Calavo Growers - 10-Q quarterly report FY

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes þ     No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ

Registrant’s number of shares of common stock outstanding as of July 31, 2005 was 14,518,833.

     This Quarterly Report on Form 10-Q contains statements relating to our future results (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, 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 but not limited to those set forth in Part I., Item 1 under the caption “Certain Business Risks” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2004, 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.

     The accompanying notes are an integral part of these consolidated condensed financial statements.

     The accompanying notes are an integral part of these consolidated condensed financial statements.

     Calavo Growers, Inc. (Calavo, the Company, we, us or our) procures and markets avocados and other perishable commodities and prepares and distributes processed avocado products. Our expertise in marketing and distributing avocados, processed avocados, and other perishable foods allows us to deliver a wide array of fresh and processed food products to food distributors, produce wholesalers, supermarkets, and restaurants on a worldwide basis. Through our two 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 Mexico, Chile, and the Dominican Republic, and distribute other perishable foods, such as Hawaiian grown papayas. We report these operations in three different business segments: (1) California avocados, (2) international avocados and perishable food products and (3) processed products.

     The accompanying consolidated condensed financial statements are unaudited. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments necessary to present fairly our financial position, results of operations, and cash flows. Such adjustments consist of adjustments of a normal recurring nature. Interim results are subject to significant seasonal variations and are not necessarily indicative of the results of operations for a full year. Our operations are sensitive to a number of factors, including weather-related phenomena and their effects on industry volumes, prices, product quality, and costs. Operations are also sensitive to fluctuations in currency exchange rates in both sourcing and selling locations, as well as economic crises and security risks in developing countries. These statements should also be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2004.

     In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (SFAS 151), to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) should be recognized as current period charges, and that fixed production overheads should be allocated to inventory based on normal capacity of production facilities. This statement is effective for the Company’s fiscal year beginning November 1, 2005. We do not expect the adoption of SFAS 151 will have a significant impact on our overall results of operations or financial position.

     In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (SFAS 153). The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. The Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of this Statement shall be applied prospectively. We do not expect the adoption of SFAS 153 will have a significant impact on our overall results of operations or financial position.

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123(R)). SFAS 123(R) requires the recognition of compensation cost relating to share-based payment transactions in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued as of the grant date, based on the estimated number of awards that are expected to vest. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) replaces SFAS No. 123,Accounting for

Stock-Based Compensation (SFAS 123), and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). SFAS 123(R) is effective November 1, 2005. As a public company, we are allowed to select from three alternative transition methods—each having different reporting implications. We do not expect the adoption of SFAS 123(R) to have a significant impact on our overall results of operations or financial position.

     In December 2004, the FASB issued FASB Staff Position (FSP) FAS 109-1 — Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (2004 Act). This FSP provides guidance on the application of SFAS No. 109 to the provisions of the tax deduction on qualified production activities contained within the 2004 Act. FSP 109-1 states that the manufacturers’ deduction should be accounted for as a special deduction in accordance with SFAS No. 109 and not as a tax rate reduction. We adopted the provisions of FSP 109-1 during our first fiscal quarter of 2005. Adoption of FSP 109-1 did not have a significant effect on our financial position or results of operations.

     In December 2004, the FASB issued FSP FAS 109-2 — Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, which provides guidance for the repatriation provisions included in the 2004 Act. The 2004 Act introduced a special limited-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer. As a result, FSP 109-2 provides an exception to the SFAS No. 109 requirement to reflect the effect of a new tax law in the period of enactment. Accordingly, an entity is allowed additional time beyond the financial reporting period of enactment to evaluate the effect of the 2004 Act on its plan for repatriation of foreign earnings. We adopted the provisions of FSP 109-2 during our first fiscal quarter of 2005. Adoption of FSP 109-2 did not have a significant effect on our financial position or results of operations.

