**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-KSB**

 

| **(Mark  one)**                                                                                                                                                                                                                 |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                      | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                            |
| **For  the fiscal year ended December 31, 2002**                                                                                                                                                                                |
|                                                                                                                                                                                                                            |
| **o**                                                                                                                                                                                                                           | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                            |
| **For  the transition period from                   to                 ** |
|                                                                                                                                                                                                                            |
| **Commission File Number 0-24285**                                                                                                                                                                                              |

 

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| **THE RICEX  COMPANY**                         |
|------------------------------------------------|
| (Name of Small Business Issuer in Its Charter) |

 

| **Delaware**                                                                  |   | **68-0412200**                        |
|-------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization               |   | (I.R.S. Employer  Identification No.) |
|                                                                          |   |                                  |
| **1241 Hawk’s Flight Court, El Dorado  Hills,  California**              |   | **95762**                             |
| (Address of Principal  Executive Offices)                                     |   | (Zip Code)                            |
|                                                                          |   |                                  |
| Issuer’s telephone number, including area code:  **(916) 933-3000** |

 

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Securitiesregistered under Section 12(b) of the Exchange Act:

 

**NONE**

 

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Titleof each class:**  None**

Nameof each exchange on which registered:** None**

 

Securitiesregistered under Section 12(g) of the Exchange Act:

 

**Common Stock, $0.001 par value**

(Titleof Class)

 

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Check whether the issuer:  (1) filed all reports to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes     ý     No    o

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B is contained in this form, and nodisclosure will be contained, to the best of the registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-KSB or any amendment to this Form 10-KSB.  ý

 

State issuer’s revenues for its most recent fiscalyear:  $5,383,000

 

State the aggregate market value of the voting andnon-voting common equity held by non-affiliates computed by reference to theprice at which the common equity was sold, or the average bid and asked pricesof such common equity, as of a specified date within the past 60 days.  As of March 1, 2003, the aggregate marketvalue of the company’s common stock held by non-affiliates was $4,459,111.

 

State the number of shares outstanding of each of theissuer’s classes of common equity as of the latest practicable date.  As of March 1, 2003, 38,550,151 shares ofcommon stock were outstanding.

 

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):  Yes  o  No  ý

 

 

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**FORM 10-KSB**

 

**INDEX**

 
| PART I        |
|---------------|
|          | Item 1. | DESCRIPTION OF THE BUSINESS |
|          | Item 2. | DESCRIPTION OF PROPERTY |
|          | Item 3. | LEGAL PROCEEDINGS |
|          | Item 4. | SUBMISSION  OF MATTERS TO A VOTE OF SECURITY HOLDERS |
| PART II       |
|          | Item 5. | MARKET  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
|          | Item 6. | MANAGEMENT’S  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION |
|          | Item 7. | FINANCIAL  STATEMENTS |
|          | Item 8. | CHANGES  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND  FINANCIAL DISCLOSURE |
| PART III      |
|          | Item  9. | DIRECTORS,  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION  16(a) OF THE EXCHANGE ACT |
|          | Item  10. | EXECUTIVE COMPENSATION |
|          | Item  11. | SECURITY  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
|          | Item  12. | CERTAIN  RELATIONSHIPS AND RELATED TRANSACTIONS |
|          | Item  13. | EXHIBITS AND REPORTS  ON FORM 8-K |
|          | Item 14. | CONTROLS AND  PROCEDURES |
| Signatures    |
|          |
| Certification |

 

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**FORWARD-LOOKING STATEMENTS**

 

This document contains “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of1995.  All statements other thanstatements of historical fact are “forward-looking statements” for purposes offederal and state securities laws, including, but not limited to, anyprojections of earnings, revenue or other financial items; any statements ofthe plans, strategies and objectives of management for future operations; anystatements concerning proposed new services or developments; any statementsregarding future economic conditions or performance; any statements of belief;and any statements of assumptions underlying any of the foregoing.

 

Forward-looking statements may include the words“may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect”or “anticipate” or other similar words. These forward-looking statements present our estimates and assumptionsonly as of the date of this annual report. Except for our ongoing obligation to disclose material information asrequired by the federal securities laws, we do not intend, and undertake noobligation, to update any forward-looking statement.

 

Although we believe that the expectations reflected inany of our forward-looking statements are reasonable, actual results coulddiffer materially from those projected or assumed in any of our forward-lookingstatements.  Our future financialcondition and results of operations, as well as any forward-looking statements,are subject to change and inherent risks and uncertainties.  The factors impacting these risks anduncertainties include, but are not limited to:

 

•                                          increasedcompetitive pressures from existing competitors and new entrants;

 

•                                          increasesin interest rates or our cost of borrowing or a default under any material debtagreements;

 

•                                          deteriorationin general or regional economic conditions;

 

•                                          adversestate or federal legislation or regulation that increases the costs ofcompliance, or adverse findings by a regulator with respect to existingoperations;

 

•                                          lossof customers or sales weakness;

 

•                                          inabilityto achieve future sales levels or other operating results;

 

•                                          theunavailability of funds for capital expenditures; and

 

•                                          operationalinefficiencies in distribution or other systems.

 

For a detailed description of these and other factorsthat could cause actual results to differ materially from those expressed inany forward-looking statement, please see “Risk Factors,” beginning at page 16below.

 

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**PART I**

 
| **Item  1.** | **DESCRIPTION OF THE BUSINESS** |
|--------------|---------------------------------|

 

**OVERVIEW**

 

The RiceX Company, formerly Food Extrusion, Inc., wasoriginally incorporated in California in 1989. In 1998, we reincorporated in Delaware and changed our name to The RiceXCompany.  Since our formation, we havebeen engaged in extensive research and development efforts that resulted in thedevelopment of a process that we call the “RiceX Process”.

 

The RiceX Process stabilizes rice bran, which is theportion of the rice kernel that lies beneath the hull and over the whiterice.  Rice bran contains over 60% ofthe nutritional value of rice.  However,without stabilization, the nutritional value of rice bran is lost shortly afterthe milling process.  This is due to thelipase-induced rancidity caused by the rice milling process.  Consequently, a rich nutrient resource musteither be thrown away or disposed of as low value animal feed.  The RiceX Process deactivates the lipaseenzyme and makes the bran shelf life stable for a minimum of one year.  While other competing processes have beenable to stabilize rice bran for a limited time, the RiceX Process naturallypreserves more of the higher value nutritional and antioxidant compounds foundin rice bran for a significantly longer period of time.

 

The RiceX Process has enabled us to develop a varietyof nutritional food products, including our primary product, RiceXÔStabilized Rice Bran.  The RiceXÔStabilized Rice Bran we produce meets microbiological standards for humanconsumption.  Our customers includeconsumer nutrition and healthcare companies, domestic and international foodcompanies, and companion animal feed manufacturers.

 

Through our wholly-owned subsidiary, Food ExtrusionMontana, Inc., we are engaged in custom manufacturing of grain based productsfor food ingredient companies at its production facility in Dillon,Montana.  Food Extrusion Montana, Inc.has specialized processing equipment and techniques for the treatment of grainproducts to cook, convert, isolate, dry and package finished food ingredientsused in the formulation of health food and consumer food finishedproducts.  RiceX Solubles, a highlynutritious, carbohydrate and lipid rich fraction, is produced at the Dillon,Montana facility.  We believe that thesemanufacturing capabilities are unique among grain processors, with customprocessing capabilities suited to numerous food applications.

 

We generated approximately $5,383,000 and $6,299,000in revenue for the years ended December 31, 2002 and 2001, respectively.  For the first time in our history, wereported two consecutive years of profitability.  We reported net incomes for years ended December 31, 2002 and2001 of $374,000 and $1,129,000, respectively. While we have net income through December 31, 2002, we expect to utilizenet operating loss, or NOL, carry-forwards for our federal income tax purposesonly.  The estimated state tax provisionpayment of $34,000 was the result of a gubernatorial suspension of applicableNOL by the California Franchise Tax Board until 2004.  California’s 2002-03 budget included a suspension of the NOL forthe 2002 and 2003 taxable years.  Inreturn for the suspension, business taxpayers will receive a 100% (instead

 

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of 65%) NOL deduction for taxable years beginning on or after January1, 2004.  In addition, the CaliforniaLegislature extended by one year the carryover period for losses incurred on orafter January 1, 2002, and by two years for losses incurred prior to January 1,2002.  These tax provisions do notinclude the effect of Alternative Minimum Tax. NOL carry-forwards expire for federal tax purposes at various dates from2009 through 2020, and expire for state tax purposes in 2003 through 2012.

 

Our business is not seasonal.  (See Part II — Item 7.  Financial Statements.)

 

We occupy approximately 24,800 square feet ofexecutive offices, warehouse and production facilities in El Dorado Hills,California and Dillon, Montana.

 

RiceXÔand RiceX SolublesÔ are our registered trade names.  Mirachol®, Max “E”® and Max “E” Glo® are ourregistered trademarks.  In addition toour trade names and our trademarks, we hold patents to the production of BetaGlucan and to a micro nutrient enriched rice bran oil process.  We also hold patents to a method to treathigh cholesterol, to a method to treat diabetes and the process for producingHigher Value Fractions, or HVF from stabilized rice bran.

 

**RICEXPRODUCTS**

 

We produce stabilized, nutrient-rich rice bran thatmay be used in a wide variety of new products. We are pursuing the development of proprietary rice bran products fromstabilized rice bran.  Our currentproducts include:

 
| RiceX Stabilized Rice Bran:      |   | Stable whole rice bran and germ.  This is our basic stabilized rice bran  product that is both a food supplement and an ingredient for cereals, baked  goods, companion animal feed, health bars, etc., and also the base material  for producing RiceX Solubles, oils and RiceX Fiber Complex. |
|----------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                             |   |                                                                                                                                                                                                                                                                                                 |
| RiceX Stabilized Rice Bran Fine: |   | This is the same product as our RiceX Stabilized  Rice Bran, except that it has been ground to a particle size that will pass  through a 20 mesh screen.  It is used  primarily in baking applications.                                                                                         |
|                             |   |                                                                                                                                                                                                                                                                                                 |
| Dextrinized Rice Bran:           |   | A carbohydrate converted stabilized rice bran that  is more suitably used in baking and mixed health drink applications.  This product contains all of the  nutrient-rich components of stabilized rice bran.                                                                                   |
|                             |   |                                                                                                                                                                                                                                                                                                 |
| RiceX Solubles:                  |   | A highly concentrated soluble carbohydrate and lipid  rich fraction component of RiceX Stabilized Rice Bran with the fiber  removed.  RiceX Solubles also embodies  a concentrated form of the vitamins and nutrients found in stabilized rice  bran.                                           |

 

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| RiceX Fiber Complex: |   | Nutrient-rich insoluble fiber source that contains  rice bran oil and associated nutrients.   This product, designed for use by the baking and health food markets,  is the remaining ingredient when stabilized rice bran is processed to form  RiceX Solubles. |
|----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

In addition, further refining RiceX Stabilized Rice Bran into oil andits by-products produces Max “E” Oil, RiceX Defatted Fiber and Higher ValueFractions.

 
| Max “E” Oil:  |   | Nutrient-rich oil made from RiceX Stabilized Rice  Bran.  This oil has a high flash point,  which provides a very long fry life, and it is not readily absorbed into  food.  In addition, the oil maintains  many of the nutritional benefits of the whole rice bran products.                                                           |
|-------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |   |                                                                                                                                                                                                                                                                                                                                               |
| RiceX Defatted Fiber:   |   | Low fat soluble fiber that does not contain rice  bran oil.  This is a product designed  for use by the baking industry for its high fiber nutritional benefits.                                                                                                                                                                              |
|                    |   |                                                                                                                                                                                                                                                                                                                                               |
| Higher Value Fractions: |   | Nutraceutical like compounds naturally occurring in  Stabilized Rice Bran and Rice Bran Oil that provide specific health  benefits.  Tocopherols, tocotrienols,  and gamma oryzanol are some of the antioxidant-rich fractions that are found  in rice bran and are enhanced by stabilization, with the gamma oryzanol being  unique to rice. |

 

**INDUSTRYBACKGROUND**

 

**THEIMPORTANCE OF RICE**

 

Rice is the staple food for approximately 70% of theworld’s population, and is the staple food source for several of the world’slargest countries.  World riceproduction is expected to be more than 550 million metric tons in the 2002-2003crop year (according to the United States Department of Agriculture),constituting more than one quarter of all cereal grains produced worldwide. TheUnited States accounts for less than 2% of the world’s rice****production.  Ninety percent (90%) of world rice tonnageis produced in 13 countries with aggregate populations of 3.2 billion people(USA Rice Federation, Rice Notes). Approximately 75% of all rice production occurs in China, India, SouthEast Asia, Africa and South America. Combined these regions have a population of 2.3 billion people (nearly50% of the world’s population), and an average per capita gross domesticproduct of $2,000 (less than one tenth of the U.S. average).

 

Malnutrition is a common problem in this group ofnations, particularly for people located in rural villages where subsistencerice farming is a primary livelihood. Transportation and storage are poor. Consequently, locally grown rice is consumed locally and the amount offood available varies widely over time with changes in seasons andweather.  Children are especiallysusceptible to variations in local agricultural output due to their heightenednutritional needs and dependency on others for food.  Per capita rice consumption in many of the poorer rice beltcountries exceeds one pound per day.

 

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Despite the importance of rice as a worldwide foodsource and the problems associated with nutritional deficiencies inrice-dependent nations, more than 60% of the nutrients found in rice are destroyedduring milling.  Most of the ricenutrients are contained in the outer brown layer of the rice kernel known asthe bran layer, which, because of poor stability, becomes inedible due tolipase-induced rancidity or microbiological spoilage shortly after the millingprocess.

 

**RICEPROCESSING AND RICE BRAN STABILIZATION**

 

When harvested from the field, rice is in the form ofpaddy, or “rough” rice.  In this form,the rice kernel is fully enveloped by the rice hull.  The hull is dried and then removed in the first stage of milling,yielding brown rice.  In the secondstage of milling, the outer brown layer, or rice bran, is removed to producewhite rice.  Rice bran is composed ofthe rice germ and several sub-layers, which accounts for approximately 8% byweight of paddy rice and contain over 60% of the nutrients found in each kernelof rice.  (Juliano, B.O., 1985 Rice:Chemistry and Technology, American Association of Cereal Chemists, St. Paul,MN, pp. 37-50.)

 

Under normal milling conditions, when brown rice ismilled into white rice, the oil in the bran and a potent lipase enzyme found onthe surface of the bran come into contact with one another.  The lipase enzyme causes very rapidhydrolysis of the oil, converting it into glycerol, monoglycerides, diglyceridesand free fatty acid, or FFA.  As the FFAcontent increases, the rice bran becomes unsuitable for human or animalconsumption.  At normal roomtemperature, the FFA level increases to 5-8% within 24 hours and thereafterincreases at the rate of approximately 4-5% per day.  Rice bran is unfit for human consumption at 5% FFA, whichtypically occurs within 24 hours of milling.

 

When the lipase enzyme can be deactivated, rice brancan be stabilized, thus preserving a potentially important nutrient source thatis largely wasted today.  Heat willdeactivate the lipase enzyme, reduce microbiological load and reduce moisturelevels.  Although heat serves as thebasis for most attempts to stabilize rice bran, most of the rice bran nutrientsare lost in this process.  Parboiled, orconverted rice, is subjected to soaking and steaming prior to being dried andmilled.  This process softens the ricekernel and reduces the problem of lipase-induced hydrolysis.  The bran produced from parboiled rice,however, is only semi-stabilized, typically spoiling in 20 days or less.  The parboiling process also destroys much ofthe nutritional value of the bran because many of the micro nutrients arewater-soluble and are leached out during the parboiling process.  There have been a number of attempts todevelop alternative rice bran stabilization processes that deactivate thelipase enzyme using chemicals, microwave heating and variants on extrusiontechnology.  We believe each of theseefforts results in an inferior product that uses chemicals or does not remainstable for a commercially reasonable period, or the nutrients in the bran arelost thereby significantly reducing the nutritional value in the bran.

 

**THERICEX SOLUTION**

 

The RiceX Process uses proprietary innovations in foodextrusion technology to create a combination of temperature, pressure and otherconditions necessary to deactivate the lipase enzyme without significantlydamaging the structure or activity of other, higher value

 

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compounds, oils and proteins found in the bran.  The RiceX Process does not use chemicals tostabilize raw rice bran, and produces an “all natural” nutrient-rich product.

