CALAVO GROWERS INC - Annual Report: 2007 (Form 10-K)

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

     Calavo Growers, Inc. (Calavo, the Company, we, us or our) procures and markets avocados and other perishable commodities and prepares and distributes processed avocado products. Our expertise in marketing and distributing avocados, processed avocados, and other perishable foods allows us to deliver a wide array of fresh and processed food products to food distributors, produce wholesalers, supermarkets, and restaurants on a worldwide basis. We procure avocados principally from California, Mexico, and Chile. Through our operating facilities in southern California, Texas, New Jersey, Arizona, and Mexico, we sort, pack, and/or ripen avocados for distribution both domestically and internationally. Additionally, we also distribute other perishable foods, such as tomatoes and Hawaiian grown papayas, and prepare processed avocado products. We 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 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.

     In November 2003, we acquired all the outstanding common shares of Maui Fresh International, Inc. (Maui). Maui distributed a multi-product line of produce through retail, food service and terminal market wholesale channels. Maui had significant operations in California, Nogales, Arizona, and Hawaii. Maui packed and distributed 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. Limoneira primarily engages in growing citrus and avocados, picking and hauling citrus, and packing lemons. The issuances of the shares discussed above were 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, but SRD shall have overall management responsibility for the operations of Maui Fresh at the Terminal Market. We use the equity method to account for our investment.

     In June 2007, we entered into a distribution agreement with Agricola Belher (Belher) of Mexico, a well-established quality producer of fresh vegetables, primarily tomatoes, for export to the U.S. market. Pursuant to such distribution agreement, Belher agreed, at their sole cost and expense, to harvest, pack, export, ship, and deliver tomatoes exclusively to our Arizona facility. In exchange, we agreed to sell and distribute such tomatoes, advance $2 million to Belher for operating purposes, provide additional advances as shipments are made during the season (subject to limitations, as defined), and return the proceeds from such tomato sales to Belher, net of our commission and aforementioned advances. The agreement also allows for us to advance additional amounts to Belher at our sole discretion. All advances that remain outstanding as of June 2008 are immediately due and payable. As of October 31, 2007, we have advanced $2 million to Belher pursuant to this agreement.

     Concurrently, we also entered into an infrastructure agreement in June 2007 with Belher in order to significantly increase production yields and fruit quality. Pursuant to this agreement, we are to advance up to $5 million to be used solely for the acquisition, construction, and installation of improvements to and on certain land owned by Belher, as well as packing line equipment. Advances incur interest at 9.4% at October 31, 2007. We advanced $5.0 million as of October 31, 2007 ($1.0 million included in prepaid expenses and other current assets and $4.0 million included in other long-term assets). Belher is to annually repay these advances in no less than 20% increments through July 2012. In addition, the agreement allows for additional $1.0 million advances to take place during the last five months of each of our fiscal years 2008 through 2010, but they are subject to certain conditions and are to be made at our sole discretion. Belher is to annually repay these advances in full on or before each of July 2008 through July 2010. Interest is to be paid monthly or annually, as defined. Belher may prepay, without penalty, all or any portion of the advances at any time.

     In order to secure their obligations pursuant to both agreements discussed above, Belher granted us a first-priority security interest in certain assets, including cash, inventory and fixed assets, as defined.

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

     At October 31, 2007, we employed approximately 830 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 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.

     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 2007, our 5 and 25 largest customers represented approximately 12% and 25% of our total consolidated revenues. During fiscal years 2007, 2006 and 2005 none of our customers represented more than 10% of total consolidated revenues.

     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 California 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 34% of the 2007 shipped 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. This fee is a fixed rate per pound and is set annually by the Board of Directors. 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 leverage our expertise in the handling and marketing of California avocados to our non-California sourced avocados and perishable food products. Non-California sourced avocados primarily include fruit imported from Mexico and Chile. 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. This was especially evident in fiscal 2007, as a cyclically low California crop, coupled with freezing weather, resulted in an unusually small California avocado crop. As a result, we supplemented our avocado demand via increased deliveries from Mexico and Chile.

     We handle some of these imported avocados on a consignment basis for the suppliers. Pursuant to these arrangements, from time to time, we make advances to Mexican growers and Chilean packers. Historically, we made such advances related to both pre-harvest and post-harvest activities, but our focus during fiscal 2007 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 anticipate making moderate pre-season advances during fiscal 2008.

     Net sales generated by non-California sourced avocados depend principally on the availability of Mexican and Chilean 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. The restriction on such states was lifted in February 2007. For the remaining 47 states, however, Mexico was able to deliver its fruit for all of fiscal 2007, 2006 and 2005. The implementation of this rule did not result in a significant increase in the sale of Mexican sourced fruit during fiscal 2007, as compared to fiscal 2006. See Item 7 for further details.

     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 2007, we packed and distributed approximately 25% of the

avocados exported from Mexico into the United States and approximately 7% 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 2007, we distributed approximately 7% of the Chilean imports into the United States, based on our estimates.

     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 invested in the 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.

     Our distribution of other perishable food products had 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 various commodities, including tomatoes, mushrooms, onions, coconuts, and pineapples. We leverage our expertise in the handling and marketing of California avocados to these perishable food products as well. While most of these items are purchased, the majority of our sales is generated from papayas and tomatoes, both of which are handled on a consigned basis, with commission rates ranging from 8%-12%. Sales of our diversified products does not generally experience significant fluctuations related to seasonality.

Processed Products

     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. 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 both the retail and food service industries. One of the key benefits of frozen products is its long shelf-life. 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.

     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 ultra 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.

     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. Net sales of frozen products represented approximately 63% and 62% of total processed segment sales for the years ended October 31, 2007 and 2006.

