UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

For the fiscal year ended October 31, 20022003

Commission file number: 000-33385

CALAVO GROWERS, INC.

Registrant’s telephone number, including area code: (949) 223-1111

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 Par Value Perper Share

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

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

     Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [  ] No [ X ][X]

     Based on the closing price as reported on the Over the Counter Bulletin Board,Nasdaq National Market, the aggregate market value of the Registrant’s Common Stock held by non-affiliates on April 30, 20022003 (the last business day of the Registrant’s most recently completed second fiscal quarter) was approximately $79,555,000.$65.1 million. Shares of Common Stock held by each executive officer and director and by each shareholder affiliated with a director or an executive officer have been excluded from this calculation because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of outstanding shares of the Registrant’s Common Stock as of December 31, 20022003 was 12,844,909.13,506,833.

Documents Incorporated by Reference

     Portions of the Registrant’s Proxy Statement for the 20032004 Annual Meeting of Shareholders, which we intend to be heldhold on March 17, 2003,15, 2004, are incorporated by reference into Part III of this Form 10-K. The definitive Proxy Statement will be filed within 120 days after October 31, 2002.2003.

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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 Part I., Item 1 under the caption “Risks Related to Our Business” 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.

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PART I

Item 1. Business

Overview

     We engage in the procurement and marketing of avocados and other perishable foods and the preparation and distribution of processed avocado products. Our expertise in marketing and distributing avocados, processed avocados, and other perishable foods allows us to deliver a wide array of fresh and processed food products to food distributors, produce wholesalers, supermarkets, and restaurants on a worldwideworld-wide basis. Through our threetwo operating facilities in Southern California and two facilities in Mexico, we sort and pack avocados procured in California and Mexico and prepare processed avocado products. Additionally, we procure avocados internationally, principally from Chile, the Dominican Republic and New Zealand, and distribute other perishable foods, such as Hawaiian grown papayas. TheseWe report these operations are reported by us in three different business segments: California avocados, processed products, and international avocados and perishable food products, and processed products.

     Our principal executive offices are located at 2530 Red Hill Avenue, Santa Ana, California 92705; telephone (949) 223-1111. At October 31, 2002, we employed approximately 589 employees worldwide.

     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 calls for the closing of our Santa Paula, California and Mexicali, Baja California Norte processing facilities and the relocation of these operations to a new facility in Uruapan, Michoacan, Mexico. We believe that this restructuring will provide cost savings in the elimination of certain transportation costs, duplicative overhead structures, and savings in the overall cost of labor and services. We anticipate that the facility will be completed near the end of our first fiscal quarter 2004.

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

     Our principal executive offices are located at 2530 Red Hill Avenue, Santa Ana, California 92705; telephone (949) 223-1111. At October 31, 2003, we employed 522 employees world-wide.

Available Information

We maintain an Internet website at http://www.calavo.com. During the third fiscal quarter of 2003, we intend to begin making available ourOur annual reportreports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, along with our annual report to shareholders and other information related to us, are available, free of charge, on this siteour website as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the Securities and Exchange Commission. Our internetInternet website and the information contained therein, or connected thereto, areis not and is not intended to be incorporated into this Annual Report on Form 10-K.

California Avocados

     Calavo was founded in 1924 to market California avocados. In California, the growing area stretches from San Diego County to the northern region of Santa BarbaraSan Luis Obispo County, with the majority of the growing areas located approximately 100 miles north and south of Los Angeles County.

     As of October 31, 2002, the Hass variety is the predominant avocado variety marketed on a world-wide basis. California grown Hass avocados are available year-round, with peak production periods occurring between May through September. Other varieties have a more limited picking season and command a lower retail price. Approximately 1,900 growers deliver avocados to us on a routine basis, generally pursuant to a standard marketing agreement. In recent years, the share of avocados handled by us has continued to increase with approximately 37.2% of the 2002 California Hass avocado crop handled by us based on results published by the California Avocado Commission. We attribute the increase in our market share principally to the recruitment of new growers that deliver their avocados to us and the competitiveness of the per pound returns we pay to our growers.

     Avocados delivered to our packinghouses are graded, sized, and packed for delivery to customers. Our ability to estimate the size and timing of the delivery of the annual avocado crop has a substantial impact on our costs and the sales price we receive for the fruit. To that end, our field teams maintain direct contact with growers and farm managers and coordinate harvest plans. The feedback from our field teams and our marketing group is used in conjunction with our sales department to establish and publish list prices used by our direct sales force to solicit orders.

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The storage life of fresh avocados is limited. It can range from one to four weeks, depending upon the maturity of the fruit, the growing methods used, and the handling conditions in the distribution chain.

     The CaliforniaAs of October 31, 2003, the Hass variety is the predominant avocado market is highly competitive with 12 major handlers providing daily price quotes to growers. A marketing order enacted by the state legislature is in effect forvariety marketed on a world-wide 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 providescommand a lower price. Approximately 2,000 growers deliver avocados to us, generally pursuant to a standard marketing agreement. Over the financial resource to fund generic advertising and promotional programs that benefit all packers. Althoughpast several years, the share of avocados handled by us are identifiable through packaging materials and a Calavo brand name sticker, we believe that consumers generally do not purchase avocadoshas remained strong, with approximately 34% of the 2003 California Hass avocado crop handled by us, based on brand loyalty. Notwithstandingdata published by the absenceCalifornia Avocado Commission. We attribute our solid foothold in the California industry principally to the competitiveness of brand loyalty,the per pound returns we have developedpay and the communication we maintain with our growers.

     Avocados delivered to our packinghouses are graded, sized, packed, and cooled for delivery to customers. Our ability to estimate the size, as well as the timing of the delivery of, the annual avocado crop has a series of marketingsubstantial impact on both our costs and the sales initiatives aimed atprice we receive for the fruit. To that end, our largest customers that are designed to differentiatefield personnel maintain direct contact with growers and farm managers and coordinate harvest plans. The feedback from our products and services from those offeredfield-men is used by our competitors. Some of these key initiatives are as follows:

	•		We have established a proprietary marketing database that facilitates a review of the performance of selective grocery stores. Based on this data we are able to assist our customers in developing programs that will increase their sales. Generally, we review the performance of stores relative to others within the same geographic area and make recommendations as to the size and display of avocados within the produce section.
	•		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. Our research has demonstrated that consumers generally purchase a larger quantity of avocados when presented in a bag as opposed to the conventional store displays. We also believe that the value proposition of avocados in a bag provides for a higher level of sales to grocery stores.
	•		We recently announced the rollout of our ProRipeTM avocado ripening program. This proprietary program allows us to deliver avocados with varying degrees of ripeness to our customer specification. We believe that ripened avocados help our customers address the consumers’ immediate needs and accelerate the sale of avocados through their stores.

     We sell avocadossales department to a diverse group of supermarket chains, wholesalers, and other direct users. The recent consolidation in the supermarket industry has led to fewer, but bigger buyers. In addition, limitedestablish sales are currently being made through e-commerce distribution channels. We believe that our largest customers will, over the long-term, 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 distribution channelsprices used by our largest customers will favorably impact larger handlers like us, which have the ability and financial resources to support these strategies. Our largest customers have also initiated the practice of drafting short-termdirect 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 largest customers to drafting sales contracts benefits large handlers like us, which have the ability to fulfill the terms of these contracts. During 2002, our 5 largest customers purchased 20.0% of our sales, and the largest 25 customers represented 56.1% of all fresh avocado sales.force.

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

     Avocados delivered to us are grouped as a homogenous pool on a weekly basis based on the variety, size, and grade. The proceeds we receive from the sale of each separate avocado pool, net of a packing and marketing fee provided to cover our costs and a profit, are paid back to the growers once each month with all of the fruit received in a given week receiving the same return by variety, grade, and size. 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 anour operating profit. Significant competitive pressures dictate that we set the packing and marketing fee at the lowest possible level to attract and retain both new and existing grower business. We believe that, if net proceeds paid ceaseceased 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.

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

	•		We have established one of the industry’s largest proprietary marketing databases that facilitates a review of the performance of avocados in various grocery stores located across the nation. Based on this data, we are able to assist our customers in developing programs that will increase their sales. Generally, we review the performance of stores relative to others within the same geographic area and make recommendations designed to increase both the per unit and total dollar sales of avocados within the produce section.
	•		We 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. 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.
	•		We have expanded our ProRipe™ avocado ripening program with select customers during fiscal 2003. This proprietary program allows us to deliver avocados with varying degrees of ripeness to our customers. We believe that ripened avocados help our customers address the consumers’ immediate needs and accelerate the sale of avocados through their stores.
	•		We plan to start marketing our avocados under joint promotion programs with other food manufacturers in fiscal 2004. Under these programs, we seek to increase the promotional exposure of our products by providing certain sales incentives. These incentives will be offered in conjunction with various promotional campaigns designed to advertise the products of all parties involved. We believe these programs will help us minimize our advertising costs, as they will be shared with other parties, while still achieving recognition in the marketplace.