 

Our processing equipment is designed to be installedon the premises of any two-stage rice mill and is located downstream from therice polishers.  After hulling, the riceis transported pneumatically to the rice polishing room where the brown ricekernels are tumbled and the rice bran is polished from the surface of eachkernel.  The bran is separated from thedenser polished rice grain and is transported pneumatically to a loop conveyorsystem we designed.  The loop conveyorsystem immediately carries the fresh, unstabilized rice bran to the RiceXCompany stabilizer.  Stabilization isachieved by feeding the fresh rice bran into a specially designed auger foodextruder that forces the material under pressure and heat through anorifice.  The auger is designed tocreate the proper temperature, shear and pressure necessary to selectivelydeactivate the lipase enzyme and reduce the microbiological load.  Process controllers that maintain processconditions within the prescribed pressure/temperature regime control thesystem.  In case of power failure orinterruption of the flow of fresh bran into the system, the electronic controlsystem is designed to purge our equipment of materials in process and safelyshut down.

 

Bran leaving our stabilization system is deposited ona food-grade conveyor that tempers the product and reduces moisturecontent.  We call this bran “RiceXBran”.  This RiceX Bran is thendischarged onto the cooling unit.  Ahigh volume, low-pressure airflow further dehumidifies and cools the RiceX Branas it moves forward.  The cooled RiceXBran is then loaded into one ton shipping containers for transportation toother processing facilities or is transported by pneumatic conveyor to abagging unit for packaging in 30, 40, 50, and 2,000 pound sacks.  RiceX Bran has a shelf life of at least oneyear and is rich in tocopherols, tocotrienols, oryzanols, a complete andbalanced amino acid profile, and other nutritional and natural compounds thatexhibit positive health properties.

 

The RiceX Process system is modular.  Each stabilization module can processapproximately 2,000 pounds of RiceX Bran per hour and has a capacity of over5,700 tons per year.  Stabilizationproduction capacity can be doubled or tripled by installing additional RiceXCompany units sharing a common conveyor and stage system, which can handle theoutput of the world’s largest rice mills. We have developed and tested a smaller production unit, which has amaximum production capacity of 840 tons per year, for installation in countriesor locations where rice mills are substantially smaller than those in theUnited States.

 

The processing conditions created by the RiceX Processare unique.  However, the ancillaryequipment used to achieve these processing conditions is in wide use throughoutthe food industry.  It is in thestabilizer unit that our proprietary technology resides; all of the otherprocessing, material handling, control, and storage components areoff-the-shelf equipment items.

 

**BENEFITSOF RICEX STABILIZED RICE BRAN**

 

Rice bran is a rich source of protein, oil, vitamins,antioxidants, dietary fiber and other nutrients.  The proximate composition and caloric content of RiceX StabilizedRice Bran is as follows:

 

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**RICEXSTABILIZED RICE BRAN COMPOSITION**

 
| Fat                 |   | 18%-23%       |
|---------------------|--------|---------------|
| Protein             |   | 12%-16%       |
| Total Dietary Fiber |   | 23%-35%       |
| Soluble Fiber       |   | 2%-6%         |
| Moisture            |   | 4%-8%         |
| Ash                 |   | 7%-10%        |
| Calories            |   | 3.2 kcal/gram |

 

Rice bran is unique in the plant kingdom.  Its protein is hypoallergenic and containsall of the essential amino acids, the necessary building blocks of protein inthe body.  Rice bran containsapproximately 20% oil, which closely resembles peanut oil in fatty acidcomposition and heat stability.  Ricebran oil contains essential fatty acids and a broad range of nutraceuticalcompounds that have been demonstrated to have therapeutic properties.  (Cheruvanky and Raghuram, 1991 Journal ofthe American College of Nutrition, Vol. 10, No. 4, pp. 593-691.)

 

Nutraceuticals are food constituents that have humantherapeutic effects.  Some of thesecompounds include a newly discovered complex of Vitamin E called“tocotrienols,” and gamma oryzanol, which is only found in rice.  These compounds are potent antioxidants thathave been shown to aid in reducing damage from free radicals in the body.  RiceX Bran also contains very high levels ofB-complex vitamins, betacarotene (a vitamin A precursor), other carotenoids andphytosterols, as well as both soluble and insoluble fiber.  (Saunders, 1990, Rice Bran Oil, presented atCalorie Control Council Meeting, February 14, 1990, Washington, D.C.)

 

We have been assigned five U.S. patents relating tothe production or use of Nutraceutical or HVF products.  The patents include patent number 5,512,287“PRODUCTION OF BETA-GLUCAN AND BETA-GLUCAN PRODUCT” which was issued on April30, 1996; patent number 5,985,344 “PROCESS FOR OBTAINING MICRONUTRIENT ENRICHEDRICE BRAN OIL” which was issued on Nov. 16, 1999; patent number 6,126,943“METHOD FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA, AND ATHEROSCLEROSIS”which was issued on Oct. 3, 2000; patent number 6,303,586 B1 “SUPPORTIVETHERAPY FOR DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA” issued on Oct. 15, 2001and patent number 6,350,473 B1 “METHOD FOR TREATING HYPERCHOLESTEROLEMIA,HYPERLIPIDEMIA AND ATHEROSCLEROSIS” issued on Feb. 26, 2002.  We plan to apply for additional patents inthe future as new products, treatments and uses are developed.

 

**BUSINESSSTRATEGY**

 

Our goal is to become the world’s leading producer anddistributor of stabilized rice bran and rice bran based products in the premiumconsumer food and animal feed sectors of the marketplace.  We will produce stabilized rice bran andrelated products in manufacturing facilities we own or through joint venturearrangements.  See “Supply andManufacturing.”  We do not intend tosell our proprietary technology or processing methods.  We will protect our process and productsthrough both trade secret protection and through patent and trademarkprotection.  See “Patents andTrademarks.”

 

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We intend to continue research and development effortsto establish the efficacy of our stabilized rice bran based products inproviding nutritional support to individuals with chronic diseases and inpromoting human health and nutrition. We believe that clinical support for stabilized rice bran products willfurther enhance the value of our products as nutraceuticals and functional foodingredients.  Finally, we intend toaggressively market our products in four distinct product areas.  These areas are nutraceuticals, functionalfood ingredients, performance feed and companion pet food supplements, and ricebran oils.  In further pursuit of thisgoal, we have focused and will continue to focus our marketing and developmentefforts in developed regions, including the U.S., Europe, South Africa,Argentina, Japan, Korea, and Taiwan; and in developing regions, including inCentral and South America, India, China, Indonesia and most of the othercountries in Asia, and Africa.

 

**DEVELOPEDNATIONS**

 

In developed nations, our focus is on producing andselling ingredients to large consumer product marketers as health enhancingingredients for existing or newly developed products, and as stand-aloneproducts to consumers.  During 2002, weentered into a distribution agreement with Kreglinger Europe to expand ourbusiness opportunities into the United Kingdom and Benelux markets on anexclusive basis.  In addition, we haveestablished relationships with German and Korean companies to introduce ourproducts into these regions.  Althoughthere can be no assurance that our products will be successfully introducedinto these regions, we believe that interest of this type validates thepotential opportunity. In addition, we believe that the relationship reflectsthe strategy for our foreign ventures. We intend to seek other opportunities indeveloped nations by converting stabilized rice bran grown in those countriesinto finished goods and into HVFs with demonstrated health or nutritionalbenefits.

 

**DEVELOPINGNATIONS**

 

Our strategic development has been focused on makingour nutrient-dense stabilized rice bran products available to developingcountries where nutritional deficiencies are a major concern, particularlyamong school-aged children.  We remainon the cutting edge in developing nations by reducing malnutrition andenhancing nutritional growth potential school-aged children.  The school nutritional and diet upgradingprograms in developing countries worldwide represent a $30 to $35 millionmarket opportunity for us.  The Food andAgriculture Organization of the United Nations and the Foreign AgriculturalService of the United States Department of Agriculture have targeted over 800million nutritionally deficient humans for assistance in the worldwide programtitled “American Special Supplemental Food Programs for Women, Infants andChildren”.

 

Our first international strategic alliance wasestablished in December 2000 with PRODESA and the Christian Children’s Fund inGuatemala.  Under this alliance, wesupplied nutritionally dense ingredients throughout Guatemala over atwelve-month period starting in January 2001. As a result, our stabilized rice bran product, RiceX Solubles, has beenused as a base for nutritionally enhanced drink for school breakfast and lunchprograms to over 67,000 children in rural communities throughoutGuatemala.  The twelve-month program inGuatemala was highly successful in reducing malnutrition in school age childrenand enhancing their

 

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nutritional growth potential. This proof-of-concept program in Guatemala generated nearly $2,300,000in revenues for us for year ended December 31, 2001.  In 2002, El Salvador’s Ministry of Education in San Salvadorpurchased our stabilized rice bran product, RiceX Solubles, for applications inits school nutrition programs for El Salvadorian children.  The agreement, which follows the similarprogram of Guatemala, resulted in revenues of approximately $1,000,000 for yearended December 31, 2002.

 

We continue to broaden our international marketdevelopment activities in Central America. We have received advisories from our Central America manufacturer’srepresentative, PRODESA, that commitments are pending from additional CentralAmerican countries for the sale of our stabilized rice bran, RiceXSolubles.  These commitments are directpurchase sales contracts financed in part through the United Statesgovernment’s Public Law 416b programs, with joint participation by the hostcountry government.  Therefore, thesecommitments require authorizations by each country’s authorizedrepresentatives.  Due to domestic andglobal uncertainties in government programs, we have experienced delays infinalizing purchase orders and delivery schedules for RiceX Solubles into thisregion.  However, management believesthat product sales and shipments will continue and expand into additionalCentral American countries during 2003 and beyond.

 

We also intend to partner with local governments andcompanies in developing nations, on a joint venture basis, to stabilize locallygrown rice bran for local consumption and for future export.  We plan to introduce our stabilizationprocess systems in large rice mills located in Central and South America,China, India and Southeast Asia in the future. In many developing nations, the average person has a 300-500 caloriedaily diet deficit.  (The Food andAgriculture Organization of the United Nations (FAO), Agrostat PC, on diskette(FAO, Rome, 12993); and the World Resources Institute in collaboration with theUnited Nations Environment Programme and the United Nations DevelopmentProgramme, World Resources 1994-95 (Oxford University Press; New York, 1994),p. 108.)  If we are able to expand intothese areas, the installation of 100 RiceX processing systems has the capacityto provide up to 500 nutritionally dense calories per day to over 15 millionpeople each year.  The diet supplementprovided by the locally grown and stabilized rice bran would help those peopleapproach U.S. levels of nutrition.

 

We have had preliminary discussions regarding thedemonstration of our system and the end products for our technology with anumber of companies and governments including countries in Central America,India, China, Argentina, Brazil, Malaysia, and certain African countries.  There can be no assurance that thesediscussions will lead to implementation of the RiceX Process with thesecompanies or governments.

 

**SALESAND MARKETING**

 

We have targeted four distinct product areas in whichRiceX Bran and related products may be used as the primary ingredient.  Our key marketing strategy is to formstrategic alliances with industry leaders in each of our target markets.  This strategy will allow us to leverage theresearch, marketing and distribution strengths of our partners in order to moreeconomically and efficiently introduce and market products.  We have formed alliances, or have enteredinto negotiations to form alliances, in each of our target markets, which arenutraceuticals, functional food ingredients, performance feed and companion petfood supplements, and rice bran oils.

 

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Our overall marketing plans in each of the targetmarkets are discussed below.

 

**NUTRACEUTICALS**

 

Nutraceuticals are food-derived substances withpharmaceutical-like properties, including vitamins and dietarysupplements.  RiceX Bran can be used asa nutraceutical to provide certain specific nutrients or food components(including antioxidants, oryzanols, Vitamin E, Vitamin B, and bran fiber) or toaddress specific health applications such as cardiovascular health, diabetescontrol, fighting free radicals and general nutritional supplementation.  We have sold RiceX Bran products as ingredientsto consumer nutrition and healthcare companies, national nutritional retailers,and multi-level personal product marketers. We continue to develop HVFs, the nutraceutical-like compounds found inrice bran that provides specific health benefits.  We have also been informed that at least one national nutritionalretailer and other personal product marketing companies are working ondevelopment of special products utilizing RiceX Bran and its relatedproducts.  There can be no assurancethat such marketing efforts will be successful or that any of the proposedproducts will be developed in a commercially reasonable time or at all.

 

**FUNCTIONALFOOD INGREDIENTS**

 

RiceX Bran is a low cost, all natural food productthat contains a unique combination of oil, protein, carbohydrates, vitamins,minerals, fibers, and antioxidants that can be used to enhance the nutritionalvalue of popular consumer products. Foods that are ideally suited for the addition of RiceX Bran to theirproducts include cereals, snack foods and breads.  We are marketing RiceX Bran to consumer food companies for use inalready established products and for development of new products.

 

The functional food market in the United States is $16billion and we estimate that this represents a $35 to $45 million market shareopportunity for us.  Premium ingredientmanufacturers are in high demand and we are strategically positioned to takeadvantage of this growing and sustainable market opportunity.  Our proprietary technology and productpatents represent extremely valuable assets for achieving strategic leverage inthis industry segment.

 

**PERFORMANCEFEED AND COMPANION PET FOOD SUPPLEMENTS**

 

We also market RiceX Bran as a feed supplement foranimals.  RiceX Bran is used as anequine feed supplement and has proven to provide greater muscle mass, improvedstamina, and hair-coat luster when added to a normal diet.  Show and performance horses represent thepremium end of the equine market and present a $12 to $15 million market shareopportunity for our future revenue growth. We have initiated strategic alliance discussions with several majordomestic premium pet food and equine feed manufacturers and distributors.  There can be no assurance that thesediscussions will be successful.

 

**RICEBRAN OILS**

 

Nutrient-rich oil made from RiceX Stabilized Rice Branhas a high flash point, which provides a long fry life and is not readilyabsorbed into food.  The oil alsomaintains many of the nutritional benefits of whole rice bran products, makingit ideally suited for healthy salad and cooking oils.

 

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We have completed a preliminary joint venture withMonsanto Corporation in which our proprietary technology for stabilizing ricebran was tested in India.  Since Indiais the second largest rice producer in the world, it made sense thatsignificant opportunities in India could be realized if our technology wasproven in that region of the world.  Wesuccessfully demonstrated our stabilization capability and Monsanto acknowledgedthat the preliminary joint venture met its objectives.  We are now developing stabilized rice branmarketing models, which would support aggressive expansion into India and othermajor rice producing countries.  Therecan be no assurance that a marketing model will be successful.

 

**MARKETINGMETHODS**

 

As of March 1, 2003, we have an Executive VicePresident of Sales and Marketing and three domestic sales representatives.  In addition, we have entered into agreementswith PRODESA for Central America markets, and Kreglinger Europe for the UnitedKingdom and Benelux markets, for developing and marketing RiceX Branproducts.  We also continue to work todevelop additional significant alliances in efforts to increase our salesvolume.

 

Pursuant to the Stabilized Rice Bran Processing Salesand Marketing Agreement between Farmers’ Rice Cooperative, or Farmers, acooperative association organized under the California Food and AgricultureCode, and us, dated May 1, 2002, Farmers has a non-exclusive license to ourrice bran processing equipment for production of stabilized rice bran solelyfor sale to our and Farmers’ customers. Pursuant to the terms of the agreement, Farmers has agreed to pay us aroyalty payment based on production schedules of stabilized rice bran producedby Farmers for sale to its customers. The royalty payment may be adjusted from time to time to account for thechanges in the market.

 

**CUSTOMERS**

 

We have in excess of 120 active customeraccounts.  Currently, our majorcustomers are Wolcott Farms, Integris Corporation and the U.S. Embassy, ElSalvador.  We depended on thesecustomers for approximately 66% of all sales revenue during 2002.  Loss of any of these customers could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

**SUPPLY ANDMANUFACTURING**

 

We purchase unstabilized rice bran from one majorsupplier, Farmers.  Pursuant to anagreement with Farmers, our stabilization machinery is physically attached toFarmers’ rice processing plants and the rice bran by-product is directly transferredto our machinery for stabilization without the need for shipping.  The relationship with Farmers is symbiotic,as the rice manufacturer searches for raw rice bran marketing channels while wehave ready access to unstabilized bran. Farmers is currently our only supplier of unstabilized rice bran.  We intend to enter into additionalrelationships with rice processors, both in the United States and abroad aspart of our overall business strategy. Our production capacity currently stands at 1,500 tons per month.  We believe that we will be able to obtainadditional suppliers due to the benefits

 

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suppliers can expect to receive from an agreement with us.  There can be no assurance that we will obtainadditional suppliers.