     In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3(SFAS 154). SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle. The provisions of SFAS 154 require, unless impracticable, retrospective application to prior periods’ financial statements of (1) all voluntary changes in principles and (2) changes required by a new accounting pronouncement, if a specific transition is not provided. SFAS 154 also requires that a chance in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate, which requires prospective application of the new method. SFAS 154 is effective for all accounting changes made in fiscal years beginning after December 15, 2005. We do not expect the adoption of SFAS 154 to have a significant impact on our overall results of operations or financial position.

     In accordance with SFAS No. 130, Reporting Comprehensive Income, we display comprehensive income, and its components, in a financial statement with the same prominence as other financial statements. The impact of any fluctuation in unrealized gains or losses on investments available-for-sale are a component of comprehensive income for each year presented.

     As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123), which was amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” the Company accounts for stock-based compensation under APB 25 and related interpretations.

     In December 2003, our Board of Directors approved the issuance of options to acquire a total of 50,000 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, and has a term of 5 years from the grant date. The market price of our common stock at the grant date was $10.01. In accordance with APB 25, we are recording compensation expense of approximately $151,000 over the vesting period of three years

from the grant date. During the three and nine month periods ended July 31, 2005 and July 31, 2004, we recognized $13,000, $38,000, $13,000 and $33,000 of compensation expense with respect to stock option awards pursuant to APB 25. Had compensation cost for stock option awards been determined based on the fair value of each award at its grant date, consistent with the provisions of SFAS No. 123, the Company’s pro forma net income and net income per share would have been as follows (dollars in thousands, except per share amounts):

     For purposes of pro forma disclosures under SFAS No. 123, the estimated fair value of the options is assumed to be amortized to compensation expense over the options’ vesting period. The fair value of the options granted in 2004 has been estimated at the date of grant using the Black-Scholes option pricing model with the following assumptions:

     The Black-Scholes and Binary option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because options held by our directors have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of these options.

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

     We operate and track results in three reportable segments: California avocados, international avocados and perishable foods products, and processed products. These three business segments are presented based on our management structure and information used by our president to measure performance and allocate resources. The California avocados segment includes all operations that involve the distribution of avocados grown in California. The international avocados and perishable foods products segment includes both operations related to distribution of fresh avocados grown outside of California and distribution of other perishable food items. The processed products segment represents all operations related to the purchase, manufacturing, and distribution of processed avocado products. Those costs that can be specifically identified with a particular product line are charged directly to that product line. Costs that are not segment specific are generally allocated based on two-year average sales dollars. We do not allocate assets or specifically identify them to our operating segments.

     The following table sets forth sales by product category, by segment (in thousands):

     Inventories consist of the following (in thousands):

     During the three and nine month periods ended July 31, 2005 and 2004, we were not required to, and did not, record any provisions to reduce our inventories to the lower of cost or market.

     We sell papayas obtained from an entity owned by our Chairman of the Board of Directors, Chief Executive Officer and President. Sales of papayas procured from the related entity amounted to approximately $5,040,000 and $4,999,000 for the nine months ended July 31, 2005 and 2004, resulting in gross margins of approximately $424,000 and $416,000. Sales of papayas procured from the related entity amounted to approximately $1,617,000, and $1,662,000 for the three months ended July 31, 2005 and 2004, resulting in gross margins of approximately $175,000 and $241,000. Included in accrued liabilities are approximately $10,000 and $113,000 at July 31, 2005 and October 31, 2004 due to this entity.

     Certain members of our Board of Directors market avocados through Calavo pursuant to marketing agreements substantially similar to the marketing agreements that we enter into with other growers. During the three months ended July 31, 2005 and 2004, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $2.3 and $2.3 million. During the nine months ended July 31, 2005 and 2004, the aggregate amount of avocados procured from entities owned or controlled by members of our Board of Directors was $3.1 and $4.2 million.