     We sell avocados to a diverse group of supermarket chains, wholesalers, foodservice and other distributors, as well as under private labels. The recent consolidation in the supermarket industry has led to fewer, but bigger buyers. In addition, limited sales are currently being made 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. An increasing number of our customers are seeking 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 2003, our 5 largest customers represented approximately 23% of our sales, and our largest 25 customers represented approximately 61% of all fresh avocado sales.

International Avocados and Perishable Food Products

     Our international avocados and perishable food products segment leverages on our expertise in the handling and marketing of California avocados. We believe that the sales generated by this segment complement our offering of California avocados to our customers and stabilize the supply of avocados during seasons of low California production. We experienced significant revenue growth in this segment in fiscal 2003. Sales generated by this segment include avocados grown outside of California and other perishable food products, such as papayas. We market avocados from Mexico, Chile, New Zealand and, new for fiscal 2003, the Dominican Republic. We handle some of these products on a consignment basis for the suppliers. The agreements may require us to pay advances to growers for the fruit they have delivered. Historical experience demonstrates that providing such advances results in our acquiring full market risk for the product, as it is possible that our resale proceeds may be less than the amounts we paid to the grower. This is a result of the high level of volatility inherent in the avocado and perishable food markets, which are subject to significant pricing declines based on the availability of fruit in the market.

     In 1996, the United States Department of Agriculture (“USDA”) established a protocol whereby Mexican grown avocados are permitted to be imported, on a restricted basis, into the United States. Restrictions imposed on the marketing of the fruit, due to phytosanitary concerns, have limited the marketing of Mexican avocados to 31 states, from the middle of October to the middle of April. In 1998, we invested in this 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. Typically, Mexican growers restrict the supply of avocados for export to the United States in order to obtain higher field prices. Our continued profitability is subject to our ability to secure a sufficient volume of avocados at reasonable prices to recover our investment in the Mexican packing operations. We have also enjoyed increased sales of Mexican avocados to Japan, Canada, and Europe. During 2003, we packed and distributed approximately 31% of the avocados exported from Mexico into the United States and approximately 13% of the avocados exported from Mexico to countries other than the United States, based on our estimates.

     Net sales generated by our International avocados and perishable food products business depends principally on the availability of Chilean and Mexican grown avocados in the U.S. markets. Currently, Mexican grown avocados are significant during our first two fiscal quarters. Chilean grown avocados are significant during our 4th and 1st fiscal quarters. We are presently reviewing the impact, if any, of the pest risk assessment issued by the USDA during fiscal 2003, which, if adopted as drafted, would lift current import limitations on Hass avocados from Mexico. The marketing of the Mexican avocados is presently limited to 31 states, from the middle of October to the middle of April. This directive is intended to analyze the risks associated with expanding the importation of Mexican avocados to all U.S. states for the entire year. We believe that this assessment will be adopted, in a form substantially similar to its draft form, during our fiscal 2004. We are unable to project the impact, if any, the adoption of this proposed assessment will have on our financial condition and results of operations.

     From time to time, we will make various advances to Mexican growers to secure their avocado harvests (principally September to June). Our ability to recover these advances is largely dependent on the growers’ ability to deliver avocados to us and is subject to inherent risks of farming, such as weather and pests. As of October 31, 2003, advances outstanding to Mexican growers were approximately $0.5 million in order to secure the delivery of their avocado crops.

     In recent years, the volume of avocados exported by Chilean growers to the United States has continued to increase. Chilean growers continue to increase avocado plantings to capitalize on high returns available in the world-wide avocado markets. 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 2003, we distributed 15% of the Chilean imports into the United States, based on our estimates.

     New Zealand also exports avocados into the United States. The harvest of New Zealand avocados (September to December) overlaps with the Chilean and Mexican avocado harvest periods. Consequently, the introduction of avocados grown in New Zealand has had the effect of increasing the volume of avocados in the marketplace and increasing pressure on sales prices. During 2003, we distributed 43% of the New Zealand imports into the United States, based on our estimates.

     The Dominican Republic also exports avocados into the United States. Similar to the harvest of New Zealand avocados, the harvest of Dominican Republic avocados (August to January) overlaps with the Chilean and Mexican avocado harvest periods. As a result, the introduction of avocados grown in the Dominican Republic has had the effect of increasing the volume of avocados in the marketplace and increasing pressure on sales prices. During 2003, we distributed 7% of the Dominican Republic imports into the United States based on our estimates. We anticipate distributing substantially all (90% - 100%) of the Dominican Republic imports into the United States for fiscal 2004.

     In recent years, our distribution of other perishable food products has generally been limited to papayas procured from a Hawaiian packing operation, which is owned by the Chairman of our Board of Directors, Chief Executive Officer and President. During 2003, we distributed approximately half of the papayas sold in the continental United States, based on our estimates.

     Maui has operations in Arizona, California, and Hawaii. The primary focus of these operations is the growing, shipping and distribution of fresh produce. Maui primarily sources its products from the United States and Mexico. While Maui has numerous commodities, Hawaiian papayas, tomatoes, bell peppers, and chili peppers account for the majority of its sales. Sales for the most recently completed fiscal year ended December 31, 2002 were approximately $20 million. Maui does not experience significant fluctuations in sales related to seasonality.

     Maui has customers located primarily in the United States and Canada and these customers are principally in both the retail, foodservice, and wholesalers sectors. We plan to leverage our existing customer relationships with Maui’s current product offerings to stimulate sales growth.

Processed Products

     In the 1960’s and early 1970’s, we pioneered the process of freezing avocadosavocado pulp and developingdeveloped a wide variety of guacamole recipes thatto address the diverse tastes of consumers and buyers in the food service industry. The segment was originally conceived as a mechanism to stabilize the price of California avocados by reducing the volume of avocados available to the market place. However, withmarketplace. 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 of fruit used in preparing product and certain otherpulp 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.

     OurIn February 2003, however, our Board of Directors approved a plan whereby the operations of our processed products business would be relocated. The plan calls for the closing of our Santa Paula, California and Mexicali, Baja California Norte processing facilities and the relocation of these operations to a new facility in Mexico includesUruapan, Michoacan, Mexico. We believe that this restructuring will provide cost savings in the elimination of certain transportation costs, duplicative overhead structures, and savings in the overall cost of labor and services. We anticipate that the facility will be completed near the end of our first fiscal quarter 2004. The Santa Paula facility closed in February 2003. We plan to close the Mexicali facility during calendar year 2004, but no firm closing date has been determined.

     Special charges recorded through October 31, 2003 consist entirely of employee separation costs and write-downs of fixed assets. All employee separation costs were paid in cash and represent final payments to 26 production and 4 managerial employees formerly working at our Santa Paula, California processing facility. We expect to pay additional employee separation costs in connection with our planned future closure of our Mexicali, Baja California Norte production facility, which will be recognized when incurred. Those costs have not yet been quantified and are expected to be accrued for and paid during calendar year 2004. Costs related to the write-down of fixed assets represent a ripening, seed removal, andnon-cash charge to reduce the carrying value of production assets located at our Santa Paula, California processed facility to their fair value. As of October 31, 2003, we have not accrued for any charges relating to the write-down of production assets being held at our Mexicali, Baja California Norte production facility as it is anticipated that all such assets will be re-commissioned at our new facility in Uruapan, Michoacan or their carrying value is less than their fair value.

     Through January 2003, the primary function of our Mexicali processed operation was to produce pulp extraction operation.for our Santa Paula plant. Our processing facility in Santa Paula, California receiveswould then receive the pulp from Mexicali, addsadd ingredients, and packagespackage the product in plastic containers. The product iswould then be frozen for storage with shipment to warehouses and, ultimately, to our customers.

Subsequent to January 2003, however, our Mexicali processed operations became primarily focused on our individually quick frozen (IQF) avocado half product line and our high-pressure line.

