The California crop is highly seasonal and is characterized by crop volume and price changes. Historically, we receive and sell a substantially lesser number of California avocados in our first fiscal quarter.

		Three months ended
		Oct. 31,				July 31,				Apr. 30,				Jan. 31,				Oct. 31,				July 31,				Apr. 30,				Jan. 31,
		2006				2006				2006				2006				2005				2005				2005				2005
		(in thousands, except per share amounts)
Statement of Operations Data
Net sales		$	76,880			$	78,954			$	67,429			$	50,647			$	62,246			$	88,699			$	60,206			$	47,671
Cost of sales			69,896				68,738				58,768				47,237				58,013				79,505				53,851				45,719
Gross margin			6,984				10,216				8,661				3,410				4,233				9,194				6,355				1,952
Selling, general and administrative			5,163				5,284				5,063				4,444				4,943				4,825				4,307				4,513
Operating income (loss)			1,821				4,932				3,598				(1,034	)			(710	)			4,369				2,048				(2,561	)
Other income (expense), net			292				(136	)			10				(75	)			213				153				1,909				82
Income before provision (benefit) for income taxes			2,113				4,796				3,608				(1,109	)			(497	)			4,522				3,957				(2,479	)
Provision (benefit) for income taxes			775				1,870				1,419				(444	)			20				1,603				1,490				(932	)
Net income (loss)		$	1,338			$	2,926			$	2,189			$	(665	)		$	(517	)		$	2,919			$	2,467			$	(1,547	)
Net income (loss) per share:
Basic		$	0.09			$	0.21			$	0.15			$	(0.05	)		$	(0.04	)		$	0.21			$	0.18			$	(0.11	)
Diluted		$	0.09			$	0.21			$	0.15			$	(0.05	)		$	(0.04	)		$	0.21			$	0.18			$	(0.11	)
Number of shares used in per share computation:
Basic			14,292				14,171				14,282				14,352				14,371				14,171				13,507				13,507
Diluted			14,319				14,237				14,343				14,352				14,371				14,237				13,580				13,507

Liquidity and Capital Resources

     Operating activities for fiscal 2006, 2005 and 2004 provided cash flows of $7.8 million, $5.6 million, and $4.5 million. Fiscal year 2006 operating cash flows reflect our net income of $5.8 million, net noncash charges (depreciation and amortization, income from subsidiary, loss on disposal of fixed assets, and stock compensation expense) of $2.7 million and a net increase in the non-cash components of our working capital of approximately $0.6 million.

     Fiscal year 2006 decreases in operating cash flows, caused by working capital changes, include an increase in accounts receivable of $5.0 million, an increase in prepaid expenses and other assets of $2.0 million, an increase in income tax receivable of $1.2 million, an increase in inventory of $0.5 million, and an increase in advance to suppliers of $0.3 million, partially offset by an increase in payable to growers of $4.6 million, an increase in trade accounts payable and accrued expenses of $2.9 million and a net decrease in deferred income taxes totaling $0.9 million.

     Increases in our accounts receivable balance as of October 31, 2006, when compared to October 31, 2005, primarily reflect a significantly higher volume of California avocado sales recorded in the month of October 2006, as compared to October 2005. Similarly, the amounts payable to our growers also reflects the increase in the volume of California avocados received in the month of October 2006, as compared to October 2005. These volume level fluctuations are consistent with the harvests experienced in the related years. Additionally, the increase in our prepaid expenses and other assets as of October 31, 2006, when compared to October 31, 2005, is primarily related to advances made pursuant to our Grower Development Program. The increase in our income tax receivable is primarily related to estimated payments made in fiscal 2006, as well as overpayments of taxes made in the prior year that were credited during fiscal 2006.

     Increases in our trade accounts payable and accrued expenses as of October 31, 2006, when compared to October 31, 2005, primarily reflect accruals for bonuses to employees, additional accruals for vendors used in the ordinary course of California business, as well as accruals related to purchased fruit.

     Cash used in investing activities was $4.7 million, $11.9 million, and $8.5 million for fiscal years 2006, 2005, and 2004. Fiscal year 2006 cash flows used in investing activities include capital expenditures of $4.5 million, principally related to the construction of coolers for our ProRipeVIP™ avocado ripening program, payments for Aweta AFS technology and equipment, and the acquisition of avocado bins.

     Cash used in financing activities was $4.2 million, and $0.7 million for fiscal years 2006 and 2004, while cash provided by financing activities was $6.9 million for fiscal year 2005. Cash used during fiscal year 2006 primarily includes the payment of a

dividend totaling $4.6 million, a payment related to our long-term obligation of $1.3 million, as well as a $1.2 million payment to retire 120,000 shares of our common stock. These cash usages were partially offset, however, by proceeds from our short-term borrowings totaling $2.4 million.