Included in other assets in the accompanying consolidated financial statements are the following intangible assets: customer-related intangibles of $590,000 (accumulated amortization of $177,000 at July 31, 2005), brand name intangibles of $275,000 and other identified intangibles totaling $2,000 (accumulated amortization of $1,700 at July 31, 2005). The customer-related intangibles and other identified intangibles are being amortized over five and two years. The intangible asset related to the brand name currently has an indefinite remaining useful life and, as a result, is not currently subject to amortization. We anticipate recording amortization expense of approximately $30,000 for the remainder of fiscal 2005 and approximately $118,000 per annum for fiscal 2006 through fiscal 2008, with the remaining amortization expense of approximately $29,000 recorded in fiscal 2009.

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

     As previously reported, we are currently under examination by the Mexican tax authorities (“Hacienda”) for the tax year ended December 31, 2000. During the first quarter of fiscal 2005, we received an assessment totaling approximately $2.0 million from Hacienda related to the amount of income at our Mexican subsidiary. Based primarily on discussions with legal counsel, we believe that Hacienda’s position has no merit and that the Company will prevail. Accordingly, no amounts have been provided in the financial statements as of July 31, 2005. We are also involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.

     In March 2005, we completed the sale of our corporate headquarters building located in Santa Ana, California for $3.4 million. This transaction resulted in a pre-tax gain on sale of approximately $1.7 million. In conjunction with such sale, we relocated our corporate offices to Santa Paula, California in March 2005. Total expenses related to such relocation approximated $0.3 million.

     Effective July 31, 2005, based on a review performed by us, we changed our estimate of useful lives of certain property, plant and equipment. The principal estimated useful lives were: buildings and improvements — 7 to 30 years; leasehold improvements — the lesser of the term of the lease or 7 years; equipment — 7 years; information systems hardware and software — 3 to 5 years. The revised estimated useful lives are: buildings and improvements — 7 to 50 years; leasehold improvements — the lesser of the term of the lease or 7 years; equipment — 7 to 25 years; information systems hardware and software – 3 to 15 years. The change in estimated useful lives increased our operating income by approximately $0.2 million during the three months ended July 31, 2005 when compared to the old useful lives.

     In February 2003, our Board of Directors approved a plan whereby the operations of our processed products business would be relocated. The plan called for the closing of our Santa Paula, California and Mexicali, Baja California Norte processing facilities and the relocation of these operations to a new facility in Uruapan, Michoacan, Mexico. 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. The Uruapan facility commenced operations in February 2004 and the Santa Paula and Mexicali facilities were closed in February 2003 and August 2004. For the first nine months of fiscal 2005, we incurred costs related to this restructuring approximating $437,000, which are recorded in our income statement as both cost of sales ($298,000) and selling, general and administrative expenses ($139,000). All the above amounts have been paid and we do not expect any additional operating costs related to this restructuring.

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

     Limoneira, which generated total revenues of approximately $26 million during fiscal 2004, primarily engages in growing citrus and avocados, picking and hauling citrus, and packing lemons. The issuances of the shares discussed above are exempt from registration under federal and state securities laws. As a result of the ownership percentage acquired in Limoneira, we recognize only dividends received from Limoneira as income. Such investment is classified as “available-for-sale,” whereby unrealized gains and losses are reported in other comprehensive income.

     In July 2005, we entered into a non-collateralized term loan agreement with Farm Credit West, PCA to finance the purchase of our Limoneira Stock. Pursuant to such agreement, we borrowed $13 million, which is to be repaid in 10 annual installments of $1.3 million. Such annual installments begin July 2006 and continue through July 2015. Interest is to be paid monthly, in arrears, beginning August 2005 through the life of the loan. Such loan bears interest at a fixed rate of 5.70%.

     Such loan contains various financial covenants, which are substantially identical to existing covenants, with which we were in compliance at July 31, 2005.

     Option Grant

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

     This information should be read in conjunction with the unaudited consolidated condensed financial statements and the notes thereto included in this Quarterly Report, and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report on Form 10-K for the year ended October 31, 2004 of Calavo Growers, Inc. (we, Calavo, or the Company). Certain prior year amounts have been reclassified to conform with the current period presentation.