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

     During fiscal 2002, we purchased and commissioned new ultra high pressure treatment equipment designed to manufacture processed avocado products that are not frozen. Through October 31, 2003, our high pressure line consisted of one ultra high pressure machine manufacturing guacamole in Mexicali. This machine was commissioned for operations in October 2002 and ran near capacity during fiscal 2003. Utilizing avocado pulp and chunks, this high pressure equipment allows us to deliver fresh guacamole to retail and food service customers. Sales of our high pressure product totaled approximately $3.2 million for fiscal year 2003.

     We continueare presently installing a second, much larger, high pressure machine in our new facility being built in Uruapan, Michoacan, Mexico. We anticipate commissioning this second machine for operations during our second fiscal quarter of 2004, but we do not believe this machine will operate near capacity until the end of fiscal 2004.

     Although the additions of these product offerings are fairly recent, we believe that these high pressure machines will position our company to evaluatedeliver the widest available array of processed avocado products to our existing cost structure in producing our processed products. In particular,customers. Consequently, we believe we are evaluating our production activitiescurrently the only single source company supplying the complete range of processed avocado products including, frozen guacamole, ultra high pressure treated guacamole, and reviewing opportunitiesfrozen avocado halves to reduce transportationfoodservice and overhead costs that are duplicative in supporting two operating facilities. We have not committed to, or developed, a time-line for the implementation of any actions, if any, that we may take in restructuring our production processes.retail customers.

     Our customers include both companies in the food service industry and the retail business. Sales are made principally through a commissioned nationwide broker network, which is supported by our regional sales managers. We believe that our marketing strength is distinguished by providing quality products, innovation, year-round product availability, strategically located warehouses, and market relationships. During 2002,2003, our largest 5 customers represented 50.2%approximately 54% of all processed sales, and theour largest 25 customers represented 75.8%approximately 76% of processed sales.

     The food service and retail industries have continued a trend of business consolidation resulting in larger customers, but a smaller number of customers for our processed products. To secure the ongoing business of some of our largest customers, we have entered into certain rebate programs and exclusivity agreements. Through October 31,During fiscal 2003 and 2002, we have made significant paymentspaid $0.4 million and $1.0 million, representing both exclusivity fees and prepaid rebates to a major foodservice distribution customer. We believe that the trend of requesting payments from producers to secure either exclusivity or preferred status as a provider of processed products will continue.

     We continue to review trends that affect our customers’ needs and their impact on the processed avocado business. In August 2001 we launched our individually quick frozen avocado half product line. This product line provides food service and retail customers with peeled avocado halves that are ripe and suitable for immediate consummation. We also recently entered into an equipment purchase agreement to acquire two ultra high pressure production machines. The first of the two machines was installed in our Mexicali facility and commissioned for operations in October 2002. This high pressure equipment will allow us to deliver fresh guacamole to retail and food service customers. Although the additions of these product offerings are fairly recent, we believe that the purchase of this equipment will position our company to deliver the widest available array of processed avocado products to our customers. Consequently, we are currently the only single source company supplying the complete range of processed avocado products including, frozen guacamole, ultra high pressure treated guacamole, and frozen avocado halves to foodservice and retail customers.

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International Avocados and Perishable Food Products

     Our international avocados and perishable food products segment leverages on our expertise in the handling and marketing of California avocados. We believe that the sales generated by this segment complement our offering of California avocados to our customers and stabilize the supply of avocados during seasons of low California production. We have experienced significant revenue growth in this segment in fiscal 2002. Sales generated by this segment include avocados procured outside of California and other perishable food products, such as papayas. We procure international avocados subject to marketing agreements entered into with growers and packers located in Mexico, Chile, and New Zealand. In recent years, our distribution of other perishable food products has generally been limited to papayas procured from a Hawaiian packing operation which is owned by the Chairman of our Board of Directors, Chief Executive Officer and President. Some of the marketing agreements governing the distribution of these products are based on consignment terms. Although consignment terms have the effect of limiting our risk, the agreements may require us to pay advances to growers for the fruit they have delivered. Historical experience demonstrates that providing such advances results in our acquiring full market risk for the product, as it is possible that our resale proceeds may be less than the amounts we paid to the grower. This is a result of the high level of volatility inherent in the avocado and perishable food markets, which are subject to significant pricing declines based on the availability of fruit in the market.

     In 1996, the United States Department of Agriculture (“USDA”) established a protocol whereby Mexican grown avocados are permitted to be imported, on a restricted basis, into the United States. Restrictions imposed on the marketing of the fruit, due to phytosanitary concerns, have limited the marketing of Mexican avocados to 31 states from the middle of October to the middle of April. In 1998, we invested in this 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. Recently, the Mexican growers and government have restricted the supply of avocados for export to the United States in order to obtain higher field prices. Our continued profitability is subject to our ability to secure a sufficient volume of avocados at reasonable prices to recover our investment in the Mexican packing operations. We have also enjoyed limited sales of Mexican avocados to Japan, Canada, and Europe. During 2002, we packed and distributed approximately 30.6% of the avocados exported from Mexico into the United States and 18.3% of the avocados exported from Mexico to countries other than the United States based on our internal estimates.

     We have made various advances to several Mexican growers to secure their avocado harvests (principally October to April). Our ability to recover these advances is largely dependent on the growers’ ability to deliver avocados to us and is subject to inherent risks of farming, such as weather and pests. We have advanced less than $1.0 million to Mexican growers, as of October 31, 2002, to secure the delivery of their avocado crops.

     In recent years, the volume of avocados exported by Chilean growers to the United States has continued to increase. Chilean growers have increased avocado plantings to capitalize on high returns available in the world-wide avocado markets. Additionally, with the Chilean harvesting season being complementary to the California season (August through January), Chilean avocados are able to command competitive retail pricing in the market. During 2002, we distributed 22.2% of the Chilean imports into the United States based on our internal estimates.

     New Zealand also exports avocados into the United States. The harvest of New Zealand avocados (August to December) overlaps with the Chilean and Mexican harvest periods. Consequently, the introduction of avocados grown in New Zealand has had the effect of increasing the volume of avocados in the marketplace and increasing pressure on the retail prices. During 2002, we distributed 18.4% of the New Zealand imports into the United States based on our internal estimates.

     We also distribute papayas packed by a company that is owned by our Chairman of the Board, Chief Executive Officer and President. In distributing papayas, we have encountered significant competition from Mexico growers. During 2002, we distributed approximately half of the papayas sold in the continental United States based on our internal estimates.

     During 1999, we discontinued distributing mangos in the United States as we were unable to achieve adequate returns.

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Sales and Other Financial Information by Business Segment and Product Category

     Sales and other financial information by business segment is provided in Note 1312 to theour consolidated financial statements whichthat 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, and Triggered Avocados.

Working Capital Requirements

     Generally, we make payments to our California avocado growers and other suppliers in advance of collecting our 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 experience larger levels of commercial bank borrowings during the California Hass avocado crop harvesting season.

     With respect to our processed products business, we require working capital to finance the production of our processed avocado products, 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.

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

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

Backlog

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

Research and Development

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

Compliance with Government Regulations

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

     The USDA regulates and reviews imported food products. In particular, the USDA regulates the distribution of Mexican avocados within 31 states in the U.S. by requiring avocado importers and handlers to execute compliance agreements. These agreements represent an acknowledgementacknowledgment by handlers of the distribution restrictions placed on Mexican avocados and are used as a tool to ensure compliance with existing regulations. From time-to-time,time to time, we have been approached by USDA representatives in their oversight of the compliance agreement process. We continue to consult with USDA representatives to ensure that our systems of internal control provide a high level of reliability in securing compliance agreements on behalf of our customers.

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     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, 2002,2003, we had approximately 589522 employees, of whom approximately 230162 were located in the United States and 359360 of whom were located in Mexico. None of Calavo’s United States employees are covered by a collective bargaining agreement. Approximately 120 of Calavo’s Mexican employees are represented by a union. No significant work stoppages have occurred since commencing operations in Mexico.

     The following is a summary of the number of “salaried” and “hourly” employees as of October 31, 2002.2003.

     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.

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 isare subject to competitive pressures, including the following:

	•		Our California avocado business is impacted by an increasing volume of foreign grown avocados being imported into the United States. Recently, there have been significant plantings of avocados in Mexico, Chile, New Zealand, the Dominican Republic, and other parts of the world, which have had, and will continue to have, the effect of increasing the volume of foreign grown avocados entering the United States market. Generally, an increase in foreign grown avocados in the United States market, up to and including the additional fruit possible related to the proposed lifting of the import limitations on Hass avocados from Mexico, has the effect of lowering prices for California grown avocados and adversely impacting our results from operations.
	•		Our California avocado business is subject to competition from other California avocado handlers. If we are unable to consistently pay California growers a competitive price for their avocados, these growers may choose to have their avocados marketed by alternate handlers.