     Our principal sources of liquidity are our existing cash reserves, cash generated from operations and amounts available for borrowing under our existing credit facilities. Cash and cash equivalents as of October 31, 2006 and 2005 totaled $0.1 million and $1.1 million. Our working capital at October 31, 2006 was $12.0 million compared to $17.6 million at October 31, 2005. The overall working capital decrease primarily reflects additional short-term borrowings, as well as additional accrued expenses 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. In October 2006, we renewed and extended one of our short-term, non-collateralized, revolving credit facilities. Our two credit facilities now expire in February 2010 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 6.2% and 4.8% at October 31, 2006 and 2005. Under these credit facilities, we had $3.8 million and $1.4 million outstanding as of October 31, 2006 and 2005. The credit facilities contain various financial covenants, the most significant relating to working capital, tangible net worth (as defined), and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) (as defined). We were in compliance with all such covenants at October 31, 2006, except for the working capital covenants with which we obtained appropriate waivers.

     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, 2006:

						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)		$	12,381			$	1,382			$	4,128			$	2,748			$	4,123
Short-term borrowings			3,804				3,804				—				—				—
Defined benefit plan			414				47				141				94				132
Operating lease commitments			5,670				1,279				1,638				746				2,007
Total		$	22,269			$	6,512			$	5,907			$	3,588			$	6,262

     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.

     With similar precision, amounts remitted to the Hass Avocado Board (HAB) in connection with their assessment program (see Item 7 for further discussion), are likewise not determinable until the fruit is actually delivered to us. HAB assessments are primarily used to fund marketing, research, and promotion efforts.

     We have commitments for capital expenditures totaling approximately $1.1 million as of October 31, 2006.

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, 2006.

(All amounts in thousands)		Expected maturity date October 31,
		2007				2008				2009				2010				2011				Thereafter				Total				Fair Value
Assets
Cash and cash equivalents (1)		$	50			$	—			$	—			$	—			$	—			$	—			$	50			$	50
Accounts receivable (1)			24,202				—				—				—				—				—				24,202				24,202
Notes receivable from shareholders (2)			2,430				—				—				—				—				—				2,430				2,278
Liabilities
Payable to growers (1)		$	6,334			$	—			$	—			$	—			$	—			$	—			$	6,334			$	6,334
Accounts payable (1)			4,046				—				—				—				—				—				4,046				4,046
Current borrowings pursuant to credit facilities (1)			3,804				—				—				—				—				—				3,804				3,804
Fixed-rate long-term obligations (3)			1,308				1,306				1,300				1,300				1,300				5,200				11,714				10,768

     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, 2006 do not exceed $0.1 million.

Item 8. Financial Statements and Supplementary Data

CALAVO GROWERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

		October 31,
		2006				2005
Assets
Current assets:
Cash and cash equivalents		$	50			$	1,133
Accounts receivable, net of allowances of $1,833 (2006) and $2,688 (2005)			24,202				19,253
Inventories, net			10,569				10,096
Prepaid expenses and other current assets			4,934				5,879
Advances to suppliers			1,406				1,141
Income taxes receivable			2,268				893
Deferred income taxes			2,348				2,651
Total current assets			45,777				41,046
Property, plant, and equipment, net			19,908				16,897
Investment in Limoneira			33,879				45,634
Investment in Maui Fresh, LLC			229				—
Goodwill			3,591				3,591
Other assets			4,110				1,314
		$	107,494			$	108,482
Liabilities and shareholders’ equity
Current liabilities:
Payable to growers		$	6,334			$	1,753
Trade accounts payable			4,046				1,892
Accrued expenses			13,689				12,482
Short-term borrowings			3,804				1,424
Dividend payable			4,573				4,564
Current portion of long-term obligations			1,308				1,313
Total current liabilities			33,754				23,428
Long-term liabilities:
Long-term obligations, less current portion			10,406				11,719
Deferred income taxes			4,391				8,589
Total long-term liabilities			14,797				20,308
Commitments and contingencies (Note 8)
Shareholders’ equity:
Common stock ($0.001 par value, 100,000 shares authorized; 14,293 and 14,362 shares outstanding at October 31, 2006 and 2005)			14				14
Additional paid-in capital			37,109				37,240
Notes receivable from shareholders			(2,430	)			(2,636	)
Accumulated other comprehensive income			6,293				13,386
Retained earnings			17,957				16,742
Total shareholders’ equity			58,943				64,746
		$	107,494			$	108,482

See accompanying notes to consolidated financial statements.

CALAVO GROWERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

		Year Ended October 31,
		2006				2005				2004
Net sales		$	273,910			$	258,822			$	274,218
Cost of sales			244,639				237,088				248,814
Gross margin			29,271				21,734				25,404
Selling, general and administrative			19,954				18,588				15,920
Restructuring charge			—				—				185
Operating income			9,317				3,146				9,299
Equity in earnings from Maui Fresh, LLC			79				—				—
Interest income			356				348				388
Interest expense			(943	)			(399	)			(66	)
Other income, net			599				2,408				156
Income before provision for income taxes			9,408				5,503				9,777
Provision for income taxes			3,620				2,181				3,567
Net income		$	5,788			$	3,322			$	6,210
Net income per share:
Basic		$	0.40			$	0.24			$	0.46
Diluted		$	0.40			$	0.24			$	0.46
Number of shares used in per share computation:
Basic			14,304				13,892				13,497
Diluted			14,354				13,985				13,582

See accompanying notes to consolidated financial statements.