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

     As previously reported, we are currently under examination by the Mexican tax authorities (“Hacienda”) for the tax year ended December 31, 2000. During the first quarter of fiscal 2005, we received an assessment totaling approximately $2.0 million from Hacienda related to the amount of income at our Mexican subsidiary. Based primarily on discussions with legal counsel, we believe that Hacienda’s position has no merit and that the Company will prevail. Accordingly, no amounts have been provided in the financial statements as of July 31, 2005. We are also involved in litigation arising in the ordinary course of our business that we do not believe will have a material adverse impact on our financial statements.

     In March 2005, we completed the sale of our corporate headquarters building located in Santa Ana, California for $3.4 million. This transaction resulted in a pre-tax gain on sale of approximately $1.7 million. In conjunction with such sale, we relocated our corporate offices to Santa Paula, California in March 2005. Total expenses related to such relocation approximated $0.3 million.

     Effective July 31, 2005, based on a review performed by us, we changed our estimate of useful lives of certain property, plant and equipment. The principal estimated useful lives were: buildings and improvements — 7 to 30 years; leasehold improvements — the lesser of the term of the lease or 7 years; equipment — 7 years; information systems hardware and software — 3 to 5 years. The revised estimated useful lives are: buildings and improvements — 7 to 50 years; leasehold improvements — the lesser of the term of the lease or 7 years; equipment — 7 to 25 years; information systems hardware and software – 3 to 15 years. The change in estimated useful lives increased our operating income by approximately $0.2 million during the three months ended July 31, 2005 when compared to the old useful lives.

     In February 2003, our Board of Directors approved a plan whereby the operations of our processed products business would be relocated. The plan called for the closing of our Santa Paula, California and Mexicali, Baja California Norte processing facilities and the relocation of these operations to a new facility in Uruapan, Michoacan, Mexico. 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. The Uruapan facility commenced operations in February 2004 and the Santa Paula and Mexicali facilities were closed in February 2003 and August 2004. For the first six months of fiscal 2005, we incurred costs related to this restructuring approximating $437,000, which are recorded in our income statement as both cost of sales ($298,000) and selling,

general and administrative expenses ($139,000). We do not expect any additional operating costs related to this restructuring.

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

     Limoneira, which generated total revenues of approximately $26 million during fiscal 2004, primarily engages in growing citrus and avocados, picking and hauling citrus, and packing lemons. The issuances of the shares discussed above are exempt from registration under federal and state securities laws. As a result of the ownership percentage acquired in Limoneira, we recognize only dividends received from Limoneira as income. Such investment is classified as “available-for-sale,” whereby it is reported at fair market value and unrealized gains and losses will be reported in other comprehensive income.

     In July 2005, we entered into a non-collateralized term loan agreement with Farm Credit West, PCA to finance the purchase of our Limoneira Stock. Pursuant to such agreement, we borrowed $13 million, which is to be repaid in 10 annual installments of $1.3 million. Such annual installments begin July 2006 and continue through July 2015. Interest is to be paid monthly, in arrears, beginning August 2005 through the life of the loan. Such loan bears interest at a fixed rate of 5.70%.

     Such loan contains various financial covenants, which are substantially identical to existing covenants, with which we were in compliance at July 31, 2005.

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

     The following table summarizes our net sales by business segment for each of the three and nine month periods ended July 31, 2005 and 2004:

     Net sales for the third quarter of fiscal 2005, compared to fiscal 2004, increased by $5.4 million, or 6.5%; whereas net sales for the nine months ended July 31, 2005, compared to fiscal 2004, decreased by $12.2 million, or 5.8%. Consistent with the historical seasonality of the California avocado harvest, our California avocado business generated a significant portion of our of our consolidated net sales for the third quarter (65.9% for the 3 months ended July 31, 2005, as compared to 80.1% for the same prior year period). For the three and nine month periods, our net sales growth reflects an increasing percentage of our business being generated from our international avocados and perishable food products segment. This increase was driven primarily by an increase in the volume of avocados being imported from Mexico. Net sales generated by our processed products business are not generally subject to the seasonal effect experienced by our other operating segments. For the nine month period, the increase in net sales to third parties delivered by our processed products business was due primarily to an increase in total pounds of product sold, partially offset by a marginal decrease in our price per pound. We 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.