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	•		Our international avocados and perishable food products business is impacted by competitors operating in Mexico. Generally, handlers of Mexican grown avocados operate facilities that are substantially smaller than our facility in Uruapan, Mexico. If we are unable to pack and market a sufficient volume of Mexican grown avocados, smaller handlers will have a lower per unit cost and be able to offer Mexican avocados at a more competitive price to our customers.
	•		Our international avocados and perishable food products business is also subject to competition from other California avocado handlers that market Chilean grown avocados. If we are unable to consistently pay Chilean packers a competitive price for their avocados, these packers may choose to have their avocados marketed by alternate handlers.
	•		Our processed products business is impacted by competitors operating exclusively in Mexico and in other areas of the world where lower product costs can be achieved. If we are unable to produce a sufficient volume of processed products at our existing facilities or successfully restructure our processed operations to take advantage of low product costs available in Mexico or elsewhere, our competitors may be able to offer processed products at a more competitive price to our customers.
	•		Our frozen guacamole products are also subject to increasing competition from ultra high pressure treated guacamole being marketed by a Mexican competitor. If we are unable to introduce a similar offering of high pressure treated guacamole product, we may not be able to maintain our existing market share of guacamole products.

We are subject to the risks of doing business internationally.

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

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

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

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

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

We are subject to rapidly changing United States Department of Agriculture (“USDA”)USDA and Food and Drug Administration (“FDA”)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.

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     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 profitability.

     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 results.

     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,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.

We have invested significant resources in optimally equipping our Uruapan, Mexico packinghouse facility. A recently filed lawsuit against the USDA may further restrict access or eliminate entirely the availability of Mexican grown avocados in the U.S. marketplace thereby impairing the value of our investment in our Uruapan packinghouse.

     During 2001, the California Avocado Commission and various other plaintiffs filed a lawsuit against the USDA alleging that the scientific basis used to expand the Mexican avocado import program was flawed. Further restrictions placed on importing Mexican grown avocados into the USU.S. marketplace originating from this, or any other lawsuit, would have the effect of significantly impacting the volume of avocados packed at our facility. Absent optimal packing volumes, we may be unable to recover our fixed costs and be forced to close our facility. Closure of our Uruapan packinghouse may result in significant equipment impairment charges and additional charges associated with exiting these operations.

Item 2. Properties

     In addition to our corporate headquarters building, we own two packinghouses and one processing facility in California and lease one packinghouse and one processing facility in Mexico. Additionally, we are currently constructing a processing facility in Uruapan, Michoacan, Mexico.

     Our two California packinghouses handle all avocados delivered to us by California growers. The Temecula, California facility was built in 1985 and has been improved in capacity and efficiency since 1985.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. TheIn conjunction with our restructuring plan, which was approved in February 2003, this facility, which includes a storage freezer, has essentially been closed. Since February 2003, a portion of this building has continued to be used as a ripening and is sufficientstorage facility for our fresh avocado operation. We are currently reviewing options related to processthis facility, which includes the possible integration of corporate offices, as well as the assimilation of the operations of our annual budgeted production needs.

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Santa Paula packinghouse.

     Our Mexicali, Mexico processing plant was built in 1995 to our specifications. Our lease commitment for this facility extends through 2004. The annual capacityIn conjunction with our restructuring plan, we plan on closing this facility during calendar 2004. We have not accrued for any charges relating to the write-down of production assets being held at our Mexicali, Baja California Norte production facility, as it is sufficient to processanticipated that all such assets will be re-commissioned at our budgeted annual production needs.new facility in Uruapan, Michoacan or their carrying value is less than their fair value.

     Our Uruapan, Mexico packinghouse, owned by the same landlord as our Mexicali facility, was also built to our specifications. We are committed to leasing the facility through 2008. This packinghouse enables us to handle in excess of 50 million pounds per year of Mexican grown avocados.

     Absent dramatic shifts     We are currently constructing a processing facility in food processing and packaging technologies, weUruapan, Michoacan, Mexico. The completion of this processed facility is projected to be near the end of our first fiscal quarter 2004. We believe that our facilities arethe annual capacity of this facility will be sufficient to meet projected needs for the foreseeable future without the need for significant additional capital expenditures. We continue to explore alternatives toprocess our administrative andbudgeted annual production facilities and, from time to time, evaluate opportunities to improve our facility configuration and the strategic location of our offices and buildings.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, 2002.2003.

Executive Officers

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

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

     Wolfgang P. HombrecherArthur J. Brunohas served as our Vice President and Corporate Secretary since December 2001.October 2003. From 19891988 to 2001,2003, Mr. HombrecherBruno served inas the assurancepresident and advisory department with the firmco-founder of Deloitte & Touche LLP and most recently in the capacity of senior manager.Maui Fresh International, Inc. Mr. HombrecherBruno is a Certified Public Accountant.

     Robert J. Wedinhas served as our Vice President Sales & Fresh Marketing 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 this organization’s executive committee.

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     Alan C. Ahmerhas 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 Product Sales and Production.

     Avi Cranehas served as our Vice President since 1999. From 1993 to 1999, Mr. Crane was employed as a General Manager by a competitor, Chiquita Brands, Inc., and from 1985 to 1993, he was employed as a Vice President by the California Avocado Commission.

Gerard J. Wattshas served as our Vice President, North American Operations since 1992. Mr. Watts joined us in 1981 at our Processed Products Division. He was promoted to Packinghouse Manager in 1984 and assumed responsibility for the design and construction of all phases of our Temecula, California packinghouse. In 1990, he was promoted to Director of Fresh Operations managing our field and packing operations. In 1998, Mr Watts assumed responsibility for the design and construction of our state of the art packing facility in Uruapan, Mexico and implemented processes for supporting the procuring, packing and shipping of Mexican grown avocados to any global location. Mr. Watts has also served on the California Avocado Commission Industry Affairs Committee and as Member and Chairman of the California Avocado Inspection Board.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

     OnIn March 18, 2002, our common stock began trading on the OTC Bulletin Board under the symbol “CVGW.” OnIn July 22, 2002, our common stock began trading on the Nasdaq National Market under the symbol “CVGW.”

     Prior to March 18, 2002, a public trading market did not exist for our common stock. The stock was not listed on a securities exchange or on Nasdaq, and shares were transferred only if federal and state securities registration exemptions were satisfied. From time to time, we distributed to our shareholders lists of shareholders who had indicated an interest in purchasing or selling shares of stock, and the purchasing and selling shareholders then privately negotiated the terms of such transactions.

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

     As of October 31, 2002,2003, there were 1,6151,500 stockholders of record of our common stock.

     In November 2003, we acquired all the outstanding common stock of Maui Fresh International, Inc. in exchange for 576,924 shares of our common stock valued at $4.05 million that we issued to the three shareholders of Maui Fresh International, Inc. See Note 16 to our consolidated financial statements, which are included in this Annual Report, for more information about this acquisition. Our issuance of these 576,924 shares was exempt from registration under the Securities Act of 1933 pursuant to Section 4(2) of the Securities Act and Regulation D thereunder as a transaction by an issuer not involving a public offering of securities.

Dividend Policy

     On October 22, 2002, ourOur dividend policy is to provide for an annual dividend payment, as determined by the Board of Directors approved the establishment of a new dividend policy. The new policy provides for annual dividend payments of 20 cents per share payable duringDirectors. We anticipate that dividends would be paid in the first quarter of eachour fiscal year. Pursuant to this new policy, the Board of Directors authorized an initial dividend payment of 20 cents per share on January 3, 2003 to our shareholders of record on November 15, 2002.

     During the year ended October 31, 2001, we paid dividends of approximately $4,973,000, or $0.50 per share, to our shareholders. For additional information pertaining to the Cooperative’s historical cash dividend payments, see “Selected Consolidated Financial Data” elsewhere in this Annual Report.

     On February 15, 2002, we paid a 5% stock dividend to shareholders of record on February 1, 2002.

13     On January 2, 2003, we paid a $0.20 per share dividend in the aggregate amount of $2,567,000 to shareholders of record on November 15, 2002.

     On January 5, 2004, we paid a $0.25 per share dividend in the aggregate amount of $3,232,000 to shareholders of record on November 17, 2003.