     During fiscal year 2002, we purchased and commissioned a 35-liter (35L) ultra high pressure machine designed to “cold pasteurize” fresh guacamole. Utilizing ultra high pressure only and without the need of any additives or preservatives, this procedure substantially destroys the cells of any bacteria that could lead to spoilage or oxidation issues. Once the procedure is completed, our guacamole is cased and shipped to various retail and food service customers throughout the United States and Canada.

     Our 35L machine discussed above ran near capacity during fiscal year 2003 through the closure date of Mexicali, which was August 2004. During fiscal year 2004, we purchased and commissioned a 215-liter (215L) ultra high pressure machine in Uruapan. This machine was commissioned for operations in July 2004, ran at about 40% capacity during fiscal 2004, increased to approximately 60% capacity during fiscal 2005, and ran at about 80% capacity during fiscal years 2006 and 2007. The 35L machine discussed above was ultimately traded in for credit towards another 215L machine, which was commissioned for operation in September 2007. As such, we currently have two 215L ultra high pressure machines located in Uruapan and estimate we are operating at approximately 42% of the combined machines’ capacities as of October 31, 2007. We believe the additional capacity provided by the 2^nd machine is reasonable given our current sales projections and expected growth. Net sales of our ultra high pressure products represented approximately 37% and 38% of total processed segment sales for the years ended October 31, 2007 and 2006.

     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 2007, our 5 and 25 largest customers represented approximately 7% and 12% of our total consolidated revenues. During fiscal years 2007, 2006 and 2005 none of our processed product customers represented more than 10% of total consolidated revenues.

     We believe that these ultra high pressure machines will enable our company to deliver the widest available array of prepared avocado and other products to our customers. Consequently, we believe that we are positioned to expand our ultra high pressure product line to include more avocado related products, high-end salsas, mangoes and other readily available fruit products.

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 require 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.

     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.

     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, 2007, we had approximately 830 employees, of which approximately 200 were located in the United States and 630 were located in Mexico. None of Calavo’s United States employees are covered by a collective bargaining agreement. Approximately 520 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, 2007.

Location		Salaried				Hourly
United States			91				107
Mexico			109				521
TOTAL			200				628

     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, Peru 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 avocados 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.

The value of our common stock may be adversely affected by market volatility.

The trading price of our common stock fluctuates and may be influenced by many factors, including:

	•		Our operating and financial performance and prospects;
	•		The depth and liquidity of the market for our common stock;
	•		Investor perception of us and the industry and markets in which we operate;
	•		Our inclusion in, or removal from, any equity market indices;
	•		Changes in earnings estimates or buy/sell recommendations by analysts; and
	•		General financial, domestic, international, economic and other market conditions;

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 Arizona, 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.

     Our two California facilities handle avocados delivered to us by California, Mexican 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 Nogales, Arizona facility primarily sorts, packs, ripens, and ships, tomatoes, avocados, and other tropical commodities as well. We believe that the annual capacity of this facility will be sufficient to handle our budgeted annual production needs.

     Our leased Swedesboro, New Jersey facility primarily sorts, packs, ripens, 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 fresh avocado packinghouse, owned by the same landlord as our former Mexicali facility, was 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, 2007.

Executive Officers of the Registrant

     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			68			Chairman of the Board, Chief Executive Officer and President
Arthur J. Bruno			57			Chief Operating Officer, Chief Financial Officer and Corporate Secretary
Robert J. Wedin			58			Vice President, Sales and Fresh Marketing
Alan C. Ahmer			59			Vice President, Processed Product Sales and Production
Michael A. Browne			49			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.” and currently trades on the Nasdaq Global Select Market. 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 Global Select Market.

Fiscal 2007		High				Low
First Quarter		$	11.67			$	9.61
Second Quarter		$	14.09			$	10.50
Third Quarter		$	14.52			$	11.85
Fourth Quarter		$	22.91			$	14.45

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

     As of October 31, 2007, there were approximately 1,300 stockholders of record of our common stock.

     During the year ended October 31, 2007, 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 2, 2008, we paid a $0.35 per share dividend in the aggregate amount of $5,030,000 to shareholders of record on December 15, 2007.

     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.

Shareowner Return Performance Graph

     The following graph compares the performance of our common stock with the performance of the Nasdaq Market Index and the Hemscott Group Index for approximately the 67.5-month period beginning on March 22, 2002 and ending October 31, 2007. In making this comparison, we have assumed an investment of $100 in Calavo Growers, Inc. common stock, the Nasdaq Market Index, and the Hemscott Group Index as of March 22, 2002, the first day that our common shares began trading on the OTC Bulletin Board. Since July 23, 2002, our shares have traded on the Nasdaq National Market and then the Nasdaq Global Select Market. We have also assumed the reinvestment of all dividends. The Hemscott Group Index is a composition of major diversified food companies.

COMPARE CUMULATIVE TOTAL RETURN
AMONG CALAVO GROWERS, INC.,
NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX

ASSUMES $100 INVESTED ON OCT. 31, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING OCT. 31, 2007

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, 2007 are derived from the audited consolidated financial statements of Calavo Growers, Inc.