 

As required, we ship RiceX Bran from our facilities inCalifornia to our plant in Dillon, Montana for further processing into RiceXSolubles, Dextrinized Rice Bran and RiceX Fiber Complex.  Current monthly production capacity is approximately50 tons of RiceX Solubles and 50 tons of RiceX Fiber Complex.  Additional equipment could more than doubleproduction capacity.  We intend toacquire or construct an additional processing facility as the demand for RiceXSolubles and RiceX Fiber Complex justifies expansion.

 

Every food product that we manufacture is producedunder published FDA and USDA regulations for “Good ManufacturingPractices.”  Our Vice President ofOperations oversees quality control and quality assurance testing.  Product samples for each product code areanalyzed for microbiological adherence to a predetermined set of productspecifications and each lot is released once it demonstrates its compliancewith specifications.

 

**PATENTSAND TRADEMARKS**

 

The RiceX Process is an adaptation and refinement ofstandard food processing technology applied to the stabilization of ricebran.  We have chosen to treat the RiceXProcess as a trade secret and not to pursue process or process equipmentpatents on the original processes.  However,process improvements will be reviewed for future patent protection.  We believe that the unique products, andtheir biological effects, resulting from our Stabilized Rice Bran arepatentable.  We have been assigned fiveU.S. patents relating to the production or use of Nutraceutical or HVFproducts.  The patents include patentnumber 5,512,287 “PRODUCTION OF BETA-GLUCAN AND BETA-GLUCAN PRODUCT” which wasissued on April 30, 1996; patent number 5,985,344 “PROCESS FOR OBTAININGMICRONUTRIENT ENRICHED RICE BRAN OIL” which was issued on Nov. 16, 1999; patentnumber 6,126,943 “METHOD FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA, ANDATHEROSCLEROSIS” which was issued on Oct. 3, 2000; patent number 6,303,586 B1“SUPPORTIVE THERAPY FOR DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA” issued onOct. 15, 2001 and patent number 6,350,473 B1 “METHOD FOR TREATINGHYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA AND ATHEROSCLEROSIS” issued on Feb. 26,2002.  We plan to apply for additional patentsin the future as new products, treatments and uses are developed.

 

RiceXÔand RiceX SolublesÔ are our registered trade names.  Mirachol®, Max “E”® and Max “E” Glo® are ourregistered trademarks.  In addition toour trade names and our trademarks, we hold patents to the production of Beta Glucanand to a micro nutrient enriched rice bran oil process.  We also hold patents to a method to treathigh cholesterol, to a method to treat diabetes and to a process for producingHVF from stabilized rice bran.

 

We endeavor to protect our intellectual propertyrights through patents, trademarks, trade secrets and other measures.  However, there can be no assurance that wewill be able to protect our technology adequately or that competitors will notdevelop similar technology.  There canbe no assurance that any patent application we may file will be issued or thatforeign intellectual property laws will protect our intellectual propertyrights.  Other companies and inventorsmay

 

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receive patents that contain claims applicable to our system andprocesses.  The use of our systemscovered by such patents could require licenses that may not be available onacceptable terms, if at all.  Inaddition, there can be no assurance that patent applications will result inissued patents.

 

Although there currently are no pending claims orlawsuits against us regarding possible infringement claims, there can be noassurance that infringement claims by third parties, or claims forindemnification resulting from infringement claims, will not be asserted in thefuture or that such assertions, if proven to be true, will not have a materialadverse affect on our financial condition and results of operations.  In the future, litigation may be necessaryto enforce our patents, to protect our trade secrets or know-how or to defendagainst claimed infringement of the rights of others and to determine the scopeand validity of the proprietary rights of others.  Any such litigation could result in substantial cost anddiversion of our resources, which could have a material adverse effect on ourfinancial condition and results of operations. Adverse determinations in such litigation could result in the loss ofour proprietary rights, subject us to significant liabilities to third parties,requires us to seek licenses from third parties or prevent us frommanufacturing or selling its systems, any of which could have a materialadverse effect on our financial condition and results of operations.  In addition, there can be no assurance thata license under a third party’s intellectual property rights will be availableon reasonable terms, if at all.

 

**COMPETITION**

 

Although we believe that we are the only company touse non-chemical methods to stabilize all natural rice bran so that the branhas a shelf life of over one-year, we compete with other companies attemptingto stabilize rice bran, as well as companies producing other food ingredientsand nutritional supplements.  Our onlysignificant competitor is Producer’s Rice Mill. The competitor may have greatercapital resources and experience in the food industry in total; however, webelieve that we have more experience in the rice bran industry.  There can be no assurance that we will beable to compete successfully in the rice bran industry.  Our major nutritional supplement competitorsinclude producers of wheat bran and oat bran, particularly in the functionalfood ingredients market segment.

 

**RESEARCHAND DEVELOPMENT**

 

Rice bran contains a wide variety of antioxidants,vitamins, and other nutrients associated with good health and resistance todisease.  We have conducted apreliminary clinical evaluation that indicates RiceX products have efficacy inthe nutritional management of certain conditions and diseases, such as diabetesmellitus and coronary vascular disease. Data from this study has been analyzed and the data supports theinitiation of clinical trials.  Weintend to vigorously conduct these trials and, if successful, will developfoods containing the active nutraceutical components of RiceX Bran tomanufacture products targeted at specific conditions or suitable for themaintenance of general health and well-being. There can be no assurance that the results of additional clinical trialswill prove successful or that we will be able to develop additional newproducts.  See “GovernmentalRegulations.”

 

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Expenditures for researchand development for the years ended December 31, 2002 and 2001 totaled $267,000and $201,000, respectively.  We expectto continue research and development expenditures to establish the scientificbasis for health claims of existing products and to develop new products andapplications.

 

**EMPLOYEES**

 

As of March 1, 2003, we had a total of 24 employees,all of whom were full time employees. We believe that our relations with our employees are good.

 

**RISKFACTORS**

 

**LIMITEDOPERATING HISTORY**

 

There is limited historical financial informationabout us upon which to base an evaluation of our performance or to make adecision regarding an investment in shares of our common stock.  Although we were originally formed in May1989, commercial manufacturing operations and marketing efforts did notcommence until June 1996.  For the firsttime in our history, we reported two consecutive years of profitability.  We reported net incomes for years endedDecember 31, 2002 and 2001 of $374,000 and $1,129,000, respectively, andgenerated almost $1,200,000 in cash from operations over this same two-yearperiod.  We have shareholders’ equity of$4,318,000 and aggregated cash and cash equivalents of $1,924,000 at December31, 2002.  Our management team hasdeveloped a strategic and financially sound business plan to meet the ongoingliquidity needs of our operations for the year ended December 31, 2003 andthereafter.  We believe we havepositioned ourselves to become the foremost premium ingredient supplier in thefood manufacturing and animal feed sectors. Our business could be subject to any or all of the problems, expenses,delays and risks inherent in the establishment of a new business enterprise,including limited capital resources, possible delays in product development,possible cost overruns due to price and cost increases in raw product andmanufacturing processes, uncertain market acceptance and absence of anoperating history.  Therefore, there canbe no assurance that our business or products will be successful or that wewill be able to achieve or maintain profitable operations.  There can be no assurance that we will notencounter unforeseen difficulties that may deplete our capital resources morerapidly than anticipated.

 

**MARKETRISKS OF A NEW BUSINESS**

 

We have formulated our business plan and strategiesbased on certain assumptions regarding the size of the rice bran market, ouranticipated share of this market, and the estimated price and acceptance of ourproducts.  These assumptions are basedon the best estimates of our management. There can be no assurance that our assessments regarding market size,potential market share attainable by us, the price at which we will be able tosell our products, market acceptance of our products or a variety of otherfactors will prove to be correct.  Anyfuture success may depend upon factors including changes in the dietary supplementindustry, governmental regulation, increased levels of competition includingthe entry of additional competitors and increased success by existingcompetitors, changes in general economic

 

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conditions, increases in operating costs including costs of production,supplies, personnel, equipment, and reduced margins cause by competitivepressures.

 

**COMPETITION**

 

Competition in our targeted industries, includingnutraceuticals, functional food ingredients, rice bran oils, animal feedsupplements and companion pet food ingredients is vigorous with a large numberof businesses engaged in the various industries.  Many of our competitors have established reputations forsuccessfully developing and marketing their products.  Many of our competitors have greater financial, managerial, andtechnical resources than we do.  If weare not successful in competing in these markets, we may not be able to attainour business objectives.

 

**GOVERNMENTALREGULATION**

 

The processing, formulation, packaging, labeling andadvertising of our products is subject to regulation by one or more federalagencies.  Although Congress hasrecently recognized the potential impact of dietary supplements in promotingthe health of U.S. citizens by enacting the Dietary Supplement Health EducationAct of 1994, or DSHEA, which severely limits the FDA’s jurisdiction inregulating dietary supplements, there is no way to predict the potential effectof DSHEA.  It may be difficult for anycompany manufacturing or marketing dietary supplements to remain in strictcompliance with the technical requirements of DSHEA.  The FDA has proposed regulations with the purpose of implementingDSHEA and proposals have been made to modify or change the provisions ofDSHEA.  It is impossible to predictwhether those regulations of proposed changes will become law or the effectthat such regulations or proposed changes, if implemented, will have on ourbusiness and operations.

 

**RELIANCEON LIMITED NUMBER OF PRODUCTS**

 

All of our products are based on stabilized ricebran.  Although we will market rice branas a dietary supplement, as an active food ingredient for inclusion in othercompanies’ products, and in other ways, a decline in the market demand for ourproducts, as well as the products of other companies utilizing our products,could have a significant adverse impact on us.

 

**RELIANCEON ADEQUATE SUPPLY OF RAW RICE BRAN**

 

Our proprietary technology is used to stabilize ricebran, which is a by-product from milling paddy rice to white rice.  We currently have a supply arrangement withone of the largest rice mills in the United States.  We are pursuing other supply sources in the United States and inforeign countries.  There can be noassurance that we will continue to secure adequate sources of raw rice bran tomeet its requirements to produce stabilized rice bran products.

 

**DEPENDENCEON MARKETING EFFORTS**

 

We are dependent on our ability to market products toanimal food producers, food manufacturers, mass merchandise and health foodretailers, and to other companies for use in their products.  We must increase the level of awareness ofdietary supplements in general and our products in particular.  We will be required to devote substantialmanagement and financial

 

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resources to its marketing and advertising efforts and there can be noassurance that these efforts will be successful.

 

**DEPENDENCEON KEY EMPLOYEES**

 

We believe that our success will depend, to a significantextent, upon the efforts and abilities of the current group of executives,strategic alliance and joint venture partners. The loss of the services of one or more of these key personnel orpartners could have a material adverse affect on our business, financialcondition and results of operations.  Inaddition, our future success will depend upon our ability to continue toattract and retain qualified management personnel.  There can be no assurance that we will be successful inattracting and retaining such personnel.

 

**PATENTS,LICENSES AND INTELLECTUAL PROPERTY CLAIMS**

 

Our success depends in part on its ability to obtainpatents, licenses and other intellectual property rights for its products andtechnology.  We have five United Statespatents and we may decide to file corresponding international applications. Wehold patents to the production of Beta Glucan and to a micro nutrient enrichedrice bran oil process.  We also holdpatents to a method to treat high cholesterol, to a method to treat diabetesand to a process for producing HVF from stabilized rice bran.  The process of seeking patent protection maybe long and expensive, and there can be no assurance that patents will beissued, that we will be able to protect our technology adequately, or thatcompetition will not be able to develop similar technology.  There currently are no claims or lawsuitspending or threatened against us regarding possible infringement claims, butthere can be no assurance that infringement claims by third parties, or claimsfor indemnification resulting from infringement claims, will not be asserted inthe future or that such assertions, if proven to be true, will not have amaterial adverse affect on our business, financial condition and results ofoperations.  In the future, litigationmay be necessary to enforce our patents, to protect our trade secrets orknow-how or to defend against claimed infringement of the rights of others andto determine the scope and validity of the proprietary rights of others.  Any litigation could result in substantialcost and diversion of our efforts, which could have a material adverse affecton our financial condition and results of operations.  Adverse determinations in any litigation could result in the lossof our proprietary rights, subjecting us to significant liabilities to thirdparties, require us to seek licenses from third parties or prevent us frommanufacturing or selling our systems, any of which could have a materialadverse affect on our financial condition and results of operations.  There can be no assurance that a licenseunder a third party’s intellectual property rights will be available to us onreasonable terms, if at all.

 

**THINMARKET; POSSIBLE VOLATILITY OF STOCK PRICE**

 

Our common stock has been traded on the OTC BulletinBoard since May 1996 under the symbol “RICX”. We believe that many factors could cause the price of our common stockto fluctuate, perhaps substantially, including

 

•                                announcementsof developments related to our business,

 

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•                                fluctuationsin our quarterly or annual operating results,

 

•                                failureto meet securities analysts’ expectations,

 

•                                generalconditions in the international marketplace and the worldwide economy,

 

•                                announcementsof technological innovations or new systems or enhancements by us or ourcompetitors,

 

•                                developmentsin patents or other intellectual property rights, and

 

•                                developmentsin our relationships with customers and suppliers.

 

**ANTI-TAKEOVEREFFECT OF CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW**

 

Under our Certificate of Incorporation, our Board ofDirectors, or Board, has the authority, without action by our stockholders, tofix certain terms of, and to issue, shares of Preferred Stock.  We are incorporated under Delaware law.  Certain provisions of our Certificate ofIncorporation and certain provisions of Delaware law may have the effect ofdelaying, deterring or preventing a change in control of our company.  Other provisions in our Certificate ofIncorporation and Bylaws, and Delaware law, impose procedural and otherrequirements that could make it more difficult to effect certain corporateactions, including replacing incumbent directors.  Furthermore, our Board is divided into three classes ofdirectors.  Each class of directorsserves for a staggered three-year term after the initial classification andelection.  This may make it moredifficult for a third party to gain control of our Board.  By virtue of these provisions, our Board maybe able to take or prevent actions affecting unaffiliated stockholders withoutsuch stockholders’ approval or consent. In addition, these provisions may adversely affect the market price ofour common stock and reduce the possibility that an investor may receive apremium for his or her shares in a tender offer.  See “Directors, Executive Officers, Promoters and ControlPersons.”

 

**THECOMPANY**

 

We were incorporated under Delaware law in May1998.  We succeeded to the business ofour predecessor corporation, Food Extrusion, Inc., pursuant to are-incorporation that was effective upon completion of the merger of the Nevadacorporation with the Delaware corporation on August 4, 1998.  Food Extrusion, Inc, was incorporated inCalifornia in May 1989 and subsequently merged in a stock-for-stock exchangeinto Core Iris, a Nevada corporation and subsequently changed its name to FoodExtrusion, Inc.  Food Extrusion, Inc.changed its name to The RiceX Company in May 1998.  Food Extrusion Montana, Inc., was incorporated in Montana inDecember 1996, as our wholly owned subsidiary. In January 1997, Food Extrusion Montana, Inc. acquired certain assets ofCentennial Foods, Inc., an Idaho corporation in exchange for common stock andthe assumption of certain liabilities which were paid in full in January 1999.

 

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| **Item  2.** | **DESCRIPTION  OF PROPERTY** |
|--------------|------------------------------|

 

We currently lease a 5,600 square foot office facilityat 1241 Hawk’s Flight Court, El Dorado Hills, California, and a 3,500 squarefoot warehouse and shipping facility at 1261 Hawk’s Flight Court, El DoradoHills, California.  Our subsidiary, FoodExtrusion Montana, Inc., owns a 15,700 square foot production facility inDillon, Montana.  The leases for the ElDorado Hills facilities expire in September 2006.  We have aggregate annual lease payments for the El Dorado Hillsfacilities approximating $69,000, net of sub-lease payment collectionsapproximating $64,000 per year.  InNovember 1999, we entered into a sub-lease agreement with a company, NutraStar,for a portion (7,800 square feet) of the facility located at 1261 Hawk’s FlightCourt, El Dorado Hills, California.  Thesub-lease with NutraStar expires in September 2006.

 

We believe that our facilities are adequate for ouranticipated needs through 2003 and that the properties are adequately coveredby insurance.

 
| **Item  3.** | **LEGAL  PROCEEDINGS** |
|--------------|------------------------|

 

From time to time we are involved in litigationincidental to the conduct of our business. While the outcome of lawsuits andother proceedings against us cannot be predicted with certainty, in the opinionof management, none of the litigation in which we are currently involved,individually or in the aggregate, is expected to result in a material effect onour financial position or results of operations.

 
| **Item  4.** | **SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS** |
|--------------|----------------------------------------------------------|

 

There were no matters submitted to our securityholders for a vote during the Quarter ended December 31, 2002.