CALAVO GROWERS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(All amounts in thousands)

		Year ended
		October 31,
		2006				2005				2004
Net income		$	5,788			$	3,322			$	6,210
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) arising during period			(11,755	)			22,184				—
Income tax (expense) benefit related to items of other comprehensive income (loss)			4,662				(8,798	)			—
Other comprehensive income (loss), net of tax			(7,093	)			13,386				—
Comprehensive income (loss)		$	(1,305	)		$	16,708			$	6,210

See accompanying notes to consolidated financial statements.

CALAVO GROWERS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)

														Notes				Accumulated
										Additional				Receivable				Other
		Common Stock								Paid-in				From				Comprehensive				Retained
		Shares				Amount				Capital				Shareholders				Income				Earnings				Total
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, net			—				—				—				—				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
Exercise of stock options and income tax benefit of $146			51				—				403				—				—				—				403
Stock compensation expense			—				—				666				—				—				—				666
Unrealized loss on Limoneira investment, net			—				—				—				—				(7,093	)			—				(7,093	)
Retirement of common stock			(120	)			—				(1,200	)			—				—				—				(1,200	)
Collections on shareholder notes receivable			—				—				—				206				—				—				206
Dividend declared to shareholders			—				—				—				—				—				(4,573	)			(4,573	)
Net income			—				—				—				—				—				5,788				5,788
Balance, October 31, 2006			14,293			$	14			$	37,109			$	(2,430	)		$	6,293			$	17,957			$	58,943

See accompanying notes to consolidated financial statements.

CALAVO GROWERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

		Year Ended October 31,
		2006				2005				2004
Cash Flows from Operating Activities:
Net income		$	5,788			$	3,322			$	6,210
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			2,035				2,862				2,648
Provision for losses on accounts receivable			14				475				25
Income from Maui Fresh, LLC			(79	)			—				—
Stock compensation expense			666				84				46
Loss (gain) on disposal of property, plant, and equipment			23				(1,668	)			—
Effect on cash of changes in operating assets and liabilities:
Accounts receivable			(4,963	)			1,403				(4,596	)
Inventories, net			(473	)			1,279				(3,354	)
Prepaid expenses and other assets			(1,969	)			(723	)			2,798
Advances to suppliers			(265	)			1,272				(1,789	)
Income taxes receivable			(1,229	)			(31	)			(803	)
Deferred income taxes			767				(1,925	)			(320	)
Payable to growers			4,581				(4,036	)			2,343
Trade accounts payable and accrued expenses			2,923				3,254				1,303
Income tax payable			—				—				(51	)
Net cash provided by operating activities			7,819				5,568				4,460
Cash Flows from Investing Activities:
Direct costs of acquisition of Maui Fresh International, Inc.			—				—				(65	)
Acquisitions of property, plant, and equipment			(4,513	)			(1,874	)			(8,409	)
Cash settlement of the acquisition of Limoneira stock, net of our common stock issued			—				(13,450	)			—
Investment in Maui Fresh, LLC			(150	)			—				—
Proceeds from sale of building			—				3,383				—
Net cash used in investing activities			(4,663	)			(11,941	)			(8,474	)
Cash Flows from Financing Activities:
Dividend paid to shareholders			(4,564	)			(4,052	)			(3,376	)
Proceeds from (repayments of) short-term borrowings, net			2,380				(576	)			2,000
Proceeds from issuance of long-term debt			—				13,000				—
Payments on long-term obligations			(1,318	)			(24	)			(29	)
Retirement of common stock			(1,200	)			(2,000	)			—
Proceeds from stock option exercises			257				275				—
Proceeds from collection of shareholder notes receivable			206				247				680
Net cash provided by (used in) financing activities			(4,239	)			6,870				(725	)
Net increase (decrease) in cash and cash equivalents			(1,083	)			497				(4,739	)
Cash and cash equivalents, beginning of year			1,133				636				5,375
Cash and cash equivalents, end of year		$	50			$	1,133			$	636
Supplemental Information -
Cash paid during the year for:
Interest		$	943			$	399			$	66
Income taxes		$	4,091			$	3,875			$	4,899
Noncash Investing and Financing Activities:
Tax receivable increase related to stock option exercise		$	146			$	59			$	—
Declared dividends payable		$	4,573			$	4,564			$	4,052
Issuance of our common stock in Limoneira transaction		$	—			$	10,000			$	—
Construction in progress included in trade accounts payable and accrued expenses		$	438			$	396			$	—
Unrealized holding gains (losses)		$	(11,755	)		$	22,184			$	—