     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,
		2007				2006				2005				2004				2003
		(In thousands, except per share data)
Income Statement Data: (1)
Net sales		$	302,984			$	273,723			$	258,822			$	274,218			$	246,761
Gross margin			31,772				29,084				21,734				25,404				25,465
Net income			7,330				5,788				3,322				6,210				7,160
Basic and diluted net income per share		$	0.51			$	0.40			$	0.24			$	0.46			$	0.55
Balance Sheet Data as of End of Period:
Working capital		$	16,334			$	12,023			$	17,618			$	20,353			$	20,735
Total assets(4)			128,018				107,563				108,482				67,398				53,689
Short-term debt(4)			1,307				1,308				1,313				22				24
Long-term debt, less current portion(2)(4)			13,106				10,406				11,719				34				61
Shareholders’ equity(4)			74,003				58,943				64,746				43,937				37,147
Cash Flows Provided by (Used in):
Operations		$	4,629			$	7,819			$	5,568			$	4,460			$	15,222
Investing(3)(4)(5)			(7,950	)			(4,663	)			(11,941	)			(8,474	)			(4,475	)
Financing(4)			4,238				(4,239	)			6,870				(725	)			(6,293	)
Other Data:
Dividends per share		$	0.35			$	0.32			$	0.32			$	0.30			$	0.25
Net book value per share		$	5.15			$	4.12			$	4.51			$	3.25			$	2.87
Pounds of California avocados sold			91,038				218,460				104,950				152,725				122,950
Pounds of non-California avocados sold			135,723				70,063				103,830				69,410				70,348
Pounds of processed avocados products sold			22,556				20,489				15,628				13,317				14,707

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, prepared 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 competitive returns to our growers. This reputation has enabled us to expand our product offerings to include avocados sourced on an international basis, prepared avocado products, and other perishable foods. We report our operations in two different business segments: (1) fresh products and (2) processed products. See Note 11 to 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).

     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 34% of the California avocado crop during the 2007 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 to retain and recruit growers that meet our business model.

     Additionally, our Fresh products business also procures avocados grown in Mexico and Chile, as well as other various commodities, including tomatoes, papayas, mushrooms, onions, coconuts, and pineapples. We operate a packinghouse in Mexico that, together with certain co-packers that we frequently purchase fruit from, handled approximately 25% of the Mexican avocado crop bound for the United States market and approximately 7% of the avocados exported from Mexico to countries other than the United States during the 2006-2007 Mexican season, based on our estimates. Additionally, during the 2006-2007 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. Customers include both food service industry and retail businesses and our products primarily include both frozen and “cold pasteurized” fresh guacamole. “Cold pasteurized” fresh guacamole refers to fresh guacamole product that has been treated by one of our ultra high pressure machines. We currently have two 215-liter ultra high pressure machines located in Uruapan, Michoacán, Mexico (Uruapan). These machines utilize ultra high pressure only (i.e. without additives or preservatives) and destroy the cells of any bacteria that could lead to spoilage or oxidation issues.

     Due to the long shelf-life of our frozen processed products and the purity of our ultra high pressure guacamole, we believe that we are well positioned to address the diverse taste and needs of today’s customers. We believe our ultra high pressure machines will enable our company to deliver the widest available array of prepared avocado and other products to our customers. We also believe that we are positioned to expand our ultra high pressure product line to include more avocado related products, high-end salsas,

mangoes and other readily available fruit products. We continue to 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.

     Net sales of frozen products represented approximately 63% and 62% of total processed segment sales for the years ended October 31, 2007 and 2006. Net sales of our ultra high pressure products represented approximately 37% and 38% of total processed segment sales for the years ended October 31, 2007 and 2006.

     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

     On January 2, 2008, we paid a $0.35 per share dividend in the aggregate amount of $5.0 million to shareholders of record on December 15, 2007.

Revolving Credit Facilities

     In July 2007 and October 2007, we renewed and extended our non-collateralized, revolving credit facilities with Farm Credit West, PCA and Bank of America, N.A. These two credit facilities now expire in February 2012 and July 2009. Under the terms of these agreements, we are advanced funds for both working capital and long-term productive asset purchases. Total credit available under these combined borrowing agreements was $30 million, with a weighted-average interest rate of 5.8% and 6.2% at October 31, 2007 and 2006. Under these credit facilities, we had $10.6 million and $3.8 million outstanding as of October 31, 2007 and 2006, of which $4.0 million was classified as a long-term liability as of October 31, 2007. We had no long-term amounts outstanding pursuant to these credit facilities as of October 31, 2006. These 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, 2007.

Agreements with Tomato Grower

     In June 2007, we entered into a distribution agreement with Agricola Belher (Belher) of Mexico, a well-established quality producer of fresh vegetables, primarily tomatoes, for export to the U.S. market. Pursuant to such distribution agreement, Belher agreed, at their sole cost and expense, to harvest, pack, export, ship, and deliver tomatoes exclusively to our Arizona facility. In exchange, we agreed to sell and distribute such tomatoes, advance $2 million to Belher for operating purposes, provide additional advances as shipments are made during the season (subject to limitations, as defined), and return the proceeds from such tomato sales to Belher, net of our commission and aforementioned advances. The agreement also allows for us to advance additional amounts to Belher at our sole discretion. All advances that remain outstanding as of June 2008 are immediately due and payable. As of October 31, 2007, we have advanced $2 million to Belher pursuant to this agreement.

     Concurrently, we also entered into an infrastructure agreement in June 2007 with Belher in order to significantly increase production yields and fruit quality. Pursuant to this agreement, we are to advance up to $5 million to be used solely for the acquisition, construction, and installation of improvements to and on certain land owned by Belher, as well as packing line equipment. Advances incur interest at 9.4% at October 31, 2007. We advanced $5.0 million as of October 31, 2007 ($1.0 million included in prepaid expenses and other current assets and $4.0 million included in other long-term assets). Belher is to annually repay these advances in no less than 20% increments through July 2012. In addition, the agreement allows for additional $1.0 million advances to take place during the last five months of each of our fiscal years 2008 through 2010, but they are subject to certain conditions and are to be made at our sole discretion. Belher is to annually repay these advances in full on or before each of July 2008 through July 2010. Interest is to be paid monthly or annually, as defined. Belher may prepay, without penalty, all or any portion of the advances at any time.

     In order to secure their obligations pursuant to both agreements discussed above, Belher granted us a first-priority security interest in certain assets, including cash, inventory and fixed assets, as defined.