 

**PART II**

 
| **Item  5.** | **MARKET FOR COMMON EQUITY AND  RELATED STOCKHOLDER MATTERS** |
|--------------|---------------------------------------------------------------|

 

The principal United States market for our commonstock is the OTC Bulletin Board. These quotations reflect inter-dealer prices,without retail mark-up, mark-down or commissions and may not represent actualtransactions.  The following is the highand low bid information for such common stock:

 
| **COMMON STOCK** |   | **HIGH** |   | **LOW** |   |
|------------------|--------|----------|--------|---------|--------|
| 2002             |   |     |   |    |   |
| First Quarter    |   | $        | 0.39   |    | $      | 0.27 |   |
| Second Quarter   |   | $        | 0.49   |    | $      | 0.24 |   |
| Third Quarter    |   | $        | 0.36   |    | $      | 0.22 |   |
| Fourth Quarter   |   | $        | 0.30   |    | $      | 0.15 |   |
|             |   |     |   |    |   |
| 2001             |   |     |   |    |   |
| First Quarter    |   | $        | 0.48   |    | $      | 0.31 |   |
| Second Quarter   |   | $        | 0.60   |    | $      | 0.26 |   |
| Third Quarter    |   | $        | 0.60   |    | $      | 0.27 |   |
| Fourth Quarter   |   | $        | 0.45   |    | $      | 0.31 |   |

 

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There were approximately 264 holders of record ourcommon stock as of March 1, 2003.

 

**DIVIDENDS**

 

We have neither paid, nor declared, any dividendssince our inception.  We do not intendto declare any such dividends in the foreseeable future.  Our ability to pay dividends is subject tolimitations imposed by Delaware law and, as a quasi-California corporation, tothe more restrictive provision of California law.  Under Delaware law, dividends may be paid to the extent that acorporation’s assets exceed its liabilities and it is able to pay its debts asthey become due in the usual course of business.  California law generally prohibits a corporation from payingdividends unless the retained earnings of the corporation immediately prior tothe distribution exceed the amount of the distribution.  Alternatively, a corporation may paydividends if the assets of the corporation exceed 1 1/4 times its liabilities,and the current assets of the corporation equal or exceed its currentliabilities.  However, if the averagepre-tax earnings of the corporation before interest expense for the two yearspreceding the distribution was less than the average interest expense of thecorporation for those years, the current assets of the corporation must exceed1 1/4 times its current liabilities.

 

**RECENTSALES OF UNREGISTERED SECURITIES**

 

In 1998, in conjunction with RiceX’s re-incorporationin Delaware, we increased our authorized number of common shares from50,000,000 shares to 100,000,000 shares and authorized 10,000,000 shares ofpreferred stock which may be issued from time to time, in one or more series.  Our Board is authorized to establish therights, preferences and privileges of each series of our preferred stock, whenissued.  At December 31, 2002, anaggregate of 38,680,724 shares of common stock were outstanding, and an additional25,179,923 shares of our common stock were reserved for future issuance uponthe exercise of stock options and warrants.

 

During 2002 and 2001, we did not issue or sell anyshares of our common stock.

 

In April 2000, we issued 14,134 shares of common stockto an agent for introducing investors to us. The value of the common stock was approximately $10,601 and is recordedin shareholders’ equity.  The shareswere issued without registration under the Securities Act in reliance on theexemption from registration provided by Section 4(2) of the Securities Act.

 

In May 2000, we issued 100,000 shares of common stockto acquire equipment from one of our suppliers.  The value of the common stock was $68,750 and is recorded inshareholders’ equity.  The shares wereissued without registration under the Securities Act in reliance on theexemption from registration provided by Section 4(2) of the SecuritiesAct.  During 2002, this supplier sold55,000 shares in the open market and we purchased the remaining 45,000 sharesat a cost of $33,767.

 

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Also in May 2000, we issued 1,200,000 shares of commonstock to three executives pursuant to the exercise of some of their stockoptions and received promissory notes in the amount of $863,000.  In June 2000, the executives rescinded theexercise of these stock options and promissory notes.  These stock options were issued in accordance with our 1997 StockOption Plan that was ratified in 1997 by our Board.  The shares were issued without registration under the SecuritiesAct in reliance on the exemption from registration provided by Section 4(2) ofthe Securities Act.

 

During June 2000, three executive officers and werescinded the exercise of 2,700,000 stock options priced at $0.72 per share andpromissory notes in the total amount of $1,941,000 given in payment of theexercise price.  On account of therescission, the executive officers returned to us the shares of common stockpurchased pursuant to the exercise of the options.  The rescission of the exercise of the options restores theexecutive officers and us to the positions occupied prior to the exercise.  The 2,700,000 stock options may be exercisedin the future at the $0.72 per share exercise price until expired.

 

Also in June 2000, we issued 32,000 shares of commonstock for services rendered.  The valueof the common stock was $24,000 and is recorded in shareholders’ equity.  The shares were issued without registrationunder the Securities Act in reliance on the exemption from registrationprovided by Section 4(2) of the Securities Act.

 

In September 2000, we finalized an agreement with aventure capital firm to convert a $2,500,000 note to equity.  On September 29, 2000, we converted the notefor 3,571,429 shares of common stock and warrants to purchase 3,571,429 sharesof common stock at $0.70 per share. These warrants are immediately exercisableand have a term of five years.  Inconnection with this conversion of the note to equity, we also granted additionalwarrants to purchase up to 4,464,285 shares of common stock at $0.70 pershare.  These additional warrants areexercisable at any time during the five-year period commencing from the date ofgrant.  The warrant shares arerestricted from sale and or transfer until such time when our revenues atvarious stages reach an annualized equivalent of $12,000,000 and$25,000,000.  The shares issued werewithout registration under the Securities Act in reliance on the exemption fromregistration provided by Section 4(2) of the Securities Act.

 

During October 2000, we issued 50,000 shares of commonstock to consultants for services rendered. The value of the common stock was $50,000 and is recorded inshareholders’ equity.  The shares wereissued without registration under the Securities Act in reliance on theexemption from registration provided by Section 4(2) of the Securities Act.

 
| **Item  6.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OR PLAN OF OPERATION** |
|--------------|---------------------------------------------------------------------|

 

The following is a discussion of our consolidatedfinancial condition as of December 31, 2002 and the results of operations forthe fiscal years ended December 31, 2002 and 2001, which should be read inconjunction with, and is qualified in its entirety by, the consolidatedfinancial statements and notes thereto included elsewhere in this report.

 

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**CRITICALACCOUNTING POLICIES**

 

A summary of our significant accounting policies isincluded in Footnote 1 of our financial statements. We believe the applicationof these accounting policies on a consistent basis enables us to provide timelyand reliable financial information about our earnings results, financialcondition, and cash flows.

 

The preparation of financial statements in accordancewith generally accepted accounting principles requires management to make judgments,estimates, and assumptions regarding uncertainties that affect the reportedamounts presented and disclosed in the financial statements. Our managementreviews these estimates and assumptions based on historical experience, changesin business conditions and other relevant factors that they believe to bereasonable under the circumstances. In any given reporting period, actualresults could differ from the estimates and assumptions used in preparing ourfinancial statements.

 

Critical accounting policies are those that may have amaterial impact on our financial statements and also require management toexercise significant judgment due to a high degree of uncertainty at the timethe estimate is made. Our management has discussed the development andselection of our accounting policies, related accounting estimates and thedisclosures set forth below with the Audit Committee of our Board of Directors.We believe our critical accounting policies include those addressing revenuerecognition, allowance for doubtful accounts, and inventories.

 

**Revenue Recognition**

 

                Revenues fromproduct sales are recognized when products are shipped.  Deposits are deferred until either theproduct has shipped or conditions relating to the sale have been substantiallyperformed.

 

**Allowance for Doubtful Accounts**

 

                We continuouslymonitor collections from our customers and maintain an allowance for doubtfulaccounts based upon our historical experience and any specific customercollection issues that we have identified. While such credit losses have historically not exceeded our expectationsand the provisions established, there is a risk that credit losses in thefuture will exceed those that have occurred in the past, in which case ouroperating results would be adversely affected.

 

**Inventory Valuation**

 

                Inventories arestated at lower of cost or market determined on a first-in, first-outbasis.  The costs associated with themilling process are allocated to inventory.

 

**OVERVIEW**

 

Since our formation in 1989, we have been engaged inextensive research and development activities that resulted in the developmentof the RiceX Process to stabilize rice bran. During 1996, 1997 and 1998, we accelerated our research, includingclinical trials; product development; equipment development; procurement ofmanufacturing facilities; development of markets and distribution methods;negotiation of strategic alliances; patent applications; raising capital; anddevelopment of corporate infrastructure, including executive recruitment activities.  We commenced commercial operations in 1996with revenues for the year aggregating approximately $908,000 and we reported anet loss of approximately $5,024,000 for the year ended December 31, 1996.

 

For the first time in our history, we reported two consecutiveyears of profitability.  We reported netincomes for years ended December 31, 2002 and 2001 of $374,000 and $1,129,000,respectively, and generated almost $1,200,000 in cash from operations over thissame two-year period.  We haveshareholders’ equity of $4,318,000 and aggregated cash and cash equivalents of$1,924,000 at December 31, 2002.

 

23

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The following highlights our financial data forDecember 31, 2002, 2001 and 2000.

 

**SelectedFinancial Summary**

**(inthousands except share data)**

 
| **Consolidated Operating Results**             |   | **2002**   |   | **2001**   |   | **2000**   |   |
|------------------------------------------------|--------|------------|--------|------------|--------|------------|--------|
| Revenue                                        |   | $          | 5,383  |       | $      | 6,299      |   | $ | 3,839 |   |
| Gross Margin                                   |   | 3,277      |   | 3,853      |   | 1,754      |   |
|                                           |   | 61         | %      | 61         | %      | 46         | %      |
| Research and  development expenses             |   | 267        |   | 201        |   | 271        |   |
| Selling, general  and administrative expenses  |   | 2,029      |   | 1,702      |   | 1,178      |   |
| Stock option and  warrant expense              |   | 12         |   | 12         |   | 92         |   |
| Professional and  investor relations fees      |   | 589        |   | 877        |   | 1,509      |   |
| Bad debt expense                               |   | 24         |   |       |   | 250        |   |
| Net income  (loss)                             |   | $          | 374    |       | 1,129  |       | $      | (2,468 | ) |
| Earnings per  share                            |   | 0.01       |   | 0.03       |   | (0.07      | )      |
| Weighted average  number of shares outstanding |   | 38,792,194 |   | 38,826,350 |   | 36,727,443 |   |
|                                                |        |            |        |            |        |            |        |  |  |  |

 
| **Consolidated Balance Sheets**               |   | **2002**   | ** ** | **2001**   | ** ** | **2000**   | ** ** |
|-----------------------------------------------|--------|------------|------------|------------|------------|------------|------------|
| Cash and cash  equivalents                    |   | $          | 1,924      |       | $          | 1,603      |       | $ | 968 |   |
| Total assets                                  |   | 4,907      |       | 4,660      |       | 4,539      |       |
| Total  liabilities and convertible debt       |   | 589        |       | 563        |       | 16         |       |
| Deferred  revenue, advance payments           |   | —     |       | 221        |       | 1,341      |       |
| Shareholders’  equity                    |   | $          | 4,318      |       | 3,876      |       | 2,581      |   |
| Number of shares  outstanding at December 31, |   | 38,680,724 |       | 38,829,350 |       | 38,829,350 |       |
|                                               |        |            |            |            |            |            |            |  |  |  |

 

Our management team has developed a strategic andfinancially sound business plan to meet our ongoing liquidity needs for theyear ended December 31, 2003 and thereafter. The operating plan includes improved gross margins from reduced costs byimproved production efficiencies and product sales mix and by increased salesand expanded marketing efforts domestically and internationally.  Management also implemented spendingcontrols, which reduced some overhead costs. Additionally, significant alliances as well as increasing sales staffare in process to help increase sales volume. We believe that we have positioned ourselves to become the foremostpremium ingredient supplier in the food manufacturing and animal feedsectors.  For a complete understandingof these activities, this Management’s Discussion and Analysis should be readin conjunction with Part I. Item 1-Description of Business and Part II. Item7-Financial Statements to this Annual Report on Form 10-KSB.

 

**YEARENDED DECEMBER 31, 2002 AND DECEMBER 31, 2001**

 

Consolidated revenues for the year ended December 31,2002 were $5,383,000, a decrease of $916,000, or 15% on a comparative basis toyear ended December 31, 2001.  Weexperienced an increase of $359,000, or 10%, in sales from our domesticmarkets, while sales from our international markets, primarily Central America,decreased $1,275,000 during year ended December 31, 2002 compared to the sameperiod last year.

 

We are in the process of broadening our presence inthe international markets, by building on the year 2001 successfulproof-of-concept program in Guatemala, which generated nearly $2,300,000 inrevenues for us for year ended December 31, 2001.  We continue to

 

24

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develop and expand our international market development activities inCentral America.  In 2002, El Salvador’sMinistry of Education in San Salvador purchased stabilized rice bran productRiceX Solubles from us for applications in its school nutrition programs for ElSalvadorian children.  The agreement,which follows the similar program of Guatemala, resulted in revenues ofapproximately $1,000,000 for year ended December 31, 2002.

 

Gross margins for year ended December 31, 2002 were$3,277,000, or 61%, compared to $3,853,000 or 61%, during the same period lastyear.  The consistency in percentage wasthe result of continued plant efficiencies, favorable product sales mix, andlower raw material costs. Gross margins on our various products vary widely andthe gross margins are impacted from period to period by sales mix andutilization of production capacity. We expect that gross margins will improveas sales volumes increase.

 

Research and Development, or R&D, expensesincreased $66,000 for year ended December 31, 2002 compared to the same periodlast year.  R&D expendituresincreased from $201,000 for year ended December 31, 2001 to $267,000 for yearended December 31, 2002.  The change inR&D expenses is mostly due to the absence of reimbursement from a customerfor R&D expenditures in process research, which occurred in the same periodlast year.

 

Selling, General and Administration, or S,G&A,expenses were $2,029,000 for year ended December 31, 2002, compared to$1,702,000 for year ended December 31, 2001, an increase of $327,000.  The increase was due mostly to expensesrelating to our expanding sales and marketing functions.  This increase had been anticipated bymanagement based upon their 2002 business development plan.

 

Professional fees decreased $211,000 to $497,000 foryear ended December 31, 2002 from $708,000 for the prior year’s period.  The decrease is primarily due to lower legaland consulting fees.

 

Investor relations’ fees decreased from $169,000 foryear ended December 31, 2001 to $92,000 for year ended December 31, 2002.  The decrease of $77,000 was primarilyassociated with expenses related to an investor relations firm in 2001.  Investor relations’ fees this periodincluded expenses related to printing and distribution of our annual report,SEC reporting requirements and expenses related to a public relations firm.

 

Interest expense for period ended December 31, 2002was zero, compared to $6,000 in the same period last year.  These expenses in 2001 are finance chargesrelated to director and officer insurance financing.  There were no finance charges of this type in 2002.  We have been out of long-term debt sinceDecember of 1999, and have not incurred any significant interest expenses.

 

We had net income of $374,000 for year ended December31, 2002, or $0.01 per share, compared to net income of $1,129,000 or $0.03 pershare, a decrease of $755,000 over the same period last year.  The decrease is primarily due to decreasedrevenues of $916,000, off-set by decreased cost of goods sold of $339,000,lower utilization of production capacity, and reduced sales to Central Americathrough year ended December 31, 2002.

 

25

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The provision for income taxes on the statements ofincome consists of $33,500 and $1,600 for the years ended December 31, 2002 and2001, respectively.  The California netoperating losses have been suspended for 2002 and 2003 which results in theCompany having state income tax expense in 2002.

 

Deferred taxes arise from temporary differences in therecognition of certain expenses for tax and financial statement purposes.  At December 31, 2002, management determinedthat realization of these benefits is not assured and has provided a valuationallowance for the entire amount of such benefits.  At December 31, 2002, net operating loss carryforwards wereapproximately $11,400,000 for federal tax purposes that expire at various datesfrom 2011 through 2020 and $9,300,000 for state tax purposes that expire in2004 through 2012.

 

Utilization of net operating loss carryforwards may besubject to substantial annual limitations due to the “change in ownership”provisions of the internal revenue code and similar state regulations.  The annual limitation may result in expirationof net operating loss carryforwards before utilization.