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

     Net sales delivered by the business decreased by approximately $8.3 million, or 12.4%, for the third quarter of fiscal 2005, when compared to the same period for fiscal 2004. The decrease in sales reflects a 19.2% decrease in pounds of avocados sold, partially offset by an improvement in our average selling prices when compared to the same prior year period. The decrease in pounds is consistent with the expected decrease in the overall harvest of the California avocado crop for the 2004/2005 season. Our market share of California avocados increased slightly to 35.2% in the third quarter of fiscal 2005, when compared to a 33.4% market share for the same prior year period.

     Net sales delivered by the business decreased by approximately $30.0 million, or 24.8%, for the first nine months of fiscal 2005, compared to the same fiscal 2004 period. The decrease in sales reflects a 24.5% decrease in pounds of avocados sold. This decrease in pounds sold is consistent with the expected decrease in the overall harvest of the California avocado crop for the 2004/2005 season. Our market share of California avocados decreased slightly to 33.0% for the nine months ended July 31, 2005, compared to 33.9% for the same period in the prior year.

     Average selling prices, on a per carton basis, for California avocados for the third quarter of fiscal 2005 were 10.4% higher when compared to the same prior year period. We attribute some of this increase in these average selling prices to fewer overall pounds sold in the U.S. marketplace. Our average selling prices remained virtually unchanged for the first nine months of fiscal 2005, when compared to the same prior year period.

     We anticipate that our California avocado business will experience a seasonal decrease during the fourth fiscal quarter of 2005.

     For the quarter ended July 31, 2005, when compared to the same period for fiscal 2004, sales to third-party customers increased by approximately $12.0 million, or 122.4%. For the nine months of fiscal 2005, when compared to the same period for fiscal 2004, sales to third-party customers increased by approximately $16.5 million, or 24.1%.

     The increased sales to third-parties by our international and perishable food products business were primarily driven by increased sales of Mexican and Chilean grown avocados in the U.S., Japanese, and/or European marketplace.

     For the quarter ended July 31, 2005, the volume of Mexican fruit handled increased by 10.3 million pounds, or 220.0%, when compared to the same prior year period. This increase is primarily related to the year round availability of Mexican sourced fruit into the United States.

     For the nine months ended July 31, 2005, the volume of Mexican and Chilean fruit handled increased by 15.5 million pounds, or 42.4%, and 8.1 million pounds, or 87.5%, when compared to the same prior year period. Such increases, however, were partially offset by decreases in Dominican Republic sourced fruit. For the nine months ended July 31, 2005, the volume of Dominican Republic fruit handled decreased by 4.1 million pounds, or 50.4%, when compared to the same prior year period.

     For the third fiscal quarter of 2005, average selling prices, on a per carton basis, for Mexican avocados were approximately 19.0% higher when compared to the same prior year period. We attribute some of this increase to fewer overall California pounds sold in the U.S. marketplace during such period. For the first nine months of fiscal 2005, average selling prices, on a per carton basis, for Chilean, Mexican, and The Dominican Republic avocados were 28.0% lower, 3.5% higher, and 17.0% lower when compared to the same prior year period. These fluctuations were primarily the result of a significant increase in seasonal imports of Chilean sourced fruit, the initial uncertainty over the effect/impact of the year-round introduction of Mexican avocados in the U.S. marketplace, and fewer overall pounds sold in the U.S. marketplace.

     We anticipate that net sales for this segment will gradually increase in the fourth fiscal quarter of 2005 as compared to the third fiscal quarter of 2005. This is consistent with the cyclical nature of the availability of foreign sourced avocados in the U.S. marketplace.