Agreement with Mushroom Grower

     Effective November 2007, we entered into a consignment and marketing agreement with Farmers Fresh Mushroom, Inc (FFMI) to market and sell conventional and organic mushrooms in the United States. FFMI agreed, among other things, to source, pack, and ship product primarily to our customers, but also to any of our distribution centers, at our option. In exchange, we agreed, among other things, to market and sell such product. The agreement specifically calls for FFMI to not actively pursue new business in the United States of America and it also requires that all product sold by us will be packed in our cartons and sold only by us.

     The term of this agreement is for 12 months (through October 2008) and automatically renews for a 12-month period on the final day of the agreement, unless terminated, as defined.

Agreement with Pineapple Grower

     Effective December 2007, we entered into a consignment and marketing agreement with Maui Pineapple Company, LTD. (MPC), to market and sell Maui Gold Pineapples throughout the continental United States and Canada. MPC agreed, among other things, to source, pack and ship such pineapples to an agreed port of entry. In exchange, we agreed, among other things, to be responsible for such product upon arrival at the port, to market and sell the related product, and to develop and implement marketing strategies aimed at building the Maui Gold brand recognition. The agreement specifically calls for us to be the sole and exclusive source for the sale of Maui Gold Pineapples. Additionally, Maui Gold Pineapples are to be our sole fresh pineapple product.

     The agreement calls for us to provide certain advances, as defined, and return the proceeds from such pineapple sales to MPC, net of our commission, fees, and incentives, if applicable. The term of this agreement is for 13 months (through December 2008) and automatically renews for a 12-month period, unless terminated, as defined.

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 relationship between promotional allowances and gross sales. The derived percentage is then applied to the current period’s sales revenues in order to arrive at the appropriate debit to sales allowances for the period. The offsetting credit is made to allowance for accounts receivable. When certain amounts of specific customer accounts are subsequently identified as promotional, they are written off against this allowance. 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. Goodwill is tested for impairment on an annual basis and between annual tests whenever events or changes in circumstances indicate that the carrying amount may not be recoverable, in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, goodwill is tested at the reporting unit level, which is defined as an operating segment or one level below the operating segment. Goodwill impairment testing is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount,

including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test would be unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss must be recognized in an amount equal to that excess. Goodwill impairment testing requires significant judgment and management estimates, including, but not limited to, the determination of (i) the number of reporting units, (ii) the goodwill and other assets and liabilities to be allocated to the reporting units and (iii) the fair values of the reporting units. The estimates and assumptions described above, along with other factors such as discount rates, will significantly affect the outcome of the impairment tests and the amounts of any resulting impairment losses. We performed our annual assessment of goodwill and determined that no impairment existed as of October 31, 2007.

     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.

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,
		2007				2006				2005
Net sales			100.0	%			100.0	%			100.0	%
Gross margins			10.5	%			10.6	%			8.4	%
Selling, general and administrative			6.5	%			7.2	%			7.2	%
Operating income			4.0	%			3.4	%			1.2	%
Interest Income			0.1	%			0.1	%			0.1	%
Interest Expense			(0.4	)%			(0.3	)%			(0.2	)%
Other income, net			0.2	%			0.2	%			0.9	%
Net income			2.4	%			2.1	%			1.3	%

Net Sales

     We believe that the fundamentals for our products continue to be favorable. Firstly, Americans are eating more avocados. Over the last 10 years, United States (U.S.) consumption of avocados has expanded at a 9% compound annual growth rate and we do not anticipate this growth significantly changing. We believe that the healthy eating trend that has been developing in the United States contributes to such growth, as avocados, which are cholesterol and sodium free, are dense in fiber, vitamin B6, antioxidants, potassium, folate, and contain unsaturated fat, which help lower cholesterol. Also, a growing number of research studies seem to suggest that phytonutrients, which avocados are rich in, help fight chronic illnesses, such as heart disease and cancer.

     Additionally, we believe that the demographic changes in the U.S. will greatly impact the consumption of avocados and avocado-based products. The Hispanic community currently accounts for approximately 14% of the U.S. population, and the total number of Hispanics is estimated to triple by the year 2050. Avocados are considered a staple item purchased by Hispanic consumers, as the per-capita avocado consumption in Mexico is estimated to be more than seven-fold that of the U.S.

     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.

     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 2007,

2006 and 2005, on behalf of avocado growers, we remitted approximately $1.7 million, $1.7 million and $1.5 million to the California Avocado Commission. During fiscal 2007, 2006 and 2005, we remitted approximately $2.2 million, $4.7 million and $2.4 million to the Hass Avocado Board related to California avocados.

     Sales of products and related costs of products sold are recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability 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:

		2007				Change				2006				Change				2005
		(Dollars in thousands)
Net sales:
Fresh products		$	261,325				10.3	%		$	236,889				2.9	%		$	230,289
Processed products			41,659				13.1	%			36,834				29.1	%			28,533
Total net sales		$	302,984				10.7	%		$	273,723				5.8	%		$	258,822
As a percentage of net sales:
Fresh products			86.3	%							86.5	%							89.0	%
Processed products			13.7	%							13.5	%							11.0	%
			100.0	%							100.0	%							100.0	%

     Net sales for the year ended October 31, 2007, when compared to 2006, increased by approximately $29.3 million, or 10.7%, principally as a result of an increase in both our fresh products and processed products segments. The increase in sales related to our fresh products segment was primarily driven by an increase in our average selling price, partially offset by a decrease in the total pounds sold. The increase related to our processed products segment was primarily related to an increase in both the total pounds sold, as well as an increase in the average selling price per pound.