 

**YEARENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000**

 

Consolidated revenues for year ended December 31, 2001was $6,299,000, an increase of $2,460,000, or 64%, compared to $3,839,000 forthe prior year of 2000.  The increasedrevenues were attributed to a year-to-date increase in three RiceX Bran productcategories, RiceX Stabilized Rice Bran, or SRB, Regular, RiceX Solubles and SRBFine.  RiceX Solubles had an increase inrevenues of $2,304,000, or 222%, primarily due to sales to the ChristianChildren’s Fund in Guatemala and an increased demand domestically.  SRB Fine increased $93,000, or 71%. SRBRegular increased $143,000, or 6%, and RiceX Fiber decreased $43,000, or 13%compared to sales through December 2000. Royalty income was $20,000 through December 2001 compared to $18,000 forthe period ended December 31, 2000.

 

Gross margins for year ended December 31, 2001 were$3,853,000, or 61%, compared to $1,754,000, or 46% for year ended December 31,2000.  The improvement in gross margindollars of $2,099,000 is attributed to product sales mix, a multi-year suppliervolume/pricing contract, and increased production use of the Food ExtrusionMontana, Inc. plant, thereby improving production efficiencies and reducingunabsorbed costs through December 31, 2001. Gross margins on our various RiceXBran products vary widely and the gross margins are impacted from period toperiod by sales mix and utilization of production capacity.  We expect that gross margins will continueto improve as sales volumes increase.

 

R&D expenses were down for year ended December 31,2001 compared to last year. R&D expenditures went from $271,000 for yearended December 31, 2000 to $201,000 for year ended December 31, 2001.  This $70,000 decrease was primarily due toreimbursements from a customer for process research.  Even though expenditures were down for the year ended 2001, weexpect to continue research and development expenditures to establish thescientific basis for health claims of existing products and to develop newproducts and applications.

 

S,G&A expenses were $1,702,000 for year endedDecember 31, 2001, compared to $1,178,000 for year ended December 31, 2000, anincrease of $524,000.  The increase was

 

26

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primarily associated with increased sales commissions and otherincreased activities over the same period last year.  These increased activities were anticipated by management basedupon their 2001 business development plan and the trend is expected to continuethrough 2002.

 

Stock option and warrant expense was $92,000 for yearended December 31, 2000 and $12,000 for year ended December 31, 2001.  Stock option compensation expense is anon-cash charge relating to the issuance of favorably priced stock options toemployees and directors to attract and retain key personnel.  The charge represents the difference betweenthe exercise price and the trading value on the date of the grant.  The difference is recognized over thevesting period of each grant, which generally ranges from two to three years,except for the directors’ grants, which vest over one year.

 

Professional and investor relations fees decreased$632,000 for year ended December 31, 2001 compared to last year.  Substantial decrease, $996,000, in investorrelations fees through December 31, 2001 compared to expenses through December31, 2000 was due for the most part to expenses relating to the issuance ofstock and warrants to an investor relations firm through year ended December31, 2000.  Other professional costsassociated with legal fees and new business development consulting fees andrelated charges increased $364,000 for year ended December 31, 2001 compared toyear ended December 31, 2000 results.

 

Interest expense for year ended December 31, 2001decreased more than $1,017,000 compared to the same period last year.  Interest expense for year ended December 31,2001 was $6,000 compared to $1,023,000 for year ended December 31, 2000.  The decrease for year ended December 31,2001, compared to year ended December 31, 2000, is associated with theeliminated amortization of interest expense on a note to a shareholder that waspaid in December 2000.

 

For year ended December 31, 2001, our net income was$1,129,000, or $0.03 per share, compared to a net loss of $2,468,000, or $0.07per share, an improvement of $3,597,000 over the same period last year.  The improvement for the year ispredominantly due to successful marketing efforts resulting in increasedrevenues, increased efficiencies in production, debt reduction and increasedgross margins.  Combining reducedinterest expenses, strong RiceX Solubles sales to the Christian Children’s Fundin Guatemala, and increased sales of RiceX Solubles domestically; weexperienced an improvement in net income.

 

While we generated net income in 2001, we expect toutilize net operating loss carry-forwards which will reduce income tax expenseto the state minimum tax of $1,600 for year ended December 31, 2001.  Net operating loss carry-forwards expire forfederal tax purposes at various dates from 2009 through 2020 and expire forstate tax purposes in 2003 through 2010.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

For twelve months ended December 31, 2002, cashbalance and cash flow increased compared to the same period last year.  Our cash balance at December 31, 2002increased $321,000 to $1,924,000, up from $1,603,000 at December 31, 2001.  Management believes our cash reserve isadequate to meet future operating requirements.

 

27

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Our management team has developed a strategic andfinancially sound business plan to meet our ongoing liquidity needs for theyear ended December 31, 2003 and thereafter. We believe that we have positioned ourselves to become the foremost premiumingredient supplier in the food manufacturing and animal feed sectors.  Our cash position has not required cash fromfinancing activities in order to fund operations in the three years sinceretiring all our debt.

 

In 2002, our Board approved resolutions authorizing usto repurchase up to a total of $1,000,000 of our own stock on the open marketfor a period of one year.  Werepurchased 103,626 shares of our own stock on the open market during the yearending December 31, 2002.  In 2002, wealso repurchased 45,000 shares of our own stock which was associated with anequipment purchase.  See Part II, Item5, "Recent Sales of Unrestricted Securities."

 

We remain on the cutting edge in developing nations byreducing malnutrition and enhancing nutritional growth potential school-agedchildren.  Our first internationalstrategic alliance was established in December, 2000 with PRODESA and theChristian Children’s Fund in Guatemala. Under this alliance we supplied nutritionally dense ingredientsthroughout Guatemala over a twelve month period starting in January 2001.  As a result, our stabilized rice branproduct, RiceX Solubles, has been used as a base for nutritionally enhanceddrink for school breakfast and lunch programs to over 67,000 children in ruralcommunities throughout Guatemala.  Thetwelve-month program in Guatemala was highly successful in reducingmalnutrition in school age children and enhancing their nutritional growthpotential.  This proof-of-conceptprogram in Guatemala generated nearly $2,300,000 in revenues for us for yearended December 31, 2001.  In 2002, ElSalvador’s Ministry of Education in San Salvador purchased stabilized rice branproduct, RiceX Solubles, for applications in its school nutrition programs forEl Salvadorian children.  The agreement,which follows the similar program of Guatemala, resulted in revenues ofapproximately $1,000,000 for year ended December 31, 2002.

 

We continue to broaden our international marketdevelopment activities in Central America. We have received advisories from our Central America manufacturer’srepresentative, PRODESA that commitments are pending from additional CentralAmerican countries for the sale of stabilized rice bran, RiceX Solubles.  These commitments are direct purchase salescontracts financed in part through the United States government’s Public Law416b programs, with joint participation by the host country government.  Therefore, these commitments requireauthorizations by the host country government. Due to domestic and global uncertainties in government programs, we haveexperienced delays in finalizing purchase orders and delivery schedules forRiceX Solubles into this region. However, management believes that product sales and shipments willcontinue and expand into additional Central American countries during 2003 andbeyond.

 

We are holding substantive discussions with severalgovernment officials that may result in expansion of our Central Americanprogram into additional countries in the future.

 

We continue to focus our market development activitieson nutritionally dense ingredients in the international market place first inLatin America and then in Asian countries. These market segments currentlyrepresent multimillion dollar potential market opportunities. We also continueto initiate strategic alliance discussions to identify and formulate potentialjoint

 

28

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venture opportunities with major domestic premium pet food and equinefeed manufacturers and distributors. Domestic markets for these segments currently represent a potentialopportunity of over $250 million annually. We hope the results of these successful alliances will have asignificant financial effect on our annual revenues and profit starting withinfiscal years 2003 and 2004.  There canbe no assurance that we will obtain additional strategic alliances.

 

We also hope to partner with local governments andcompanies in developing nations on a joint venture basis to stabilize locallygrown rice bran for local consumption and for future export.  We plan to introduce our stabilizationprocess systems in large rice mills located in Central and South America,China, India and Southeast Asia.  Wehave had preliminary discussions regarding the demonstration of our system andthe end products for this technology with a number of companies and governmentsincluding other countries in Central America, India, China, Argentina, Brazil,Malaysia and certain African countries. There can be no assurance that these discussions will lead toimplementation of the RiceX Process with these companies or governments.

 

These efforts could significantly increase demand forour products beyond our current production capacity.  While we believe we can increase our production capacity to meetsales demand, significant additional capital could be required to meet suchexpansion requirements.  We havesufficient cash reserves to meet all anticipated short term operatingrequirements.  However, the timing andamount of any long-term capital requirements cannot be predicted at thistime.  There can be no assurance thatany financing will be available on acceptable terms.  If such financing is not available on satisfactory terms, we maybe unable to develop or expand our business, develop new products, or developnew markets at the rate desired and our operating results may be adverselyaffected.

 

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| **Item  7.** | **FINANCIAL  STATEMENTS** |
|--------------|---------------------------|

 

**THERICEX COMPANY**

**INDEX TOFINANCIAL STATEMENTS**

 
| **Independent Auditor’s Report**                                                           |
|-------------------------------------------------------------------------------------------------|
|                                                                                            |
| **Financial  Statements**                                                                       |
|                                                                                            |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                   |
|                                                                                            |
| Consolidated  Statements of Income for the years ended December 31, 2002 and 2001               |
|                                                                                            |
| Consolidated  Statement of Shareholders’ Equity (Deficit) as of December 31, 2002 and 2001 |
|                                                                                            |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2002 and 2001           |
|                                                                                            |
| Notes to  Consolidated Financial Statements                                                     |

 

30

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**INDEPENDENT AUDITOR’S REPORT**

 

The Board of Directors

**TheRiceX Company**

 

We have audited the accompanying consolidated balancesheets of **TheRiceX Company**and Subsidiary (the Company) as of December 31, 2002and 2001, and the related consolidated statements of income, shareholders’equity (deficit) and cash flows for the years then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States of America which require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of The RiceX Company and Subsidiary as of December 31, 2002 and 2001,and the results of its consolidated operations and its consolidated cash flowsfor the years then ended in conformity with accounting principles generallyaccepted in the United States of America.

 
| /s/ Moss Adams LLP                      |   |
|-----------------------------------------|--------|
|                                    |
| Stockton, California  February 14, 2003 |

 

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**THERICEX COMPANYCONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                    |   | **DECEMBER  31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|------------|
|                                                                                                                                                                    |   | **2002**          | ** ** | **2001** | ** ** |
| **ASSETS**                                                                                                                                                              |   |              |       |   |   |
| CURRENT ASSETS                                                                                                                                                          |   |              |       |   |   |
| Cash and cash  equivalents                                                                                                                                              |   | $                 | 1,923,710  |   | $ | 1,603,065 |   |
| Trade accounts  receivable, net of allowance  for  doubtful accounts, $20,000 in 2002   and  2001                                                        |   | 1,365,475         |       | 783,374 |   |
| Inventories                                                                                                                                                             |   | 307,311           |       | 240,394 |   |
| Deposits and  other current assets                                                                                                                                      |   | 101,182           |       | 155,017 |   |
| Total current  assets                                                                                                                                                   |   | 3,697,678         |       | 2,781,850 |   |
|                                                                                                                                                                    |   |              |       |   |   |
| PROPERTY AND  EQUIPMENT, net                                                                                                                                            |   | 1,116,958         |       | 1,786,276 |   |
| OTHER ASSETS,  net                                                                                                                                                      |   | 91,986            |       | 91,986 |   |
|                                                                                                                                                                    |   | $                 | 4,906,622  |   | $ | 4,660,112 |   |
|                                                                                                                                                                    |   |              |       |   |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                          |   |              | ** ** |   | ** ** |
|                                                                                                                                                                    |   |              |       |   |   |
| CURRENT  LIABILITIES                                                                                                                                                    |   |              |       |   |   |
| Accounts payable  and accrued liabilities                                                                                                                               |   | $                 | 588,970    |   | $ | 562,497 |   |
| Deferred revenue                                                                                                                                                        |   | —            |       | 221,234 |   |
| Total current  liabilities                                                                                                                                              |   | 588,970           |       | 783,731 |   |
|                                                                                                                                                                    |   |              |       |   |   |
| COMMITMENTS AND  CONTINGENCIES (Note 4)                                                                                                                                 |   |              |       |   |   |
|                                                                                                                                                                    |   |              |       |   |   |
| SHAREHOLDERS’  EQUITY (DEFICIT)                                                                                                                                    |   |              |       |   |   |
| Preferred stock,  par value $.00l per share,  10,000,000  shares authorized,  no shares issued  and outstanding                                               |   | —            |       | — |   |
| Common stock,  par value $.001 per share,   100,000,000 shares authorized, 38,680,724 and 38,829,350 shares issued  and outstanding in 2002 and 2001, respectively |   | 38,681            |       | 38,829 |   |
| Additional  paid-in capital                                                                                                                                             |   | 29,315,287        |       | 29,363,588 |   |
| Accumulated  deficit                                                                                                                                                    |   | (24,978,898       | )          | (25,352,998 | ) |
| Deferred  expenses relating to equity issuance                                                                                                                          |   | (57,418           | )          | (173,038 | ) |
| Total  shareholders’ equity                                                                                                                                        |   | 4,317,652         |       | 3,876,381 |   |
|                                                                                                                                                                    |   | $                 | 4,906,622  |   | $ | 4,660,112 |   |

 

The accompanying notesare an integral part of these statements.

 

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**THERICEX COMPANYCONSOLIDATED STATEMENTS OF INCOME**

 
|                                                        |   | **YEARS  ENDED DECEMBER 31,** |      |
|-------------------------------------------------------------|--------|-------------------------------|-----------|
|                                                        |   | **2002**                      |      | **2001** |   |
| REVENUES                                                    |   |                          |      |   |   |
| Sales                                                       |   | $                             | 5,380,752 |   | $ | 6,278,523 |   |
| Royalties                                                   |   | 2,255                         |      | 20,045 |   |
|                                                        |   | 5,383,007                     |      | 6,298,568 |   |
| COST OF SALES                                               |   | 2,106,081                     |      | 2,445,119 |   |
|                                                        |   | 3,276,926                     |      | 3,853,449 |   |
| RESEARCH AND  DEVELOPMENT EXPENSES                          |   | 266,498                       |      | 200,651 |   |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES               |   | 2,029,612                     |      | 1,702,021 |   |
| STOCK OPTION AND  WARRANT EXPENSE                           |   | 12,000                        |      | 12,000 |   |
| INVESTOR  RELATIONS                                         |   | 92,257                        |      | 169,189 |   |
| PROFESSIONAL  FEES                                          |   | 497,151                       |      | 707,964 |   |
| Income from  operations                                     |   | 379,408                       |      | 1,061,624 |   |
| OTHER INCOME  (EXPENSE)                                     |   |                          |      |   |   |
| Interest and  other income                                  |   | 28,192                        |      | 75,060 |   |
| Interest and  other expense                                 |   | —                        |      | (6,437 | ) |
| Income before  income taxes                                 |   | 407,600                       |      | 1,130,247 |   |
| INCOME TAX  EXPENSE                                         |   | 33,500                        |      | 1,600 |   |
| Net income                                                  |   | $                             | 374,100   |   | $ | 1,128,647 |   |
| BASIC AND  DILUTED EARNINGS PER SHARE  net income per share |   | $                             | .01       |   | $ | .03 |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING              |   | 38,680,724                    |      | 38,829,350 |   |

 

The accompanying notesare an integral part of these statements.