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, 20022003 are derived from the audited consolidated financial statements of Calavo Growers, Inc. and our predecessor, Calavo Growers of California. The selected financial data as of and for the years ended October 31, 2000, 1999, and 1998 have been restated to correct an error in the computation of income taxes relating to the member business of Calavo Growers of California. See Note 14 to our consolidated financial statements that are included elsewhere in this Annual Report for additional information about this restatement.

     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.

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(2)		In July 2003, our Board of Directors approved the retirement of our Industrial Development Revenue Bond. The bonds were initially floated to provide the financing to construct our Temecula, California packinghouse. We repaid $2.8 million in principal under the indenture in September 2003.
(3)		Cash flows used in operations for fiscal 1999 include the effect of higher accounts receivable balances as of October 31, 1999 when compared to October 31, 1998. The increase in accounts receivable during the year is a result principally of higher California and imported avocado sales. Cash flows from financing activities for fiscal 1999 relate principally to amounts borrowed under short-term borrowing agreements to finance our increased operating cash flow needs and fund our fiscal 1998 investing activities.
(4)		Cash flows used in investing activities for fiscal 1998 reflect amounts expended2003 include the effect of constructing a processing facility in purchasing our corporate headquarters building and capital expenditures madeUruapan, Michoacan, Mexico. The completion of this processed facility is projected to complete constructionbe near the end of our Mexican packinghouse.
(5)		EBIT represents income before income taxes plus interest expense of approximately $0.3 million, $0.4 million, $0.8 million, $0.8 million and $0.4 million, respectively, for each of the five years in the period ended October 31, 2002.
(6)		EBITDA is a measure of liquidity used by Calavo and members of the financial community to assess the cash flow generating capabilities of our on-going operations and our ability to service debt.first fiscal quarter 2004.

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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” beginning on page 89 and elsewhere in this Annual Report.

Overview

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

     Our California avocado business grades, sizes, packs and packscools avocados grown in California for distribution and marketingdelivery to our customers. We presently operate two packinghouses in Southern California thatCalifornia. These packinghouses handled approximately 37.2%34% of the California Hass avocado crop during the 20022003 fiscal year, based on statisticsdata 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 majoritysignificant portion of our costs are fixed. Our strategy calls for continued efforts in aggressively recruiting new growers, retaining existing growers and procuring a larger percentage of the California avocado crop to improve our results from operations.

     Our international and perishable food products business procures avocados grown in Mexico, Chile, New Zealand, and the Dominican Republic, as well as papayas grown in Hawaii. We operate a packinghouse in Mexico that handled approximately 31% of the Mexican avocado crop bound for the United States market during the 2002-2003 Mexican harvest season, based on our estimates. Additionally, during the 2002-2003 Chilean avocado harvest season, we handled approximately 15% of the Chilean avocado crop, based on our estimates. Our strategy is to procure and sell the internationally grown avocados to complement our distribution efforts in support 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 papayas grown in Hawaii 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. We operateDuring fiscal 2003, we operated a processing plant in Mexico and a second facility in Southern California. The second facility, however, was closed in February 2003 in conjunction with the relocation of our processed business to our new, under construction, facility in Uruapan, Michoacan, Mexico. We anticipate this facility will be completed near the end of our first fiscal quarter in 2004. Our customers include both food service industry and retail businesses. Our strategy calls for the development of new guacamole recipes and other processed avocado products that address the diverse taste of today’s consumers. We also seek to expand our relationships with major food service companies and develop alliances that will allow our products to reach a larger percentage of the marketplace.

     Our international and perishable food products business procures avocados grown in Mexico, Chile, and New Zealand, as well as papayas grown in Hawaii. We operate a packinghouse in Mexico that handled approximately 30.6% of the Mexican avocado crop bound for the United States market during the 2001-2002 Mexican harvest season based on internal estimates. Additionally, during the 2001-2002 Chilean avocado harvest season, we handled approximately 22.2% of the Chilean avocado crop based on internal estimates. Our strategy is to procure and sell the internationally grown avocados to complement our distribution efforts in support 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 in the long term solidify the demand for avocados among consumers in the United States and elsewhere in the world. Our efforts in distributing papayas grown in Hawaii 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 California avocado and international and perishable food product businesses are highly cyclicalseasonal and are characterized by rapid crop volume and price changes. Furthermore, the operating results of all of our businesses, including our processed product 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 and our customers’ 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. However, weWe believe, however, that we are currently positioned to address these risks and deliver favorable operating results for the foreseeable future.

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     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). We have realigned our businesses to combine within our California avocado segment the results of operations of both the California avocados grown previously by members and those that were procured from non-members. We believe that this presentation provides an enhanced view of the results of our California operations and a better framework to evaluate the results of our various operations.

Recent Developments

Dividend Payment

     In January 2002, members of the Board of Directors elected to exercise options to purchase 1,005,000 shares of common stock pursuant to our directors’ stock option plan. Some of our directors chose to pay the exercise price of $5.00 per share by executing full-recourse promissory notes and/or delivering cash consideration. The exercise of these stock options and the eventual repayment of these notes will have the effect of increasing our total assets and shareholders’ equity by approximately $5.0 million.

     On February 15, 2002,2004, we paid a 5% stock dividend to all shareholders of record as of February 1, 2002. Basic and diluted earnings$0.25 per share for all periods presented have been restated to reflectdividend in the stock dividend.

     On March 18, 2002, our shareholders approved an employee stock plan whereby employees were granted the opportunity to purchase our common stock. On March 28, 2002, we awarded selected employees the opportunity to purchase approximately 473,000 sharesaggregate amount of common stock at $7.00 per share, the closing price of our common stock on the date prior to the grant. The plan also provides for us to advance some, or all, of the purchase price of the purchased stock to the employee upon the execution of a full-recourse promissory note at prevailing interest rates. Through the expiration date of the awards, 84 employees had elected to purchase approximately 279,000 shares of our common stock.

     On July 19, 2002, the Nasdaq National Market approved our application for listing our common stock. Our shares began trading on the Nasdaq National Market on July 22, 2002 under the symbol CVGW.

     On August 30, 2002, we completed a rights offering to sell 1,000,000 shares of common stock at a price of $5.00 per share$3,232,000 to shareholders of record on July 29, 2002. Proceeds fromin November 2003.

Stock options

     During the rights offering to shareholders generated $5,000,000 in cash, less offering costs of approximately $290,000.year ended October 31, 2003, 95,000 stock options were exercised for proceeds totaling $475,000.

     On October 22, 2002,In December 2003, our Board of Directors approved the establishmentissuance of options to acquire a new dividend policy. The new policy provides for annual dividend paymentstotal of 20 cents50,000 shares of our common stock to two members of our Board of Directors. Each option to acquire 25,000 shares vests in substantially equal installments over a 3-year period, has an exercise price of $7.00 per share payable duringand has a term of 5 years from the first quartergrant date. The market price of each fiscal year. Pursuantour common stock at the grant date was $10.01. In accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” we will record compensation expense of approximately $151,000 over the vesting period of three years from the grant date.

Purchase commitment

     In May 2003, we entered into a commitment to purchase approximately 1.3 million pounds of processed avocado products from a supplier for a cost of approximately $1.5 million over a 12-month period. Through December 2003, we have received substantially all products subject to this new policy,commitment.

Acquisition

     In order to diversify our product lines and increase synergies within the marketplace, we acquired all the outstanding common shares of Maui Fresh International, Inc. (“Maui”) for 576,924 shares of our common stock valued at $4.05 million in November 2003. Maui, which generated approximately $20 million in revenues during its fiscal year ended December 31, 2002, is a specialty produce company servicing a wide array of retail, food service, and terminal market wholesale customers with over 25 different specialty commodities. The value of our common stock issued in conjunction with the acquisition was based on the average quoted market price of our common stock for 3 days before and after the announcement date.

     As security for certain potential contingencies, such as unrecorded liabilities, we are entitled to hold approximately 58,000 shares issued in conjunction with such acquisition for one full year from the acquisition date. In the event that these contingencies resolve as we expect them to, we will be obligated to return these shares.

     The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Such estimates are preliminary and are subject to change upon receipt of valuation information:

     Goodwill is not subject to amortization and is generally not expected to be deductible for tax purposes.

Processed product segment restructuring

     In February 2003, our Board of Directors authorized an initial dividend paymentapproved a plan whereby the operations of 20 cents per share on January 3,our processed products business will be relocated. The plan calls for the closing of our Santa Paula, California and Mexicali, Baja California Norte processing facilities and the relocation of these operations to a new facility in Uruapan, Michoacan, Mexico. We believe that this restructuring will provide cost savings in the elimination of certain transportation costs, duplicative overhead structures, and savings in the overall cost of labor and services. We anticipate that the facility will be completed near the end of our first fiscal quarter 2004. The Santa Paula facility closed in February 2003. We plan to close the Mexicali facility during calendar year 2004, but no firm closing date has yet been determined.