     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, 2007												Year ended October 31, 2006
		Fresh				Processed								Fresh				Processed
		products				products				Total				products				products				Total
Third-party sales:
California avocados		$	95,130			$	—			$	95,130			$	140,995			$	—			$	140,995
Imported avocados			120,588				—				120,588				51,191				—				51,191
Papayas			5,887				—				5,887				4,822				—				4,822
Specialities and tropicals			12,923				—				12,923				9,543				—				9,543
Processed — food service			—				38,338				38,338				—				34,021				34,021
Processed — retail and club			—				10,706				10,706				—				10,454				10,454
Total fruit and product sales to third-parties			234,528				49,044				283,572				206,551				44,475				251,026
Freight and other charges			26,816				739				27,555				30,383				637				31,020
Total gross sales to third-parties			261,344				49,783				311,127				236,934				45,112				282,046
Less sales incentives			(19	)			(8,124	)			(8,143	)			(8	)			(8,278	)			(8,323	)
Total net sales to third-parties			261,325				41,659				302,984				236,889				36,834				273,723
Intercompany sales			13,020				8,123				21,143				9,532				6,227				15,759
Net sales		$	274,345			$	49,782				324,127			$	246,421			$	43,061				289,482
Intercompany sales eliminations											(21,143	)											(15,759	)
Consolidated net sales										$	302,984											$	273,723

		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			51,191				—				51,191				81,756				—				81,756
Papayas			4,822				—				4,822				6,251				—				6,251
Specialities and tropicals			9,543				—				9,543				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				251,026				206,265				35,073				241,338
Freight and other charges			30,156				637				31,020				24,129				258				24,387
Total gross sales to third-parties			236,897				45,112				282,046				230,394				35,331				265,725
Less sales incentives			(8	)			(8,278	)			(8,323	)			(105	)			(6,798	)			(6,903	)
Total net sales to third-parties			236,889				36,834				273,723				230,289				28,533				258,822
Intercompany sales			9,532				6,227				15,759				15,850				6,166				22,016
Net sales		$	246,421			$	43,061				289,482			$	246,139			$	34,699				280,838
Intercompany sales eliminations											(15,759	)											(22,016	)
Consolidated net sales										$	273,723											$	258,822

     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

     Fiscal 2007 vs. Fiscal 2006:

     Net sales delivered by the business increased by approximately $24.4 million, or 10.3%, from fiscal 2006 to 2007. This increase was primarily related to an increase in Mexican and Chilean avocado sales and an increase in tomato sales, partially offset by a decrease in California avocado sales.

     Sales of Mexican sourced avocados increased $73.2 million, or 138.3%, for fiscal year 2007, when compared to the same prior year period. The volume of Mexican fruit sold increased by approximately 61.1 million pounds, or 106.2%, when compared to the same prior year period. This increase was primarily in the U.S. marketplace and was substantially related to an increased emphasis in the Mexican avocado crop certified for export to the U.S., which principally stemmed from the expected, and ultimately realized, smaller California avocado crop. Additionally, the average per carton selling price of Mexican avocados increased approximately 15.2% when compared to the same prior year period. We attribute some of this increase to the smaller California avocado crop in the marketplace during fiscal 2007, as well as the premium pricing related to our ProRipeVIP^TM avocado ripening program.

     Sales of Chilean sourced avocados increased $4.9 million for fiscal year 2007, when compared to the same prior year period. The volume of Chilean fruit sold increased by approximately 7.8 million pounds, or 86.2%, when compared to the same prior year period. This increase 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 decrease of 11.9% for fiscal 2007, when compared to the same prior period. We attribute some of these price fluctuations to the size and/or timing of delivery of the Chilean and California avocado crop in the marketplace during fiscal 2007.

     Mexican and Chilean grown avocados are primarily sold in the U.S., Japanese, and/or European marketplace. We anticipate that the combined sales of Mexican and Chilean grown avocados will remain comparable in fiscal 2008.

     The volume of non-brokered tomatoes increased by approximately 25.6 million pounds during fiscal 2007, when compared to the same prior year period. This increase, which accounted for the majority of the fluctuation, was primarily related to a new supplier relationship. We expect a significant increase in tomato sales during fiscal 2008 due primarily to our new tomato agreements. See Note 16 to the consolidated financial statements.

     Sales of California sourced avocados decreased $56.5 million for fiscal 2007, when compared to the same prior period. This decrease was primarily related a 58.3% decrease in pounds of avocados sold, partially offset by an increase in our average selling prices. The decrease in pounds was primarily related to a cyclically low California avocado crop for the 2006/2007 season, coupled with the freeze experienced during our first fiscal quarter. Our market share of shipped California avocados decreased to 33.7% for fiscal 2007, when compared to a 35.6% market share for the same prior year period. Based on estimates generated from the California Avocado Commission, we expect the California avocado crop for the 2007/2008 season to be moderately larger than the 2006/2007 crop.

     For fiscal year 2007, average selling prices, on a per carton basis, for California avocados were 56.2% higher when compared to the same prior year period. We attribute some of this increase to the aforementioned smaller California avocado crop for the 2006/2007 season. For fiscal year 2008, 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.

     Fiscal 2006 vs. Fiscal 2005:

     Net sales delivered by the business increased by approximately $6.6 million, or 2.9%, from fiscal 2005 to 2006. This increase was 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 to 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.

     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.

     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.

     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.

Processed Products

     Fiscal 2007 vs. Fiscal 2006:

     Net sales increased by approximately $4.8 million, or 13.1% for fiscal 2007, when compared to the same prior period. The increase in net sales is primarily attributable to an increase of 2.1 million pounds of product sold, or 10.0%, as well as an increase in the net selling price totaling $0.05 per product pound sold, or 2.8%. During fiscal year 2007, the increase in pounds sold primarily relates to an increase in the sale of both our frozen and high-pressure guacamole products, which increased approximately 12.0% and 6.5% when compared to the same prior year period. The increase in our net average selling price primarily relates to a change in our product mix.

     We currently have two 215L ultra high pressure machines located in Uruapan and estimate we are operating at approximately 42% of the combined machines’ capacities as of October 31, 2007. We believe the additional capacity provided by the 2^nd machine is reasonable given our current sales projections and expected growth. Net sales of our ultra high pressure products represented approximately 37% and 38% of total processed segment sales for the years ended October 31, 2007 and 2006.