 

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**THERICEX COMPANYCONSOLIDATED STATEMENT OFSHAREHOLDERS’ EQUITY (DEFICIT)**

 

**YEARSENDED DECEMBER 31, 2002 AND 2001**

 
|                                                       |   | **Common Stock** |   | **Additional  Paid-In  Capital** |   | **Accumulated  Deficit** |   | **Deferred  Expenses  Related to  Equity  Issuance** |   | **Total  Share-  holders’  Equity  (Deficit)** |        |
|------------------------------------------------------------|--------|------------------|--------|----------------------------------|--------|--------------------------|--------|------------------------------------------------------|--------|-----------------------------------------------------|-------------|
| **Shares**                                                 |   | **Amount**       |   |                             |   |                     |
| Balance,  December 31, 2000                                |   | 38,829,350       |   | $                                | 38,829 |                     | $      | 29,351,588                                           |   | $                                                   | (26,481,645 | ) | $ | (327,720 | ) | $ | 2,581,052 |   |
| Amortization of  warrants issued to former employees       |   | —           |   | —                           |   | 12,000                   |   | —                                               |   | —                                              |        | 12,000 |   |
| Amortization of  warrants  issued for consulting fees |   | —           |   | —                           |   | —                   |   | —                                               |   | 76,557                                              |        | 76,557 |   |
| Amortization of  prepaid  processing fees             |   | —           |   | —                           |   | —                   |   | —                                               |   | 78,125                                              |        | 78,125 |   |
| Net income for  the year                                   |   | —           |   | —                           |   | —                   |   | 1,128,647                                            |   | —                                              |        | 1,128,647 |   |
| Balance,  December 31, 2001                                |   | 38,829,350       |   | 38,829                           |   | 29,363,588               |   | (25,352,998                                          | )      | (173,038                                            | )           | 3,876,381 |   |
| Stock repurchase                                           |   | (148,626         | )      | (148                             | )      | (60,301                  | )      | —                                               |   | —                                              |        | (60,449 | ) |
| Amortization of  warrants issued to former employees       |   | —           |   | —                           |   | 12,000                   |   | —                                               |   | —                                              |        | 12,000 |   |
| Amortization of  warrants  issued for consulting fees |   | —           |   | —                           |   | —                   |   | —                                               |   | 76,556                                              |        | 76,556 |   |
| Amortization of  prepaid  processing fees             |   | —           |   | —                           |   | —                   |   | —                                               |   | 39,064                                              |        | 39,064 |   |
| Net income for  the year                                   |   | —           |   | —                           |   | —                   |   | 374,100                                              |   | —                                              |        | 374,100 |   |
| Balance,  December 31, 2002                                |   | 38,680,724       |   | $                                | 38,681 |                     | $      | 29,315,287                                           |   | $                                                   | (24,978,898 | ) | $ | (57,418 | ) | $ | 4,317,652 |   |

 

The accompanying notesare an integral part of these statements.

 

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**THERICEX COMPANYCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
|                                                                                                |   | **YEARS  ENDED DECEMBER 31,** |      |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------|-----------|
|                                                                                                |   | **2002**                      |      | **2001** |   |
| CASH FLOW FROM  OPERATING ACTIVITIES                                                                |   |                          |      |   |   |
| Net income                                                                                          |   | $                             | 374,100   |   | $ | 1,128,647 |   |
| Adjustments to  reconcile net income to net cash from operating activities:                         |   |                          |      |   |   |
| Depreciation and  amortization                                                                      |   | 703,720                       |      | 816,850 |   |
| Amortization of  shares and warrants issued for services, prepaid interest, and debt issuance  cost |   | 127,620                       |      | 166,685 |   |
| Deferred revenue  received                                                                          |   | —                        |      | 1,240,800 |   |
| Recognition of  deferred revenue                                                                    |   | (221,234                      | )         | (2,360,369 | ) |
| Net changes in  operating assets and liabilities                                                    |   |                          |      |   |   |
| Trade accounts  receivable                                                                          |   | (582,101                      | )         | (141,694 | ) |
| Inventories                                                                                         |   | (66,917                       | )         | 72,440 |   |
| Deposits and  other current assets                                                                  |   | 53,835                        |      | (109,165 | ) |
| Accounts payable  and accrued liabilities                                                           |   | 26,473                        |      | (54,627 | ) |
| Net cash from  operating activities                                                                 |   | 415,496                       |      | 759,567 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                               |   |                          |      |   |   |
| Purchases of  property and equipment, and other assets                                              |   | (34,402                       | )         | (137,766 | ) |
| Proceeds from  sale of equipment                                                                    |   | —                        |      | 13,521 |   |
| Net cash from  investing activities                                                                 |   | (34,402                       | )         | (124,245 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                               |   |                          |      |   |   |
| Repurchase of  common stock                                                                         |   | (60,449                       | )         | — |   |
| Net cash from  financing activities                                                                 |   | (60,449                       | )         | — |   |
| NET INCREASE IN  CASH AND CASH EQUIVALENTS                                                          |   | 320,645                       |      | 635,322 |   |
| CASH AND CASH  EQUIVALENTS, beginning of year                                                       |   | 1,603,065                     |      | 967,743 |   |
| CASH AND CASH  EQUIVALENTS, end of year                                                             |   | $                             | 1,923,710 |   | $ | 1,603,065 |   |

 

The accompanying notesare an integral part of these statements.

 

35

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**THERICEX COMPANYNOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 1 – Description of Business and Significant AccountingPolicies**

 

The RiceX Company (“RiceX”), formerly Food Extrusion,Inc., was incorporated in California in 1989 and in 1998 was reincorporated inDelaware and changed its name to The RiceX Company.  RiceX has a wholly owned subsidiary, Food Extrusion Montana, Inc.(FoodEx Montana).  The consolidatedfinancial statements include the accounts of RiceX and FoodEx Montana (collectively“the Company”), after the elimination of all inter-company balances andtransactions.

 

The Company is an agribusiness food technologycompany, which has developed a proprietary process to stabilize rice bran.  RiceX is headquartered in El Dorado Hills,California and has stabilization equipment located at a rice mill in NorthernCalifornia.  The Company purchases rawrice bran from the mill and mill employees, under Company supervision, operatethe Company’s equipment to stabilize rice bran.  The Company pays a processing fee to the mill for thisservice.  Under an agreement with themill, the mill may use the Company’s equipment to stabilize rice bran for itscustomers in exchange for the payment of a royalty fee to the Company.  The Company intends to enter into additionalrelationships with rice processors as part of its overall business strategy.

 

FoodEx Montana is engaged in the business of custommanufacturing grain-based products for food ingredient companies at itsproduction facility in Dillon, Montana. The facility has specialized processing equipment and techniques for thetreatment of grain products to cook, enzyme treat, convert, isolate, dry andpackage finished food ingredients.  Thesoluble form of the Company’s rice bran products is produced at the Montanafacility.

 

The processing, formulation, packaging, labeling andadvertising of the Company’s products are subject to regulation by one or morefederal agencies.  Congress enacted theDietary Supplement Health Education Act of 1994 (“DSHEA”), which limits theFDA’s jurisdiction in regulating dietary supplements.  The FDA has proposed regulations with the purpose of implementingDSHEA and proposals have been made to modify or change the provisions ofDSHEA.  The effect that those regulationsor proposed changes will have on the operations of the Company cannot currentlybe determined.

 

A summary of the significant accounting principles andpractices used in the preparation of the consolidated financial statementsfollows:

** **

**Use of estimates** – The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

36

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**Concentration of credit risk** – Financialinstruments that potentially subject the Company to significant concentrationsof credit risk consist primarily of trade accounts receivable for sales tomajor customers.  The Company performscredit evaluations on its customers financial condition and generally does notrequire collateral on accounts receivable. The Company maintains an allowance for doubtful accounts on itsreceivables based upon expected collectibility of all accounts receivable.  Uncollected accounts have not beensignificant.

 

In 2002, three major customers each accounted for 28%,21%, and 17% of sales, respectively. Accounts receivable includes amounts duefrom two customers comprising of 68% and 10% of the total outstanding.Approximately 17% of total sales are the result of exports to El Salvador.

 

In 2001, three major customers each accounted for 36%,30% and 11% of sales, respectively. Accounts receivable includes amounts duefrom two customers comprising of 54% and 17% of the total outstanding.Approximately 36% of total sales are the result of exports to Guatemala.

** **

**Cash and cash equivalents** – Cashequivalents consist of highly liquid investments with an original or remainingmaturity at the time of purchase of three months or less.

** **

**Inventories** – Inventories are stated at thelower of cost or market determined on a first-in, first-out basis.  The costs associated with the millingprocess are allocated to inventory.

** **

**Property and equipment** – Property andequipment are stated at cost. Depreciation or amortization is computed on the straight-line methodover the shorter of the estimated life of the asset or the lease term,generally ranging from three to ten years. Upon sales or retirement, the related cost and accumulated depreciationor amortization are removed from the accounts and the resulting gain or loss,if any, is included in results of operations. The cost of additions, improvements, and interest on construction arecapitalized, while maintenance and repairs are charged to operations whenincurred.

 

The estimated lives used in determining depreciationand amortization are:

 
| Buildings              |   | 10 years    |
|------------------------|--------|-------------|
| Equipment              |   | 5 - 7 years |
| Leasehold improvements |   | 7 years     |
| Furniture and fixtures |   | 5 - 7 years |

 

**Deferred expenses related to equity issuance –**Costs incurred in connection with equity issuances are deferred and amortizedover the terms of the related service.

 

**Revenue recognition –** Revenues from productsales are recognized as products are shipped. Deposits are deferred until either the product has shipped or conditionsrelating to the sale have been substantially performed.

 

37

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**Research and development** – Research anddevelopment costs are expensed when incurred.

** **

**Stock options** – At December 31, 2002, theCompany has one stock-based employee compensation plan, which is described morefully in Note 5. The Company accounts for this plan under the recognition andmeasurement principles of APB Opinions No. 25, Accounting for Stock Issued toEmployees, and related Interpretations. No stock-based employee compensationcost is reflected in net income, as all options granted under those plans hadan exercise price equal to the market value of the underlying common stock onthe date of grant. The following table illustrates the effect on net income andearnings per share if the Company had applied the fair value recognitionprovisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,to stock-based employee compensation.

 
|                                                                                                                         |   | **2002** |    | **2001** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Net income, as  reported                                                                                                     |   | $        | 374,100 |     | $      | 1,128,647 |   |
| Deduct:  Total stock-based employee  compensation expense determined under fair  value based method for all awards |   | (36,688  | )       | (489,015 | )      |
| Pro forma net  income                                                                                                        |   | $        | 337,412 |     | $      | 639,632 |   |
| Earnings per  share:                                                                                                         |   |     |    |     |   |
| Basic and diluted  net income per share – as reported                                                                   |   | $        | .01     |     | $      | .03 |   |
| Basic and  diluted net income per share – pro forma                                                                     |   | $        | .01     |     | $      | .02 |   |
| Weighted average  fair value of options granted to employees during the year                                                 |   | $        | .21     |     | $      | .26 |   |

 

**Net income per share** –  Basic net income per share is computed basedon the weighted average number of shares of common stock outstanding duringeach period. Diluted earnings per share reflect the potential dilution thatcould occur if common shares were issued pursuant to the exercise of options orwarrants.

** **

**Income taxes** – Deferred income tax assetsand liabilities result from the future tax consequences associated withtemporary differences between the carrying amounts and the tax bases of assetsand liabilities. A valuation allowance is established to reduce deferred taxassets if it is more likely than not, that all, or some portion, of suchdeferred tax assets will not be realized.

 

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**Accounting for long-lived assets****–** Long-lived assets are recorded at the lower ofamortized cost or fair value.  As partof an ongoing review of the valuation of long-lived assets, management assessesthe carrying value of such assets if facts and circumstances suggest they maybe impaired.  If this review indicatesthat the carrying value of these assets may not be recoverable, as determinedby a non-discounted cash flow analysis over the remaining useful life, thecarrying value would be reduced to its estimated fair value.  There has been no impairment recognized inthese consolidated financial statements.

** **

**Reclassifications****–**Certain reclassifications have been made to the 2001 financial information toconform to the 2002 presentation.

####  

#### **New Accounting Pronouncements –**During the year2002 the Financial Accounting Standard Board issued the following accountingstandards.

 

SFAS No. 148, *Accounting forStock-Based Compensation – Transition and Disclosure an amendment of FASBStatement No. 123*.  ThisStatement amends FASB No. 123, to provide alternative methods of transition fora voluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition, itamends the disclosure requirements of Statement 123 to require prominent disclosuresin both annual and interim financial statements about the method of accountingfor stock-based employee compensation and the effect of the method used onreported results.  As of December 31,2002, the Company has adopted the disclosure requirements of the Statement andcontinues to follow the intrinsic value method to account for stock-basedemployee compensation.

 

**Note 2 – Property and Equipment**

 

Property and equipment consists of the following:

 
|                                                  |   | **DECEMBER  31,** |      |
|-------------------------------------------------------|--------|-------------------|-----------|
|                                                  |   | **2002**          |      | **2001** |   |
| Land and  buildings                                   |   | $                 | 380,154   |   | $ | 377,510 |   |
| Equipment                                             |   | 4,455,799         |      | 4,423,196 |   |
| Leasehold  improvements                               |   | 381,642           |      | 381,642 |   |
| Furniture and  fixtures                               |   | 218,071           |      | 218,071 |   |
| Construction in  progress                             |   | 10,717            |      | 10,717 |   |
|                                                  |   | 5,446,383         |      | 5,411,136 |   |
|                                                  |   |              |      |   |   |
| Less accumulated  depreciation  and amortization |   | (4,531,325        | )         | (3,826,760 | ) |
|                                                  |   | 915,058           |      | 1,584,376 |   |
| Equipment not  placed in service                      |   | 201,900           |      | 201,900 |   |
|                                                  |   | $                 | 1,116,958 |   | $ | 1,786,276 |   |

 

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**Note 3 – Accounts Payable and Accrued Liabilities**

 

Accounts payable and accrued liabilities consist ofthe following:

 
|                       |   | **DECEMBER  31,** |    |
|----------------------------|--------|-------------------|---------|
|                       |   | **2002**          |    | **2001** |   |
| Trade accounts  payable    |   | $                 | 257,633 |   | $ | 204,062 |   |
| Other accrued  liabilities |   | 320,076           |    | 223,435 |   |
| Customer  deposits         |   | 11,261            |    | 135,000 |   |
|                       |   | $                 | 588,970 |   | $ | 562,497 |   |

 

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**Note 4 – Commitments and Contingencies**

 

                The Company leasesoffice, laboratory and warehouse space and vehicles under operating leaseswhich expire in 2006. Beginning in October 2001, the Company has the unilateralright to terminate the facilities’ operating leases with six months writtennotice.  Rent expense under operatingleases was $60,189 and $64,353 for the years ended December 31, 2002 and 2001,respectively.

 

                The following is aschedule of future minimum lease payments required under the above leases:

 

Fiscalyear ending each December

 
| 2003  |   | $       | 123,505 |   |
|-------|--------|---------|---------|--------|
| 2004  |   | 124,277 |    |
| 2005  |   | 126,592 |    |
| 2006  |   | 94,944  |    |
| Total |   | $       | 469,318 |   |

 

The Company is involved in litigation arising duringthe normal course of business. Management believes the results of anyunfavorable outcomes would not be material to the Company’s financial position.

** **

**Note 5 – Shareholders’ Equity**

 

A.            Commonand preferred stock

 

In conjunction with RiceX’s re-incorporation inDelaware, the Company increased its authorized number of common shares from50,000,000 shares to 100,000,000 shares and authorized 10,000,000 shares ofpreferred stock which may be issued from time to time, in one or more series,and authorized its Board of Directors to establish the rights, preferences andprivileges of each such series, when issued. At December 31, 2002, an aggregate of 25,179,923 shares of the Company’scommon stock was reserved for future issuance upon the conversion of debt andthe exercise of stock options and warrants.

 

B.            Stockissued for services and other

 

In July 1999, the Company issued 250,000 shares ofcommon stock to a vendor in lieu of cash to guarantee direct supplies for threeyears, “prepaid processing fee.”  Thevalue of the common stock was $234,000 and is recorded as a contra account toshareholders’ equity and was amortized to cost of goods sold over the threeyear period.  During 2002 and 2001, theCompany amortized $39,064 and $78,125, respectively.

 

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C.            Conversionof debt to equity

 

In September 2000, the Company converted a $2,500,000note into 3,571,429 shares of common stock and issued warrants to purchase3,571,429 shares of common stock.  Inconnection with this conversion, the Company also granted additional warrantsto purchase up to 4,464,285 shares of stock at $0.70 per share.  These additional warrants are restrictedfrom sale or transfer until such time the Company’s revenues at various stagesreach an annualized equivalent of $12,000,000 and $25,000,000.

 

D.            Privateplacement

 

During 2000, the Company issued 182,137 shares ofcommon stock and warrants to purchase shares of common stock in conjunctionwith a $6 million dollar private placement for cash proceeds of $116,400.  These warrants, which expire three yearsfrom issue date, have an exercise price for the first year of $1.00 per share,for the second year of $1.25 per share and for the third year of $1.50 pershare.  At December 31, 2002, all warrantsissued in conjunction with this private placement were outstanding.

 

E.             Repurchaseof common stock

 

In 2002, the Board of Directors approved resolutionsauthorizing the Company to repurchase up to a total of $1,000,000 of its ownstock on the open market for a period of one year.  The Company repurchased 103,626 shares of its own stock on theopen market during the year ending December 31, 2002.  