     Through October 31, 2003, we have incurred costs related to this restructuring approximating $1,304,000. Our income statement for the year ended October 31, 2003 includes $890,000 as cost of sales, $106,000 as special charges, and $308,000 as selling, general and administrative expenses. These costs are comprised of the following components as of and for the year ended October 31, 2003:

     Special charges recorded through October 31, 2003 consist entirely of employee separation costs and write-downs of fixed assets. All employee separation costs were paid in cash and represent final payments to 26 production and 4 managerial employees formerly working at our shareholdersSanta Paula, California processing facility. We expect to pay additional employee separation costs in connection with our planned future closure of record on November 15, 2002.our Mexicali, Baja California Norte production facility, which will be recognized when incurred, in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Those costs have not yet been quantified and are expected to be accrued for and paid during fiscal year 2004. Costs related to the write-down of fixed assets represent a non-cash charge to reduce the carrying value of production assets located at our Santa Paula, California processed facility to their fair value. These write-downs were primarily the result of fixed assets no longer being used in the production process. As of October 31, 2003, we have not accrued for any charges relating to the write-down of production assets being held at our Mexicali, Baja California Norte production facility as it is anticipated that all such assets will be re-commissioned at our new facility in Uruapan, Michoacan or their carrying value is less than their net realizable value.

Critical Accounting Policies and 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 on-goingongoing 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, trade promotions,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.

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

     Grower Advances.Advances to Suppliers.We advance funds to third-party growers primarily in California, Chile and Mexico for various farming needs. These advances are generally secured with a crop lien or other collateral owned by the grower. We continuously evaluate the ability of these growers to repay advances and the fair value of the collateral in order to evaluate the possible need to record an allowance.

     Trade Promotions.Promotional AllowancesTrade promotions are an important component of the sales and marketing of our products, and are critical to the support of our business. Trade promotion costs include amounts paid to encourage retailers and food-service companies to purchase our products. Accruals.We provide for trade promotions are recorded primarilypromotional allowances at the time of sale, based on our historical experience. Our estimates are generally based on evaluating the average length of time between the product toshipment date and the date on which we pay the customer basedthe promotional allowance. The product of this lag factor and our historical promotional allowance payment rate is the basis for the promotional allowance included in accrued expenses on expected levels of performance. Settlement ofour balance sheet. Actual amounts may differ from these estimates and such differences are recognized as an adjustment to net sales in the liabilities typically occurs in subsequent periods primarily through an authorized process for deductions taken by a customer from amounts otherwise due to us. As a result, the ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions takenperiod they are identified.

     Cash rebates are generally earned by our customers upon achievement of volume purchases or by corporate customers for amounts they consider due to them. Final determinationpurchases made by their affiliated subsidiaries. Cash rebates, as well as all other sales incentives that result in a reduction in, or refund of, the permissibleselling price at the time of sale, have been classified as a reduction of sales.

Net Sales. We recognize sales once they are realizable and earned. Sales of products and related costs of products sold are recognized when persuasive evidence of an arrangement exists, shipment has been made, title passes, the price is fixed or determinable and collectibility is reasonably assured. Perishable product sales are recorded when the product is shipped, title passes, and the sales price is known. Sales from processed products are recorded when the product is shipped and title and risk passes. Service revenue, including freight, ripening, storage, bagging and palletization charges, is recorded when services are performed and sales of the related products are delivered.

Allowance for customer deductions may take extended periods. We provide an allowance for customer deductions and receivable balances remaining, after partial invoice payments, based on historical experience and the aging of time.the related accounts receivable.

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:

Net Sales

     Despite the adverse consequences the general economic downturn has and continues to have on consumer spending in the United States, weWe believe that the fundamentals for our products continue to be favorable. Government census studies continue to indicate a shift in the demographics of the U.S. population in which larger portions of the population descend from a Hispanic origin. Avocados are considered a staple item purchased by Hispanic consumers and their acceptance as part of American cuisine continues to spur demand for our products. We anticipate avocado products will further penetrate the United States market placemarketplace 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.

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     We recognize sales of perishable products when the product is shipped, title and risk passes, and the market price is known. Service revenue, including freight, ripening, and palletization charges, are recorded when services are performed and/or the product is shipped. We generally recognize sales from processed product sales directly to our customers upon shipment and transfer of title and risk. We provide for sales returns and other allowances at the time of shipment, based on our experience. The following table summarizes our net sales by business segment:

     Net sales for the year ended October 31, 20022003, when compared to 20012002, grew by approximately $25.0$4.1 million, or 11.5%1.7%, principally as a result of growth experienced by our California avocados and International avocados and perishable food products businesses and our processed products segments, partially offset by a decrease in our processed products business.California avocados segment. In particular, growth in our net sales reflects an increasing percentage of our business being generated by our International avocados and perishable food product business.segments.

     Net sales generated by our International avocados and perishable food products business depends principally on the availability of Chilean and Mexican grown avocados in the U.S. markets. Currently, Mexican grown avocados are significant during our first two fiscal quarters. Chilean grown avocados are significant during our 1st and 4th fiscal quarters. We are presently reviewing the impact, if any, of the pest risk assessment issued by the USDA during fiscal 2003, which, if adopted as drafted, would lift current import limitations on Hass avocados from Mexico. The marketing of the Mexican avocados is presently limited to 31 states, from the middle of October to the middle of April. This directive is intended to analyze the risks associated with expanding the importation of Mexican avocados to all U.S. states for the entire year. We believe that this assessment will be adopted, in a form substantially similar to its draft form, during our fiscal 2004. We are unable to project the impact, if any, the adoption of this proposed assessment will have on our financial condition and results of operations.

     Notwithstanding the aforementioned pest risk assessment, we anticipate the continuation of growth in thisour International avocados and perishable food product segment for fiscal 2003 with flat or2004. Additionally, we anticipate slightly increasing sales in our processed products business. Webusiness and also anticipate continued growth in net sales generated from value-added bagging and ripening services, as well as the need to promote our products with additional sales incentives. We also anticipate that sales generated from our California avocados and International avocados and perishable food products segments will continue to represent the majority of total net sales and the percentage of total net sales generated from these segments may increase in the future.

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

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     Net sales by segment includeincludes intercompany salesactivity consisting of value-added services billed by our Calavo de Mexico subsidiary to its parent for receiving and packaging avocados from our Uruapan packinghouse to our Mexicali processing plant,for sale outside of Mexico, as well as value-added services billed by our Mexicali processing planCalavo Foods de Mexico subsidiary to our Santa Paula processing plant inits parent for processing fresh avocados in avocado pulp.pulp, which was then made into finished product at our Santa Paula processing facility, which is now closed. All intercompany sales are eliminated in our consolidated results of operations.

California Avocados

     Net sales delivered by the business increaseddecreased by approximately $15.9,$15.4 million, or 10.7%9.4%, from fiscal 20012002 to 2002.2003. The increasedecrease in fiscal 20022003 sales primarily reflects a decrease in avocados delivered by our growers of 23%, or 34.4 million pounds, partially offset by a significant improvement in the average selling prices of avocados when compared to fiscal 2001, partially offset by a decrease in avocados delivered by our growers of 5.8% or 9.2 million pounds.2002. The decrease in delivered pounds is consistent with the expected decrease in the overall harvest of the California avocado crop for the 2001/2002 season.2002/2003 season, as well as a shift in growing areas where we do not command as significant a market share. Despite this decrease in volume, we have continued to build onmaintain our leadership role in packing and marketing California grown avocados and have increased ouravocados. Our market share of first grade Hass variety avocados bywas approximately 1.5% to 37.2%34% and 37% during fiscal 2003 and 2002. For the 2002/2003 season, we attribute such decrease in fiscal 2002 when compared to a 35.7% market share achieved in fiscal 2001.primarily to the aforementioned shift into growing areas where we do not command as significant a market share among growers.

     Average selling prices, on a per carton basis, for first grade Hass variety avocados for fiscal 20022003 were $3.88$4.59 higher when compared to fiscal 2001.2002. We attribute some of the increase in these average selling prices to increasing demand for California grown avocados in the U.S. marketplace and a slightly reduced volume of avocados. We believe that our investments in focused marketing activities, combined with promotional programs established by the California Avocado Commission, have generally had a positive effect on average sales prices. Our strategy is to continue to develop marketing opportunities that favorably position avocados packed by Calavo with our customers by emphasizing existing value-added services, such as fruit bagging and ripening. We believe that these and other value added strategies are critical elements in sustaining competitive average selling prices achieved during fiscal 2002.