     We believe that these ultra high pressure machines will enable our company to deliver the widest available array of prepared avocado and other products to our customers. Consequently, we believe that we are positioned to expand our ultra high pressure product line to include more avocado related products, high-end salsas, mangoes and other readily available fruit products.

     Fiscal 2006 vs. Fiscal 2005:

     Net sales increased by approximately $8.3 million, or 29.1% 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.

Gross Margins

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

		2007				Change				2006				Change				2005
		(Dollars in thousands)
Gross Margins:
Fresh products		$	21,461				14.9	%		$	18,673				9.4	%		$	17,071
Processed products			10,311				(1.0	)%			10,411				123.3	%			4,663
Total gross margins		$	31,772				9.2	%		$	29,084				33.8	%		$	21,734
Gross profit percentages:
Fresh products			8.2	%							7.9	%							7.4	%
Processed products			24.8	%							28.3	%							16.3	%
Consolidated			10.5	%							10.6	%							8.4	%

     Our cost of sales 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, remained consistent for fiscal year 2007 when compared to fiscal year 2006. This consistency was principally attributable to decreased profitability in our processed product segment, substantially offset by an increase in profitability from our fresh products segment. Consolidated gross margin, as a percent of sales, increased 2.2% 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.

     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 decrease in our gross margin percentage during fiscal year 2007 was primarily related to a significant decrease in pounds of fruit sold, as well as an increase in the market price of avocados. During fiscal year 2007, when compared to fiscal year 2006, we experienced a 58.3% decrease in pounds of avocados sold. Additionally, we also experienced a 56.2% increase in the average sales price of California avocados. Combined, these had the effect of increasing our per pound costs, which, as a result, negatively impacted gross margins.

     The increase in our gross margin percentage related to California avocados 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 gross margin and gross profit percentage for consignment sales, including Chilean avocados and tomatoes, 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 party. 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 years 2007, 2006, and 2005, we generated gross margins of $1.7 million, $1.2 million, and $1.7 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 2007, our gross margins generated from the sale of Mexican avocados increased from approximately $1.6 million in fiscal year 2006 to $14.0 million in fiscal year 2007. Such increase was primarily related to a 106.2% increase in the volume of Mexican avocados sold, as well as higher sales prices of Mexican fruit. Collectively, these items positively affected gross margins.

     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 $1.6 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.

     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 2007, the processed products gross profit percentages decreased primarily as a result of higher fruit costs, as well as increased packaging costs, both of which had the effect of increasing our per pound costs. Such were partially offset, however, by an increase in total pounds produced, which had the effect of reducing our per pound costs. We anticipate that the gross profit percentage for our processed product segment will continue to experience fluctuations during the next fiscal year primarily due to the uncertainty of the cost of fruit that will be used in the production process.

     During fiscal year 2006, when compared to the same prior year period, 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.

Selling, General and Administrative

		2007				Change				2006				Change				2005
		(Dollars in thousands)
Selling, general and administrative		$	19,759			NM				$	19,767				6.3	%		$	18,588
Percentage of net sales			6.5	%							7.2	%							7.2	%

     Selling, general and administrative expenses include costs of marketing and advertising, sales expenses, and other general and administrative costs. For fiscal year 2007, selling, general and administrative expenses remained substantially consistent when compared to the same period for fiscal 2006. This consistency was primarily related to higher corporate costs, including, but not limited to, costs related to an increase bad debt expense (totaling approximately $0.5 million), an increase in legal fees (totaling approximately $0.1 million), and an increase in management bonuses (totaling approximately $0.1 million). Such higher corporate costs were substantially offset, however, by a decrease in auditing/Sarbanes-Oxley costs (totaling approximately $0.1 million), and a decrease in stock option expense (totaling approximately $0.6 million).

     For fiscal year 2006, selling, general and administrative expenses increased by $1.2 million, or 6.3%, 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).

Interest income

		2007				Change				2006				Change				2005
		(Dollars in thousands)
Interest income		$	248				(30.3	)%		$	356				2.3	%		$	348
Percentage of net sales			0.1	%							0.1	%							0.1	%

     Interest income was primarily generated from loans to growers and our notes receivable from shareholders. During fiscal years 2007, 2006 and 2005, interest income includes interest accrued on notes receivable from directors and officers of approximately $0.1 million, $0.2 million and $0.2 million.

Interest expense

		2007				Change				2006				Change				2005
		(Dollars in thousands)
Interest expense		$	(1,346	)			42.7	%		$	(943	)			136.3	%		$	(399	)
Percentage of net sales			(0.4	)%							(0.3	)%							(0.2	)%

     Interest expense is primarily generated from our line of credit borrowings, as well as our term loan agreement with Farm Credit West, PCA. For fiscal 2007, as compared to fiscal 2006, the increase in interest expense was primarily related to a higher average outstanding balance under our non-collateralized, revolving credit facilities with Farm Credit West, PCA and Bank of America, N.A.

     For fiscal 2006, as compared to fiscal 2005, the increase in interest expense was 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

		2007				Change				2006				Change				2005
		(Dollars in thousands)
Other income, net		$	512				(14.5	)%		$	599				(75.1	)%		$	2,408
Percentage of net sales			0.2	%							0.2	%							0.9	%

     Other income, net includes dividend income, as well as certain other transactions that are outside of the course of normal operations. During fiscal 2007, 2006, and 2005, we received $0.4 million, $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

		2007				Change				2006				Change				2005
		(Dollars in thousands)
Provision for income taxes		$	4,271				18.0	%		$	3,620				66.0	%		$	2,181
Percentage of income before provision for income taxes			36.8	%							38.5	%							39.6	%

     The effective income tax rate for fiscal years 2007, 2006, and 2005 is higher than the federal statutory rate principally due to state taxes. Our effective income tax rate decreased from 38.5% in fiscal year 2006 to 36.8% in fiscal year 2007 primarily as a result of a an increase in pre-tax income in a foreign jurisdiction with favorable tax rates. 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.