 

In May 2000, the Company issued 100,000 shares ofcommon stock to acquire equipment from one of its suppliers.  The value of the common stock was $68,750and is recorded in shareholders' equity. During 2002, this supplier sold 55,000 shares in the open market and theCompany purchased the remaining 45,000 shares at a cost of $33,767.

 

F.             Warrantsand non-qualified stock options issued

 

At December 31, 2002, warrants and non-qualified stockoptions outstanding were as follows:

 
| **Shares issuable under warrants  and non-qualified options** |   | **Number of  Shares** |   | **Exercise  Price  Per Share** |   | **Exercise  Period** |   |
|---------------------------------------------------------------|--------|-----------------------|--------|--------------------------------|--------|----------------------|--------|
| Balance, January  1, 2001                                     |   | 21,749,369            |   | $0.70 - $2.00                  |   | 1 -  5 years    |   |
| Canceled during  the year                                     |   | (250,000              | )      | $1.00                          |   | 2 years              |   |
| Balance,  December 31, 2001                                   |   | 21,499,369            |   | $0.70 - $2.00                  |   | 1 -  5 years    |   |
| Expired during  the year                                      |   | (3,168,446            | )      | $0.75 - $2.00                  |   | 3 -  5 years    |   |
| Balance,  December 31, 2002                                   |   | 18,330,923            |   | $0.70 - $1.65                  |   | 1 -  5 years    |   |

 

The balance outstanding at December 31, 2002 and 2001includes incentive warrants to purchase 7,714,287 shares which are restrictedfrom sale and, or transfer, until such time when certain sales targets areachieved.

 

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G.            Stockoption plan

 

The Company has 10,000,000 shares of common stockreserved for grant to its officers, director and key employees under its stockoption plan.  At December 31, 2002,options to purchase 6,849,000 shares of common stock had been granted under thePlan and 3,151,000 shares were available for future grants. Stock optioninformation is as follows:

 
|                                      |   | **Number of  Shares** |   | **Weighted-  Average   Exercise  Price** |   |
|-------------------------------------------|--------|-----------------------|--------|------------------------------------------|--------|
| Shares under  option at January 1, 2001   |   | 4,922,000             |   | $                                        | .78    |   |
| Granted                                   |   | 950,000               |   | .38                                      |   |
| Forfeited                                 |   | (203,000              | )      | .40                                      |   |
| Shares under  option at December 31, 2002 |   | 5,669,000             |   | $                                        | .73    |   |
| Granted                                   |   | 1,180,000             |   | .34                                      |   |
| Shares under  option at December 31, 2002 |   | 6,849,000             |   | $                                        | .66    |   |
| Options  exercisable at December 31, 2002 |   | 6,322,000             |   | $                                        | .69    |   |

 

Weighted average remaining contractual life of optionsoutstanding at December 31, 2002 is 8 years.

 

As required by SFAS No. 123, the Company has valuedstock option and warrants granted to employees and made the required pro formacalculations under the fair value method using the Black-Scholes option pricingmodel with the following weighted-average assumptions for 2002 and 2001:risk-free interest rate range of 2.14% to 3.44% in 2002 and 3.44% to 4.44% in2001; expected option lives of three years in 2002 and 2001; expectedvolatility of 100% in 2002 and 107% to 115% in 2001; and no expected dividends,in either year.

** **

**Note 6 – Employee Benefit Plan**

 

The Company has a 401(k) plan, *The RiceX Company 401(k) Plan & Trust*,which requires an employee to have completed one year of service and attainedthe age of 21 to participate in the plan. Additionally, the Company may, at its discretion, make additionalemployer contributions.  In order to beeligible to receive an allocation of the discretionary contributions, theemployee must work 1000 hours in and be employed on the last day of the planyear.  Employees are immediately vestedin company contributions.  The Companycontributes 3% of each employee’s salary annually to the plan regardless ofemployee participation.  Plancontributions amounted to $41,000 and $35,000 in 2002 and 2001, respectively.

 

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**Note 7 – Related Party Transactions**

 

During 2000, the Company entered into an exclusivedistribution agreement (the “Original Agreement”) with NutraStar Incorporated,a Nevada corporation (“NutraStar”) to develop products and market them into thenutraceutical and value added functional foods markets for human nutrition.  Under this arrangement, the Companyrecognized sales to NutraStar of $443,793 and $72,000 during 2002 and 2001,respectively.

 

In early 2001 the Company suspended NutraStar’sexclusivity arrangement and began making direct sales to the customer basewhich was previously acquired by NutraStar under the Original Agreement. TheCompany continued NutraStar’s pricing which was higher than what RiceX hadpreviously charged these customers.  Theprice differential of approximately $156,000 was recognized as commissionexpense by the Company and is recorded as selling expense in its 2001 Statementof Income. After paying NutraStar $56,000, the Company applied the remaining$100,000 price differential to the receivable balance from NutraStar.  The net effect of these transactionsresulted in a remaining balance of $130,000 due from NutraStar which wassubsequently exchanged for shares of NutraStar California’s Series A preferredstock as discussed below. The Original Agreement between RiceX and NutraStarsubsequently was canceled in 2001 because of issues related to payment foroutstanding goods shipped by the Company.

 

In late 2001, NutraStar entered into a plan andagreement of exchange (the ”Reorganization”) dated November 9, 2001with Alliance Consumer International, Inc. (“Alliance”).  Pursuant to the Reorganization, NutraStarbecame a wholly owned subsidiary of Alliance, and Alliance thereafter changedits name to NutraStar Incorporated, a California corporation (“NutraStarCalifornia”).  In addition, several creditorsof NutraStar, including the Company, agreed to cancel certain indebtedness owedby NutraStar in exchange for shares of NutraStar California’s Series Apreferred stock.  Pursuant to thisarrangement, during December 2001 the Company agreed to cancel $190,000 ofNutraStar’s indebtedness in exchange for 190,000 shares of NutraStarCalifornia’s Series A preferred stock. Concurrent with the Reorganization, the Company and NutraStar enteredinto a new five-year exclusive distribution agreement (the “ExclusiveDistribution Agreement”) whereby the Company granted NutraStar an exclusivelicense to sell certain RiceX brand products for distribution into thenutraceutical market.  The ExclusiveDistribution Agreement covers the United States and all of its territories andany additional countries or regions of the countries that RiceX and NutraStarmutually agree upon in writing. NutraStar has agreed to meet certain escalating minimum purchaserequirements throughout the term of the contract.  NutraStar has paid a $135,000 security deposit, which is recordedin other liabilities.  A prepaymentdeposit of fifty percent is required for each purchase order for the first sixmonths of the agreement and decreases to zero as long as there are no defaultsduring the first twelve months. The agreement also provides for the option toextend for two additional periods of five years each.  In exchange for the exclusive license in the nutraceuticalmarket, the Company will receive license fees. In July 2002, RiceX terminatedthe Exclusive Distribution with NutraStar for its failure to meet certainperformance requirements as specified in the Exclusive Distribution Agreement.Patricia McPeak, who resigned as president of the Company on March 31, 2000retained her seat on the Company’s Board of Directors until June 29, 2001 atwhich time her term expired. Ms. McPeak is an officer and director of NutraStarand also became an officer and director of NutraStar California. She is

 

44

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the spouse of Daniel McPeak, Sr., Chairman of the Board and ChiefExecutive Officer of the Company. 

 

In September 2000, the Company finalized an agreementwith a venture capital firm to convert a $2,500,000 note to equity (see Note5).  In connection with thistransaction, the Company issued common stock and warrants to two principleparties, one of which is GBV Intermark Fund, LLC.  The manager of this fund was appointed to the Company’s Board ofDirectors in October 2000. The shares of RiceX common stock and warrants issuedto GBV Intermark Fund, LLC were acquired by Intermark Group Holdings, LLC onApril 4, 2002 in a private transaction

 

During 2001, the Company paid to an investor relationsfirm, who is a shareholder, approximately $80,000 for investor relationsservices.

** **

**Note 8 – Income Taxes**

 

The provision for income taxes on the statements ofincome consists of $33,500 and $1,600 for the years ended December 31, 2002 and2001, respectively.  The California netoperating losses have been suspended for 2002 and 2003 which results in theCompany having state income tax expense in 2002.

 

Deferred tax assets (liabilities) are comprised of thefollowing:

 
|                             |   | **DECEMBER  31,** |      |
|----------------------------------|--------|-------------------|-----------|
|                             |   | **2002**          |      | **2001** |   |
| Net operating  loss carryforward |   | $                 | 4,151,000 |   | $ | 4,264,000 |   |
| Options and  warrants            |   | 51,000            |      | — |   |
| Accrued reserves                 |   | 125,000           |      | 118,000 |   |
| Research costs                   |   | 821,000           |      | 872,000 |   |
| Accumulated  depreciation        |   | (291,000          | )         | (254,000 | ) |
| Other                            |   | 15,000            |      | 16,000 |   |
|                             |   | 4,872,000         |      | 5,016,000 |   |
| Less valuation  allowance        |   | (4,872,000        | )         | (5,016,000 | ) |
|                             |   | $                 | —    |   | $ | — |   |

 

Deferred taxes arise from temporary differences in therecognition of certain expenses for tax and financial statement purposes.  At December 31, 2002, management determinedthat realization of these benefits is not assured and has provided a valuationallowance for the entire amount of such benefits.  At December 31, 2002, net operating loss carryforwards wereapproximately $11,400,000 for federal tax purposes that expire at various datesfrom 2011 through 2020 and $9,300,000 for state tax purposes that expire in2004 through 2012.

 

Utilization of net operating loss carryforwards may besubject to substantial annual limitations due to the “change in ownership”provisions of the internal revenue code and similar

 

45

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state regulations.  The annuallimitation may result in expiration of net operating loss carryforwards beforeutilization.

 

46

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**Note 9 – Supplemental Cash Flow Information and Non cashFinancing Activities**

** **
|                                                             |   | **YEARS  ENDED DECEMBER 31,** |    |
|------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                             |   | **2002**                      |    | **2001** |   |
| Supplemental  cash flow information:                             |   |                          |    |   |   |
| Cash paid for  income taxes                                      |   | $                             | 1,600   |   | $ | 1,600 |   |
| Cash paid for  interest expense                                  |   | $                             | —  |   | $ | 6,400 |   |
|                                                             |   |                          |    |   |   |
| Non cash  investing and financing activities:                    |   |                          |    |   |   |
| Amortization/issuance  of common stock and warrants for services |   | $                             | 127,620 |   | $ | 166,685 |   |

 

**Note 10 – Earnings per Share**

 

The Company computes earnings per share (EPS) inaccordance with SFAS No. 128, “*Earnings per Share*”.  SFAS No. 128 requires the presentation ofbasic EPS, which does not consider the effect of common stock equivalents, anddiluted EPS, which considers all dilutive common stock equivalents.

 
|                                 |   | **Years  Ended December 31, 2002** |    |
|--------------------------------------|--------|------------------------------------|---------|
|                                 |   | **Income  (Numerator)**            |    | **Shares  (Denominator)** |   | **Per-Share  Amount** |   |
| **Basic  EPS**                       |   |                               |    |   |   |   |   |
| Net Income                           |   | $                                  | 374,100 |   | 38,680,724 |   | $ | .01 |   |
|                                 |   |                               |    |   |   |   |   |
| **Effect of Dilutive Securities**    |   |                               |    |   |   |   |   |
| Stock options                        |   |                               |    | 38,017 |   |   |   |
|                                 |   |                               |    |   |   |   |   |
| **Diluted EPS**                      |   |                               |    |   |   |   |   |
| Net income plus  assumed conversions |   | $                                  | 374,100 |   | 38,718,741 |   | $ | .01 |   |

 

Options and warrants to purchase 24,979,923 shares ofcommon stock at a range of $0.30 – $1.81 a share were outstanding during2002.  They were not included in thecomputation of diluted EPS because the options’ exercise price was greater thanthe average market price of the common shares during the year.

 
|                                 |   | **Years  Ended December 31, 2001** |      |
|--------------------------------------|--------|------------------------------------|-----------|
|                                 |   | **Income  (Numerator)**            |      | **Shares  (Denominator)** |   | **Per-Share  Amount** |   |
| **Basic  EPS**                       |   |                               |      |   |   |   |   |
| Net income                           |   | $                                  | 1,128,647 |   | 38,829,350 |   | $ | .03 |   |
|                                 |   |                               |      |   |   |   |   |
| **Effect of Dilutive Securities**    |   |                               |      |   |   |   |   |
| Stock options                        |   |                               |      | 37,975 |   |   |   |
|                                 |   |                               |      |   |   |   |   |
| **Diluted EPS**                      |   |                               |      |   |   |   |   |
| Net income plus  assumed conversions |   | $                                  | 1,128,647 |   | 38,867,325 |   | $ | .03 |   |

 

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Options and warrants to purchase 19,454,082 shares ofcommon stock at a range of $0.38 – $2.00 a share were outstanding during2001.  They were not included in thecomputation of diluted EPS because the options’ exercise price was greater thanthe average market price of the common shares during the year.

 

**Note 11 – Fair Value of Financial Instruments**

 

The fair value of the Company’s financial instrumentsapproximated carrying value at December 31, 2002 and 2001.  The Company’s financial instruments includecash and accounts receivable for which the carrying amount approximates fairvalue due to the short maturity of the instruments.

 

**Item 8.**                    
| **CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND  FINANCIAL DISCLOSURE** |
|-------------------------------------------------------------------------------------------------|

** **

None

** **

48

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**PART III**

 

**Item 9.**                    
| **DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL  PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT** |
|----------------------------------------------------------------------------------------------------------------------|

** **

 
| **NAME**                 |   | **AGE** |   | **POSITION**                                         |
|--------------------------|--------|---------|--------|------------------------------------------------------|
| Daniel L. McPeak, Sr.    |   | 68      |   | Class III Director, CEO, and Chairman of the Board   |
| Kirit S. Kamdar(1)(2)    |   | 60      |   | Class I Director                                     |
| Steven W. Saunders(1)(2) |   | 47      |   | Class I Director                                     |
| Kenneth L. Miller(1)(2)  |   | 58      |   | Class II Director                                    |
| Todd C. Crow             |   | 54      |   | Class III Director, Vice President Finance & CFO |
| Ike E. Lynch             |   | 57      |   | Vice President of Operations                         |
| Daniel L. McPeak, Jr.    |   | 43      |   | Vice President and General Manger                    |

 

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(1)     Member of the Compensation Committee

(2)     Member of the Audit Committee

 

**DIRECTORSAND EXECUTIVE OFFICERS**

 

DANIEL L. MCPEAK. Mr. McPeak co-founded our company in February 1989 and has servedas Chairman of our Board since our formation. In November 1998, Mr. McPeak was re-appointed to act as our ChiefExecutive Officer, or CEO.  Mr. McPeakpreviously served as our CEO from May 1989 to April 1997.  Mr. McPeak will serve as a Class IIIDirector until the election of Directors in 2004. Mr. McPeak is the father ofDaniel L. McPeak, Jr.

 

KIRIT S. KAMDAR. Mr. Kamdar has served as a Class I Director of our company since August1998.  He will serve as a Class IDirector until the next election of Class I Directors in 2005.  From January 1990 to September 1992, Mr.Kamdar also served as a director on our Board, and from January 1990 to April1994 as our Executive Vice President. Since July 1974, Mr. Kamdar has been Chairman of the Board and ChiefExecutive Officer of Kamflex Corporation, a manufacturing corporation.

 

STEVEN W. SAUNDERS. Mr. Saunders has served as a Class I Director of our company sinceAugust 1998.  He will serve as a Class IDirector until the next election of Class I Directors in 2005.  Mr. Saunders has been President of SaundersConstruction, Inc., a commercial construction firm, since February 7, 1991, andPresident of Warwick Corporation, a business-consulting firm.

 

KENNETH L. MILLER. Mr. Miller has served as a Class II Director of our company since October2000.  He will serve as a Class IIDirector until the next election of Class II Directors in 2003.  Mr. Miller co-founded Granite Bay Ventures,LLC, a venture capital firm, and has served as Senior Partner from January 1999to present.  From March 1995 to present,Mr. Miller has served as a self-employed consultant focusing on marketing andstrategic planning.  From November 1999to the present, Mr. Miller has served as a Director of Polymer Bioscience,Inc., a medical device company.  FromNovember 1998 to the present, Mr. Miller has served as a Director of DigitalDoc, Inc., a dental technology company. From 1991 to 1996, Mr. Miller served as Senior Vice President of FieldOperations for LeFebure Corporation, a bank

 

49

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equipment manufacturing company. From 1979 to 1991, Mr. Miller held various positions, including Directorof Marketing and Vice President, General Manager of the Mosler Division ofAmerican Standard, Inc., an electronics systems firm.  From 1971 to 1979, Mr. Miller held various senior financial andmanagement positions in the moving and storage industry.