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prices.

     Net sales delivered by the business decreasedincreased by approximately $0.9$15.9 million, or 0.6%10.7%, from fiscal 20002001 to 2001.2002. The modest decreaseincrease in fiscal 2002 sales reflects lower per pounda significant improvement in the average selling prices offset by an increase in volume. During fiscal 2001, our growers delivered 39.2 million additional pounds of avocados when compared to fiscal 2000, representing2001, partially offset by a volume increasedecrease in avocados delivered by our growers of 32.9%. Although5.8%, or 9.2 million pounds. The decrease in delivered pounds was consistent with the qualityexpected decrease in the overall harvest of the avocados sold remained comparableCalifornia avocado crop for the 2001/2002 season. Despite this decrease in volume, we continued to those delivered during fiscal 2000, the average size of the avocados delivered was one size smaller. The significant increasebuild on our leadership role in the volume ofpacking and marketing California grown avocados handled byand maintained a strong market share of first grade Hass variety avocados during fiscal 2002. Our market share of first grade Hass variety avocados was approximately 37% and 36% during fiscal 2002 and 2001.

     Average selling prices, on a per carton basis, for first grade Hass variety avocados for fiscal 2002 were $3.88 higher when compared to fiscal 2001. We attribute some of the industry, coupled with increasing deliveries of Mexican and Chilean grown avocados, resultedincrease in pricing pressures that causedthese average selling prices to fall proportionately with the volume increase. Furthermore, effective November 1, 2001, the United States Department of Agriculture approved the distribution of Mexicanincreasing demand for California grown avocados into 12 new states which, in the short-term resulted in continued pressure on average selling prices.U.S. marketplace and a slightly reduced volume of avocados.

     In October 2002, the USDA announced the creation of a NationalHass Avocado Board to promote the sale of Hass variety avocados in the U.S. marketplace. The California Avocado Commission, which receives its funding from the sale of California grown avocados,avocado growers, has historically shouldered the promotional and advertising costs supporting avocado sales. The new NationalHass Avocado Board now 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. We believe that the incremental funding of promotional and advertising programs in the U.S. will, in the long-term,long term, positively impact average selling prices and will favorably impact our California avocado and international avocado businesses. During fiscal 2003, we remitted approximately $2.4 million to the Hass Avocado business.Board.

International and Perishable Food Products

     For fiscal 2003, net sales include approximately $6.3 million of value-added services billed by our Mexican subsidiaries to the parent company, which are eliminated from our consolidated financial results. For fiscal 2003, when compared to fiscal 2002, net sales to third-party customers increased by approximately $15.2 million, or 28.4%, from $53.8 million to $69.0 million.

     The increased sales to third parties by our International and perishable foods products business were primarily driven by a greater volume of Chilean and Mexican grown avocados penetrating into the U.S., Japan and Europe marketplaces. The volume of fruit handled increased by 4.1 million pounds of Chilean grown avocados, or 16.3%, and 9.3 million pounds of Mexican grown avocados, or 30.3%, for fiscal 2003 when compared to fiscal 2002. Pricing during fiscal 2003 was fairly stable as well, when compared to fiscal 2002.

     During fiscal 2003, we sourced a significantly greater volume of Mexican grown avocados from our Uruapan, Mexico packinghouse. During fiscal 2003, the volume of fruit related to shipments to the U.S. marketplace increased by approximately 2.5 million pounds, or 13.8%, as compared to fiscal 2002. In addition, net sales resulting from the sale of Mexican grown avocados were also favorably impacted by increased demand from Japanese and European customers. During fiscal 2003, the volume of fruit related to shipments to Japan and Europe increased by approximately 6.7 million pounds, or 76.8%, as compared to fiscal 2002. We believe that sales of Mexican grown avocados will continue to show a growing trend. We intend to leverage our position as the largest packer of Mexican grown avocados for export markets to improve the overall performance of this business.

     For fiscal 2002 and 2001, net sales include approximately $5.3 million and $3.8 million of intercompany sales betweenvalue-added services billed by our Uruapan packinghouse and our Mexicali processing plant,Mexican subsidiaries to the parent company, which are eliminated infrom our consolidated financial results. For fiscal 2002, when compared to fiscal 2001, net sales to third-partythird party customers increased by approximately $10.6 million, or 24.5%, from $43.2 million to $53.8 million.

The increased sales to third-parties by our International and Perishable Foods Products business arethird parties were primarily driven by a greater volume of Chilean and Mexican grown avocados in the U.S. marketplace. The volume of fruit handled increased by 2.4 million pounds of Chilean grown avocados, or 10.2%, and 22.6 million pounds of Mexican grown avocados, or 113.6%, for fiscal 2002 when compared to fiscal 2001.

 Our California based competitors and we have historically handled marketing of Chilean grown avocados in the U.S. marketplace. During 2002, many of the Chilean packers realigned the distribution of their avocados amongst California based avocado handlers. The effect of this realignment has resulted in uncertainties in the marketplace despite an overall increase in the Chilean avocado crop. We believe that this uncertainty has resulted in adverse average selling prices for Chilean grown avocados. Furthermore, the recent labor disputes, which have affected the U.S. west-coast port operations in October of 2002, have limited the volume of Chilean avocado sales during this time frame. We believe that in the long-run the realignment of receivers of Chilean avocados and the labor disputes affecting west-coast port operations will not adversely impact our net sales of Chilean grown avocados. However, there can be no assurances that the realignment of receivers of Chilean avocados or the labor disputes affecting west-coast port operations will not detrimentally affect our operations.

     During fiscal 2002, we sourced a significantly greater volume of Mexican grown avocados from our Uruapan, Mexico packinghouse. Net sales during 2002 derived from shipments to the U.S. marketplace increased by approximately $7.1 million, or 103.4%, as compared to fiscal 2001. In addition, net sales resulting from the sale of Mexican grown avocados were also favorably impacted by increased demand from Japanese customers. During fiscal 2002, shipments to Japan increased by approximately $0.4 million, or 9.8%, when compared to fiscal 2001. We believe that sales from Mexican grown avocados will continue a growing trend. We intend to leverage our position as the largest packer of Mexican grown avocados for export markets to improve the overall performance of this business.

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     For fiscal 2001 and 2000, net sales include approximately $3.8 million and $4.0 million of intercompany sales between our Uruapan packinghouse and our Mexicali processing plant, which are eliminated in our consolidated financial results. For fiscal 2001, when compared to fiscal 2000, net sales to third-party customers decreased by approximately $0.5 million, or 1.2%, from $43.7 million to $43.2 million. Although net sales remained essentially flat, the volume of avocados sold increased by 2.6 million pounds, or 6.2%. In particular, the volume of Chilean grown avocados imported into the United States increased by 5.9 million pounds offset by a slightly lower volume of pounds imported from Mexico and New Zealand. The increased volume of avocados arriving from Chile caused pricing pressures that resulted in decreases in average selling prices.

Processed Products

     For fiscal 2003, net sales include approximately $4.3 million of value-added services billed by our Mexican subsidiaries to the parent company, which are eliminated from our consolidated financial results. Net sales to third-party customers increased by approximately $4.2 million, or 17.9%, from $23.8 million for fiscal 2002 to $28.0 million for fiscal 2003. The increase in fiscal 2003 net sales to third-party customers is primarily attributable to an increase in 0.5 million pounds of product sold, or 3.2%, an increase in the sales price per product pound sold of $0.18, and a decrease in sales incentives and promotional activities paid of $0.6 million or 8.8%. During fiscal 2003, we experienced an increase in demand for our frozen processed products as one of our competitors exited from the business. As a result of the increase in demand for our product, we decreased our sales incentives and promotional activities paid.

     During fiscal 2002, we purchased and commissioned new ultra high pressure treatment equipment designed to manufacture processed avocado products that are not frozen. Through October 31, 2003, our high pressure line consisted of one ultra high pressure machine manufacturing guacamole in Mexicali. This machine was commissioned for operations in October 2002 and ran near capacity during fiscal 2003. Utilizing avocado pulp and chunks, this high pressure equipment allows us to deliver fresh guacamole to retail and food service customers. Sales of our high pressure product totaled approximately $3.2 million for fiscal year 2003. We did not have significant sales of our high pressure product during fiscal 2002.