     For the quarter ended July 31, 2005, when compared to the same period for fiscal 2004, sales to third-party customers increased by approximately $1.6 million, or 24.3%. This increase is primarily related to a 26.4% increase in total pounds sold. Our net selling prices remained consistent during the third quarter ended July 31, 2005 when compared to the same prior year period.

     For the first nine months of fiscal 2005, when compared to the same period for fiscal 2004, sales to third-party customers increased by approximately $1.3 million, or 6.8%. This increase is primarily related to a 10.6% increase

in total pounds sold. Such increase, however, was partially offset by a marginal decrease in our net selling prices of approximately 3.7% during the nine months ended July 31, 2005 when compared to the same prior year period.

     Our ultra high pressure products continue to experience solid demand. During the third quarter ended July 31, 2005, sales of high pressure product totaled approximately $2.6 million, as compared to $1.6 million for the same prior year period. We believe that the introduction of these fresh guacamole products will, in the long-term, successfully address a growing market segment.

     The following table summarizes our gross margins and gross profit percentages by business segment for each of the three and nine month periods ended July 31, 2005 and 2004:

     Our cost of goods sold consists predominantly of fruit costs, packing materials, freight and handling, labor and overhead (including depreciation) associated with preparing food products and other direct expenses pertaining to products sold. Consolidated gross margin, as a percent of sales, remained consistent for the three month period ended July 31, 2005. For the nine month period ended July 31, 2005, consolidated gross margin, as a percent of sales, decreased 0.4%. This decrease was principally attributable to decreased profitability in our international avocados and perishable food products operating segment.

     For the nine months ended July 31, 2005, our California avocados segment experienced an increase in its gross profit percentage. This was principally driven by a minor increase in our packing and marketing fee (which is charged to cover our costs and a profit). For the nine months ended July 31, 2005, the gross profit percentages generated by our international avocados and perishable food products business were negatively impacted by an increase in fruit costs. These increases in fruit costs, however, were partially offset by increases in fruit volume, which had the effect of reducing our per pound packing costs. For the nine months ended July 31, 2005, the gross profit percentages for our processed products segment increased primarily as a result of efficiencies related to the relocation of production from Santa Paula, California and Mexicali, Mexico to our newly acquired facility in Uruapan, Mexico. Such efficiencies were partially offset, however, by higher fruit costs and final costs related to the closing of our Mexicali, Mexico facility. We anticipate that the gross profit percentage for our processed product segment will continue to experience significant fluctuations during the next fiscal quarter primarily due to uncertainty of fruit costs that will be used in the production process.

     Selling, general and administrative expenses include costs of marketing and advertising, sales expenses and other general and administrative costs. Selling, general and administrative expenses increased $1.0 million, or 25.4%, for the three months ended July 31, 2005, when compared to the same period for fiscal 2004. This increase was primarily related to higher corporate costs, including, but not limited to, costs related to implementing provisions required under section 404 of the Sarbanes-Oxley Act (totaling approximately $0.5 million) and an increase in bad debt expense (totaling approximately $0.4 million). For the first nine months ended July 31, 2005, when compared to the same prior year period, selling, general and administrative expenses increased by $2.1 million, or 18.6%, compared to the same period for fiscal 2004. This increase was primarily related to higher corporate costs, including, but not limited to, costs related to implementing provisions required under section 404 of the Sarbanes-Oxley Act (totaling approximately $1.1 million), an increase in bad debt expense (totaling approximately $0.4 million), corporate moving expenses (totaling approximately $0.3 million) and final expenses related to the closing of our Mexicali, Mexico facility (totaling approximately $0.1 million). Such higher corporate costs were partially offset by a decrease in employee compensation costs (totaling approximately $0.6 million).

     Other income, net includes interest income and expense generated in connection with our financing and operating activities, as well as certain other transactions that are outside of the course of normal operations. For the nine months ended July 31, 2005, other income, net includes the gain on the sale of our corporate facility totaling approximately $1.7 million.