Quarterly Results of Operations

     The following table presents our operating results for each of the eight fiscal quarters in the period ended October 31, 2007. 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,
		2007				2007				2007				2007				2006				2006				2006				2006
		(in thousands, except per share amounts)
Statement of Operations Data
Net sales		$	85,295			$	91,212			$	69,184			$	57,293			$	76,880			$	78,954			$	67,429			$	50,647
Cost of sales			78,214				82,680				59,993				50,325				69,896				68,738				58,768				47,237
Gross margin			7,081				8,532				9,191				6,968				6,984				10,216				8,661				3,410
Selling, general and administrative			5,608				4,708				4,812				4,631				5,163				5,284				5,063				4,444
Operating income (loss)			1,473				3,824				4,379				2,337				1,821				4,932				3,598				(1,034	)
Other income (expense), net			128				(247	)			(137	)			(156	)			292				(136	)			10				(75	)
Income (loss) before provision (benefit) for income taxes			1,601				3,577				4,242				2,181				2,113				4,796				3,608				(1,109	)
Provision (benefit) for income taxes			411				1,355				1,655				850				775				1,870				1,419				(444	)
Net income (loss)		$	1,190			$	2,222			$	2,587			$	1,331			$	1,338			$	2,926			$	2,189			$	(665	)
Net income (loss) per share:
Basic		$	0.08			$	0.16			$	0.18			$	0.09			$	0.09			$	0.21			$	0.15			$	(0.05	)
Diluted		$	0.08			$	0.15			$	0.18			$	0.09			$	0.09			$	0.21			$	0.15			$	(0.05	)
Number of shares used in per share computation:
Basic			14,329				14,300				14,294				14,293				14,292				14,171				14,282				14,352
Diluted			14,530				14,452				14,398				14,359				14,319				14,237				14,343				14,352

Liquidity and Capital Resources

     Operating activities for fiscal 2007, 2006 and 2005 provided cash flows of $4.6 million, $7.8 million, and $5.6 million. Fiscal year 2007 operating cash flows reflect our net income of $7.3 million, net noncash charges (depreciation and amortization, income from Maui Fresh, LLC, loss on disposal of fixed assets, provision for losses on accounts receivable, deferred income taxes and stock compensation expense) of $3.1 million and a net decrease from changes in the non-cash components of our working capital of approximately $5.8 million.

     Fiscal year 2007 decreases in operating cash flows, caused by working capital changes, include a decrease in payable to growers of $3.9 million, a decrease in trade accounts payable and accrued expenses of $2.9 million, a net increase in accounts receivable of $2.2 million, and an increase in advance to suppliers of $0.9 million, partially offset by a decrease in inventory of $2.2 million, a net decrease in prepaid expenses and other assets of $1.0 million, a decrease in income tax receivable of $0.8 million, and a decrease in other assets totaling $0.1 million.

     Our amounts payable to growers reflects a significant decrease in the volume of California avocados received in the month of October 2007, as compared to October 2006. The decreases in our trade accounts payable and accrued expenses as of October 31, 2007, when compared to October 31, 2006, primarily reflect the timing of certain payments, reductions related to vendors used in the ordinary course of California business, which decreased significantly as compared to prior year, as well as a reduction in our promotional allowance liability.

     The increase in our accounts receivable balance as of October 31, 2007, when compared to October 31, 2006, primarily reflects a significantly higher volume of Mexican and Chilean avocado sales, partially offset by a significant reduction in the volume of California avocado sales, recorded in the month of October 2007, as compared to October 2006. These volume level fluctuations are consistent with the harvests experienced, and our increased emphasis in the Mexican avocado crop certified for export to the U.S., in the related years. The increase in our advances to suppliers as of October 31, 2007, as compared to October 31, 2006, primarily reflects our advances pursuant to our new tomato agreements. See Note 16 in our consolidated financial statements.

     The decrease in our inventory balance is primarily related to a significant reduction in California inventory on hand at October 31, 2007, as compared to the same prior year period. Additionally, we also experienced a significant decrease in finished processed products inventory based primarily on sales exceeding production during fiscal 2007, as compared to fiscal 2006. The net decrease in prepaid expenses and other current assets primarily relates to the collection of certain non-trade receivables, and the decrease in our income tax receivable was primarily related to estimated payments made in fiscal 2007, as compared to pre-tax income for fiscal 2007.

     Cash used in investing activities was $8.0 million, $4.7 million, and $11.9 million for fiscal years 2007, 2006, and 2005. Fiscal year 2007 cash flows used in investing activities include capital expenditures of $3.0 million and a $5.0 million loan to Agricola Belher pursuant to our tomato agreements. See Note 16 to our consolidated financial statements.

     Cash provided by financing activities was $4.2 million and $6.9 million for fiscal years 2007 and 2005, while cash used in financing activities was $4.2 million for fiscal year 2006. Cash provided during fiscal year 2007 primarily includes proceeds from our non-collateralized, revolving credit facilities totaling $6.8 million, $2.4 million related to payments on notes receivable from shareholders and $0.7 million related to stock option exercises. These cash receipts were partially offset, however, by the payment of a dividend totaling $4.6 million and a payment related to our long-term obligation of $1.3 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, 2007 and 2006 totaled $1.0 million and $0.1 million. Our working capital at October 31, 2007 was $16.3 million compared to $12.0 million at October 31, 2006. The overall working capital increase primarily reflects a reduction in payables to growers and trade accounts payable, partially offset by additional short-term borrowings.