     We are presently installing a second, much larger, high pressure machine in our new facility being built in Uruapan, Michoacan, Mexico. We anticipate commissioning this second machine for operations during our second fiscal quarter of 2004, but we do not believe this machine will operate near capacity until near the end of fiscal 2004. We believe that the introduction of these fresh guacamole products will, in the long-term, successfully address a growing market segment.

     For fiscal 2002 and 2001, net sales include approximately $6.2 million and $3.8 million of intercompany sales betweenvalue-added services billed by our Mexicali and Santa Paula processing plants,Mexican subsidiaries to the parent company, which are eliminated infrom our consolidated financial results. Net sales to third-party customers decreased by approximately $2.5 million, or 9.5%, from $26.3 million for fiscal 2002 to $23.8 million for fiscal 2001. The decrease in fiscal 2002 net sales to third-party customers is attributable to a decrease in 0.5 million pounds of product sold, or 3.7%, and an increase in sales incentives and promotional activities paid of $1.2 million or 23.0%.      We continue to experience decreases in net sales to retail customers with a larger percentage of our net sale originating from our food service customers. We believe that the decrease in net sales to retail customers is attributable to the introduction by our competitors of new products that have not been frozen.

     Our strategy to reverse the decrease in net sales generated by our processed business includes the introduction of new products. During fiscal 2002, we purchased and commissioned new ultra high pressure treatment equipment designed to manufacture processed avocado products that are not frozen. In the fourth quarter of fiscal 2002, we successfully produced samples of this new product group and recorded our first sale during the first fiscal quarter of 2003. We believe that the introduction of these fresh guacamole products will, in the long-term, successfully address a growing market segment and reverse the recent decline in our sales. However, there can be no assurances that we will be successful in continuing to develop competitive products and penetrating a marketplace that is currently dominated by an established competitor.

     For fiscal 2001 and 2000, net sales include approximately $3.8 million and $4.1 million of intercompany sales between our Mexicali and Santa Paula processing plants, which are eliminated in our consolidated financial results. The decrease in net sales reflects a decrease in the volume of processed avocado product sold of 0.2 million pounds, or 1.2%, offset by a decrease in promotional costs of $0.5 million or 8.1%. Increases in net sales to retail and club stores only partially offset a decrease in net sales to our food service customers.

Gross Margins

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

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     Gross margins and gross profit percentages for our California avocado business are largely dependent on production yields achieved at our packinghouses, current market prices of avocados, and the volume of avocados packed. The decrease in our gross margin percentage during fiscal 2003 is primarily related to a higher average return per pound paid to our growers. Our growers received an average return of $1.03 per pound, as compared to $0.86 per pound in fiscal 2002. The volume of avocados delivered by our growers decreased, however, by approximately 34.4 million pounds. During fiscal 2002, our growers received an average return of $0.86 per pound, as compared to $0.73$0.74 per pound in fiscal 2001, whereas the volume of avocados delivered by our growers decreased by approximately 9.2 million pounds. During fiscal 2001, our growers received an average return of $0.73 per pound as compared to $1.06 per pound2003, freight and handling costs decreased by approximately $0.7 million, from $4.2 million in fiscal 2000, whereas the volume of avocados sold increased by approximately 39.22002 to $3.5 million pounds.during fiscal 2003. During fiscal 2002, freight and handling costs decreased by approximately $0.2 million, from $3.0 million in fiscal 2001 to $2.8 million during fiscal 2002. Freight and handling costs increased by approximately $1.2 million, from $1.8 million for fiscal 2000 to $3.0 million for fiscal 2001 primarily as a result of a higher volume of avocado deliveries to our customers. During both fiscal 2002 and 2001, we continuedWe continue to review our packinghouse processes resultingfor potential improvements in greater packing efficiencies and more favorable production yields.

     Gross margins and gross profit percentages for our processed product business are largely dependent on the pricing of our final product and the cost of avocados used in preparing guacamole. The cost of avocados used in the preparation of our processed products decreased by 36.9% from fiscal 2001 to 2002, principally due to lower prices for avocados having the necessary quality for preparing processed products. The cost of avocados used in the preparation of our processed products increased by 40.4% from fiscal 2000 to 2001, principally due to a lower volume of Mexican avocados available for processing. The lower volume of Mexican avocados available for processing caused us to purchase higher-priced avocados grown in California to meet the segment’s volume sales requirements.

     The gross margin and gross profit percentage for our international avocado and perishable food products business are dependent on the volume of fruit we handle and the competitiveness of the returns that we provide to third partythird-party domestic packers. For example, the gross margins we earn on avocados procured from Chile, and New Zealand, and the Dominican Republic, as well as papayas grown in Hawaii, are generally based on a commission agreed to with each packer that is subject to incentive provisions. These provisions provide for us to deliver returns to these domestic packers that are competitive with those delivered by other handlers. Accordingly, the gross margin results for this business are a function of the volume handled and the competitiveness of the sales prices that we realize as compared to others. For fiscal 2003, we generated gross margins of $2.3 million from the sale of fresh produce products that were domestically packed by third parties, whereas gross margins for fiscal 2002 were only $1.4 million. For fiscal 2002, we generated gross margins of $1.4 million from the sale of fresh produce products that were domestically packed by third parties, whereas gross margins for fiscal 2001 were only $1.2 million. The gross margins of $1.2 million for fiscal 2001 were down $0.4 million from fiscal 2000 principally as a result of unfavorable returns. Our business with Mexican growers differs in that we operate a packinghouse in Mexico and purchase avocados directly from the field. Consequently, the gross margin and gross profit percentages generated by our Mexican operations are significantly impacted by the volume of avocados handled by our packinghouse. During fiscal 2003, our gross margins generated from the sale of Mexican avocados improved from approximately $1.8 million in fiscal 2002 to $2.2 million in fiscal 2003, principally as a result of increases in the pounds packed at our facility. These efficiencies, however, were adversely affected via the introduction of the new $0.025 per pound marketing assessment imposed on avocados imported into the United States. During fiscal 2002, our gross margins generated from the sale of Mexican avocados improved from a negative margin of approximately $0.7 million in fiscal 2001 to a positive margin of $1.8 million in fiscal 2002 principally as a result of increases in the pounds packed at our facility.

     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 2003, the decrease in the gross margin percentage is primarily related to higher fruit costs, as well as inefficiencies related to the relocation of production from Santa Paula, California and Mexicali, Mexico to our newly constructed facility in Uruapan, Mexico. Additionally, as a result of the closure of our Santa Paula processed facility and greater then expected increase in demand for our products, we have been depleting our inventory at a rate greater than initially planned. Therefore, we entered into agreements and/or discussions with two processed avocado product suppliers to supplement our existing inventory levels. This had the effect of decreasing our gross margin percentage due to higher costs and inefficiencies related to sourcing this product from outside suppliers. During fiscal 2001 to 2002, the cost of avocados used in the preparation of our gross marginsprocessed products decreased from approximately $1.1 million in fiscal 2000by 36.9%, principally due to a negative margin of approximately $0.7 million in fiscal 2001 attributable to a decrease in pounds packed atlower prices for avocados having the necessary quality for preparing our facility.processed products.

Selling, General and Administrative

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Selling, general and administrative expenses increased by $0.2approximately $1.3 million from fiscal 20002001 to fiscal 2001.2002. The increase is attributable principally to a$0.6 million of additional administrative expenses, $0.6 million in incentives paid to employees, and miscellaneous other net increases of $0.1 million.

Other Income, Net

Provision for Income Taxes

     The effective income tax rate for fiscal 2003 is higher than the federal statutory rate principally due to state taxes. The effective income tax rate for fiscal 2002 is higher than the federal statutory rate principally due to state and foreign taxes and certain non-recurring transaction costs related to the process of convertingour conversion from a cooperative to a for-profit corporation that were non-deductible for tax purposes. Our effective income tax rate decreased from 45.3% in fiscal 2002 to 37.6% in fiscal 2003 primarily as a result of a reduction in non-deductible transaction costs and offset by other net decreases of $0.1 million.a favorable reduction in our state and foreign tax rates during fiscal 2003 when compared to fiscal 2002. We anticipate that our effective tax rate for fiscal 2004 will be approximately 40.0%.

Other Expense (Income), Net

Provision (Benefit) for Income Taxes

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Quarterly Results of Operations

     The following table presents our operating results for each of the eight fiscal quarters in the period ended October 31, 2002.2003. 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. Our effective income tax rate decreased in our 4^th fiscal quarter of 2003 primarily as a result of a favorable reduction in our foreign tax rate.