     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 July 2007 and October 2007, we renewed and extended our non-collateralized, revolving credit facilities with Farm Credit West, PCA and Bank of America, N.A. These two credit facilities now expire in February 2012 and July 2009. Under the terms of these agreements, we are advanced funds for both working capital and long-term productive asset purchases. Total credit available under these combined borrowing agreements was $30 million, with a weighted-average interest rate of 5.8% and 6.2% at October 31, 2007 and 2006. Under these credit facilities, we had $10.6 million and $3.8 million outstanding as of October 31, 2007 and 2006, of which $4.0 million was classified as a long-term liability as of October 31, 2007. We had no long-term amounts outstanding pursuant to these credit facilities as of October 31, 2006. These 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, 2007.

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, 2007:

		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)		$	17,132			$	2,054			$	8,360			$	3,970			$	2,748
Revolving credit facilities			6,630				6,630				—				—				—
Defined benefit plan			361				47				141				94				79
Operating lease commitments			4,719				739				1,602				751				1,627
Total		$	28,842			$	9,470			$	10,103			$	4,815			$	4,454

     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 and promotion efforts.

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, 2007.

		Expected maturity date October 31,
(All amounts in thousands)		2008				2009				2010				2011				2012				Thereafter				Total				Fair Value
Assets
Cash and cash equivalents (1)		$	967			$	—			$	—			$	—			$	—			$	—			$	967			$	967
Accounts receivable (1)			25,992				—				—				—				—				—				25,992				25,992
Advances to Suppliers (1)			2,292				—				—				—				—				—				2,292				2,292
Liabilities
Payable to growers (1)		$	2,414			$	—			$	—			$	—			$	—			$	—			$	2,414			$	2,414
Accounts payable (1)			2,643				—				—				—				—				—				2,643				2,643
Current borrowings pursuant to credit facilities (1)			6,630				—				—				—				—				—				6,630				6,630
Long-term borrowings pursuant to credit facilities (2)			—				1,000				1,000				1,000				1,000				—				4,000				4,092
Fixed-rate long-term obligations (3)			1,307				1,306				1,300				1,300				1,300				3,900				10,413				9,972

     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, 2007 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,
		2007				2006
Assets
Current assets:
Cash and cash equivalents		$	967			$	50
Accounts receivable, net of allowances of $2,271 (2007) and $1,833 (2006)			25,992				24,202
Inventories, net			8,359				10,569
Prepaid expenses and other current assets			4,911				4,934
Advances to suppliers			2,292				1,475
Income taxes receivable			1,539				2,268
Deferred income taxes			2,525				2,348
Total current assets			46,585				45,846
Property, plant, and equipment, net			20,888				19,908
Investment in Limoneira			48,962				33,879
Investment in Maui Fresh, LLC			403				229
Goodwill			3,591				3,591
Other assets			7,589				4,110
		$	128,018			$	107,563
Liabilities and shareholders’ equity
Current liabilities:
Payable to growers		$	2,414			$	6,334
Trade accounts payable			2,643				4,046
Accrued expenses			12,227				13,758
Short-term borrowings			6,630				3,804
Dividend payable			5,030				4,573
Current portion of long-term obligations			1,307				1,308
Total current liabilities			30,251				33,823
Long-term liabilities:
Long-term obligations, less current portion			13,106				10,406
Deferred income taxes			10,658				4,391
Total long-term liabilities			23,764				14,797
Commitments and contingencies (Note 8)
Shareholders’ equity:
Common stock ($0.001 par value, 100,000 shares authorized; 14,371 and 14,293 shares outstanding at October 31, 2007 and 2006)			14				14
Additional paid-in capital			38,068				37,109
Notes receivable from shareholders			—				(2,430	)
Accumulated other comprehensive income			15,664				6,293
Retained earnings			20,257				17,957
Total shareholders’ equity			74,003				58,943
		$	128,018			$	107,563

See accompanying notes to consolidated financial statements.

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

		Year Ended October 31,
		2007				2006				2005
Net sales		$	302,984			$	273,723			$	258,822
Cost of sales			271,212				244,639				237,088
Gross margin			31,772				29,084				21,734
Selling, general and administrative			19,759				19,767				18,588
Operating income			12,013				9,317				3,146
Equity in earnings from Maui Fresh, LLC			174				79				—
Interest income			248				356				348
Interest expense			(1,346	)			(943	)			(399	)
Other income, net			512				599				2,408
Income before provision for income taxes			11,601				9,408				5,503
Provision for income taxes			4,271				3,620				2,181
Net income		$	7,330			$	5,788			$	3,322
Net income per share:
Basic		$	0.51			$	0.40			$	0.24
Diluted		$	0.51			$	0.40			$	0.24
Number of shares used in per share computation:
Basic			14,304				14,304				13,892
Diluted			14,435				14,354				13,985

See accompanying notes to consolidated financial statements.

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

						Year ended
		October 31,
		2007				2006				2005
Net income		$	7,330			$	5,788			$	3,322
Other comprehensive income (loss), before tax:
Unrealized holding gains (losses) arising during period			15,083				(11,755	)			22,184
Income tax benefit (expense) related to items of other comprehensive income (loss)			(5,712	)			4,662				(8,798	)
Other comprehensive income (loss), net of tax			9,371				(7,093	)			13,386
Comprehensive income (loss)		$	16,701			$	(1,305	)		$	16,708

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, 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
Exercise of stock options and income tax benefit of $233			78				—				943				—				—				—				943
Stock compensation expense			—				—				16				—				—				—				16
Unrealized gain on Limoneira investment, net			—				—				—				—				9,371				—				9,371
Collections on shareholder notes receivable			—				—				—				2,430				—				—				2,430
Dividend declared to shareholders			—				—				—				—				—				(5,030	)			(5,030	)
Net income			—				—				—				—				—				7,330				7,330
Balance, October 31, 2007			14,371			$	14			$	38,068			$	—			$	15,664			$	20,257			$	74,003