 

TODD C. CROW. Mr. Crow has served as a Class III Director of our company since June2001.  He will serve as a Class IIIDirector until the next election of Class III Directors in 2004.  Mr. Crow joined us in May 1996 and has beenour Vice President of Finance and Chief Financial Officer since November 1998,and our Secretary since January 1999. From September 1997 to November 1998, Mr. Crow was our Controller.  From May 1996 to September 1997, he was ourChief Financial Officer.  Mr. Crow alsoserved as a director of our company from June 1996 to January 1997.  From 1989 until joining us, Mr. Crow heldsenior financial positions with the Morning Star Group, an agri-businessholding company, and Harter, Inc., a food-processing manufacturer.

 

IKE E. LYNCH. Mr. Lynch currently serves as Vice President of Operations andInternational Business Development for our company, and President and ChiefOperating Officer of Food Extrusion Montana, Inc.  He has held these positions since January 1997.  From 1966 through 1982, Mr. Lynch wasemployed by the H. J. Heinz Company in various Management roles, culminatingwith the President and CEO position of the Hubinger Company, a subsidiary ofHeinz.  In 1982 Mr. Lynch left Heinz tobecome President and CEO of Dawn Enterprises a LLC, specializing in Ethanolproduction and marketing.  Mr. Lynchleft Dawn Enterprises in 1989 to form Centennial Foods, Incorporated, where heserved as President and Chief Executive Officer until our the acquisition ofCentennial Foods in 1997.

 

DANIEL L. MCPEAK, JR. Mr. McPeak joined our company in July 1996, and has been our VicePresident and General Manager since November 1998.  From July 1996 to July 1997, he served as Director of Sales andMarketing, then moved to the position of Business Manager until November1998.  From 1994 until joining us, Mr.McPeak served as Vice President of Marketing for Fort Knox, Inc., a securityproducts manufacturer.  Daniel L.McPeak, Jr. is the son of Daniel L. McPeak, Sr.

** **

**BOARD OFDIRECTORS**

 

Our Board is classified into three classes, designatedClass I, Class II and Class III.  Theterm of office of the initial Class I Directors expires at the first regularlyscheduled meeting of the stockholders following the effective date of ourCertificate of Incorporation (August 4, 1998). The term of office of the initial Class II Directors expires at the secondannual meeting of the stockholders following the effective date of ourCertificate of Incorporation.  And, theterm of office of the initial Class III Directors expires at the third annualmeeting of the stockholders following the effective date of our Certificate ofIncorporation.  The classification ofour Board has the effect of generally requiring at least two annual stockholdermeetings, instead of one, to replace a majority of the members of our Board.

 

50

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**BOARDCOMMITTEES**

 

Our Board has established an Audit Committee and aCompensation Committee.

 

Our Audit Committee, consisting of Kirit Kamdar,Steven Saunders and Kenneth Miller, facilitates and maintains opencommunications among our Board, our Audit Committee, senior management and ourindependent auditors.  Our AuditCommittee also serves as an independent and objective party to monitor ourfinancial reporting process and internal control system.  In addition, our Audit Committee reviews andappraises the efforts of our independent auditors. Our Audit Committee meetsperiodically with management and our independent auditors. The Audit Committeeheld one meeting in fiscal year 2002 and all members participated.

 

Our Compensation Committee, consisting of KiritKamdar, Steven Saunders and Kenneth Miller, establishes salary, incentive andother forms of compensation for our CEO, and administers our 1997 Stock OptionPlan.  Our Compensation Committee meetsperiodically with management and our independent auditors. The CompensationCommittee held two meetings in fiscal year 2002 and all members participated.

** **

**SECTION 16(a) COMPLIANCE**

 

Based upon a review of our records, we are not awareof any of our officers or directors that failed to timely file one or morereports disclosing beneficial ownership of our securities as required underSection 16(a) of the Securities Exchange Act of 1934, as amended, during thefiscal year ended December 31, 2002.

** **

**Item10.****                 EXECUTIVECOMPENSATION**

 

The following table sets forth the total compensationfor our CEO and each of our current executive officers whose total salaries andbonuses for fiscal 2001 and 2002 exceeded $100,000 or would have exceeded$100,000 on an annualized basis.  Werefer to collectively to these executives as the “Named Executive Officers”.

** **

**SUMMARY COMPENSATION TABLE**

** **
|                              |   | **Annual  Compensation** |   | **Long Term  Compensation** |    |
|-----------------------------------|--------|--------------------------|--------|-----------------------------|---------|
| **Name & Principal Position** |   | **Year**                 |   | **Salary**                  |    | **Other  Annual  Compensation** |   | **Awards  Securities  Underlying Options/SARs (#)** |   | **All Other  Compensation** |   |
| Daniel L. McPeak, Sr. (1)         |   | 2002                     |   | $                           | 269,000 |   | — | (2) | 175,000 |   |   |   |
| Chairman of the Board             |   | 2001                     |   | $                           | 250,000 |   | — | (2) | 200,000 |   |   |   |
| Chief Executive Officer           |   | 2000                     |   | $                           | 233,000 |   | — | (2) | 2,000,000 |   |   |   |
|                              |   |                     |   |                        |    |   |   |   |   |   |   |
| Ike E. Lynch                      |   | 2002                     |   | $                           | 149,000 |   | — | (2) | 125,000 |   |   |   |
| VP Operations  and Chief          |   | 2001                     |   | $                           | 135,000 |   | — | (2) | — |   |   |   |
| Operating Office  of Food         |   | 2000                     |   | $                           | 132,000 |   | — | (2) | — |   |   |   |
| Extrusion  Montana                |   |                     |   |                        |    |   |   |   |   |   |   |
|                              |   |                     |   |                        |    |   |   |   |   |   |   |
| Todd C. Crow (3)                  |   | 2002                     |   | $                           | 149,000 |   | — | (2) | 175,000 |   |   |   |
| Chief Financial  Officer          |   | 2001                     |   | $                           | 135,000 |   | — | (2) | 150,000 |   |   |   |
|                              |   | 2000                     |   | $                           | 132,000 |   | — | (2) | — |   |   |   |
|                              |   |                     |   |                        |    |   |   |   |   |   |   |
| Daniel L.  McPeak, Jr. (4)        |   | 2002                     |   | $                           | 149,000 |   | — | (2) | 125,000 |   |   |   |
| Executive VP,                     |   | 2001                     |   | $                           | 135,000 |   | — | (2) | — |   |   |   |
| General Manager                   |   | 2000                     |   | $                           | 132,000 |   | — | (2) | — |   |   |   |

 

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----

(1)                Mr. McPeak was CEOfrom May 1989 to April 1997 and from November 1998 to present.

(2)                OtherAnnual Compensation is less than 10% of Salary.

(3)                Mr. Crow was ChiefFinancial Officer from May 1996 to September 1997 and from November 1998 to present.

(4)                Mr. McPeak, Jr.was Vice President of Sales and Marketing from July 1996 to October 1997 andfrom November 1998 to present Executive Vice President, General Manager.

 

**OPTIONACTIVITY IN 2001 TO EXECUTIVES**

 

The following table sets forth for each of the NamedExecutive Officers certain information concerning stock options activitygranted during 2002.

 
| **Name**            |   | **Number of  Securities  Underlying  Options/SARs  Granted (#)** |   | **Percent of  Total   Options/SARs  Granted to  Employees in  Fiscal Year** |   | **Exercise  Price  ($/Sh)** |   | **Market  Price  ($/Sh)** |   | **Expiration  Date** |   |
|---------------------|--------|------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|-----------------------------|--------|---------------------------|--------|----------------------|--------|
| Daniel McPeak,  Sr. |   | 175,000                                                          | (1)    | 15                                                                          | %      | $                           | 0.36   |                      | $      | 0.36                 |   | 1/02/12 |   |
| Ike E. Lynch        |   | 125,000                                                          | (1)    | 11                                                                          | %      | $                           | 0.36   |                      | $      | 0.36                 |   | 1/02/12 |   |
| Todd C. Crow        |   | 125,000                                                          | (1)    | 11                                                                          | %      | $                           | 0.36   |                      | $      | 0.36                 |   | 1/02/12 |   |
| Todd C. Crow        |   | 50,000                                                           | (2)    | 5                                                                           | %      | $                           | 0.30   |                      | $      | 0.30                 |   | 1/29/12 |   |
| Daniel McPeak,  Jr. |   | 125,000                                                          | (1)    | 11                                                                          | %      | $                           | 0.36   |                      | $      | 0.36                 |   | 1/02/12 |   |

 

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(1)               Options weregranted on January 2, 2002, one third of the option shares were fully vested ongrant date and immediately exercisable at $0.36 per share.  One third of the option shares vest andbecome exercisable on the first anniversary of the award date and exercisableat $0.36 per share.  One third of theoption shares vest and become exercisable on the second anniversary of theaward date and exercisable at $0.36 per share. Market price of underlying securities on the date of grant was $0.36 pershare.

(2)               Options weregranted on January 29, 2002 the option shares vest and become exercisable on apro-rated basis over a twelve-month period beginning on the award date.  Option shares will be one hundred percentvested on the first anniversary of the award date.  Vested option shares are exercisable at $0.30 per share.  Market price of underlying securities on thedate of grant was $0.30 per share.

 

**STOCKOPTION EXERCISES AND YEAR-END VALUE TABLE**

 

The table below reflects the number of shares coveredby both exercisable and non-exercisable stock options as of December 31, 2002for the Named Executive Officers. Values

 

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for “in-the-money” options represent the position spread between theexercise price of existing options and the market value for our common stock onDecember 31, 2002.

 
|            |   | **Shares  Acquired on  Exercised (#)** |   | **Value  Realized** |   | **Number of  Unexercised Options** |   | **Value of  Unexercised  In-the-Money Options** |   |
|-----------------|--------|----------------------------------------|--------|---------------------|--------|------------------------------------|--------|-------------------------------------------------|--------|
| **Exercisable** |   | **Unexercisable**                      |   | **Exercisable**     |   | **Unexercisable**                  |
| None            |   |                                   |   |                |   |                               |   |                                            |   |   |   |   |   |

 

**DIRECTORCOMPENSATION**

 

On July 9, 1997, our Board adopted a non-employeedirector compensation plan pursuant to which non-employee directors arecompensated.  Under the terms of theplan, non-employee directors receive a $15,000 annual retainer, which is paidin annual installments for participation at up to six meetings of ourBoard.  Non-employee directors also receivean immediately exercisable, nonqualified stock option to purchase 50,000 sharesof our common stock, which is granted upon appointment to our Board.  In addition, non-employee directors alsoreceive an immediately exercisable, nonqualified stock option to purchase15,000 shares of our common stock to be granted on the day of each annualstockholders’ meeting during the non-employee director’s service on ourBoard.  The options are to be granted asfree-standing options and not under the 1997 Stock Option Plan.  The exercise price will be the fair marketvalue of a share of our common stock on the date of grant.  Directors are also reimbursed for reasonableexpenses incurred in attending meetings of our Board and Board committees.

 

Effective February 22, 2001, the options program wasreinstated and amended.  The amendmentsinclude issuing options to purchase 50,000 shares of our common stock to eachBoard member on the anniversary of their appointment as a Board member.  These options are to be granted under the1997 Stock Option Plan.  The optionswill be fully vested at the end of one year, or to the anniversary date.  Should a member leave prior to 100 percentvesting, the options shares will be prorated to the vested period.

 

On April 27, 1999, our Board voted to temporarilysuspend the grant of options and the payment of the annual retainer to membersof our Board.  The annual retainerremains suspended.

** **

**EMPLOYMENTAGREEMENTS**

 

MCPEAK, SR. EMPLOYMENT AGREEMENT.  We entered into an Employment Agreement withDaniel L. McPeak, Sr. in April 2000, pursuant to which Mr. McPeak agreed toserve as Chairman of our Board, and as our CEO.  The employment agreement provides that Mr. McPeak will receive anannual base salary of $250,000.  Theagreement terminates on March 31, 2003, unless Mr. McPeak’s employment isterminated earlier.  Thereafter, for afive-year period commencing April 1, 2003 and ending on March 31, 2008, theemployment agreement will convert to a consulting agreement.  During the consulting period, we will payMr. McPeak a consulting fee of $125,000 per year.  If during the consulting period, our annual sales revenues reachor exceed $12,000,000, the consulting fee will be increased to $175,000 peryear.  The term will be automaticallyextended for additional one-year periods unless either party deliversnotice of election not to extend the term at least 60 days prior to the end ofthe then current term.  Mr. McPeak’semployment may be terminated prior to the expiration of the term, in the eventof

 

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Mr. McPeak’s death or termination by us for “Cause” (as defined in theemployment agreement).  In addition, theagreement may be terminated if we terminate Mr. McPeak without cause.  If Mr. McPeak is terminated without cause,he is entitled to the base salary in effect at such time for the remainder ofthe term of the agreement.  Within sixmonths of first receiving notice of a “Change in Control” (as defined in theemployment agreement), Mr. McPeak may elect to retire from service and render,on a non-exclusive basis, only such consulting and advisory services tous as he may reasonably accept.  In suchan event, he is also entitled to continue receiving his benefits and salaryuntil the latter of six months after the date of such election, subsequentfull-time employment with another enterprise, or the expiration of the term ofthe agreement.

 

LYNCH EMPLOYMENT AGREEMENT.  In May 1999, we entered into an employment agreement with Ike E.Lynch, pursuant to which Mr. Lynch agreed to serve as our Vice President ofOperations and the Chief Operating Officer of our subsidiary, Food ExtrusionMontana.  The employment agreementprovides that Mr. Lynch will receive an annual base salary of $125,000increased to $135,000 on May 1, 2000, and will be reviewed annually.   The employment agreement terminates on May1, 2004, unless it is terminated earlier. The term will be automatically extended for an additional five-year termunless either party delivers notice of election not to extend the employment atleast 90 days prior to the expiration of the initial term.  Mr. Lynch’s employment may be terminatedprior to the expiration of the agreement by the mutual written agreement of theparties or in the event of Mr. Lynch’s disability.  For the purposes of the employment agreement, “disability” meansMr. Lynch’s inability, due to physical or mental impairment, to perform hisduties and obligations, despite reasonable accommodation by us, for a periodexceeding three months.  Mr. Lynch’semployment may also terminated in the event of his death, notice by us oftermination for cause (as defined in the agreement), or written notice by us oftermination without cause, upon fourteen (14) days notice.  Mr. Lynch is entitled to compensation forearly termination.  If Mr. Lynch isterminated without cause, we will pay to Mr. Lynch, as liquidated damages andin lieu of any and all other claims which Mr. Lynch may have against us, theamount equal to Mr. Lynch’s monthly base salary multiplied by the number ofmonths remaining in the term of this agreement, or a payment amount equal totwo years of Mr. Lynch’s base salary, whichever is greater.

 

CROW EMPLOYMENT AGREEMENT.  In May 1999, we entered into an employment agreement with Todd C.Crow, pursuant to which Mr. Crow agreed to serve as our Chief FinancialOfficer.  Mr. Crow’s employmentagreement provides that he will receive an annual base salary of $125,000increased to $135,000 on May 1, 2000, and will be reviewed annually.  The agreement terminates on May 1, 2004,unless it is terminated earlier.  Theterm will be automatically extended for an additional five-year term unlesseither party delivers notice of election not to extend the employment at least90 days prior to the expiration of the initial term. Mr. Crow’s employment maybe terminated prior to the expiration of the agreement by the mutual writtenagreement of the parties or in the event of Mr. Crow’s disability.  For the purposes of the employmentagreement, “disability” means Mr. Crow’s inability, due to physical or mentalimpairment, to perform his duties and obligations, despite reasonableaccommodation by us, for a period exceeding three months.  Mr. Crow’s employment may also be terminatedin the event of his death, notice by us of termination for cause (as defined inthe agreement), or written notice by us of termination without cause, uponfourteen (14) days notice.  Mr. Crow isentitled to compensation for early termination.  If Mr. Crow is terminated without cause, we will pay to him, asliquidated damages and in lieu of any and all other claims which Mr. Crow may

 

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have against us, the amount equal to Mr. Crow’s monthly base salarymultiplied by the number of months remaining in the term of this agreement, ora payment amount equal to two years of Mr. Crow’s base salary, whichever isgreater.

 

MCPEAK, JR. EMPLOYMENT AGREEMENT.  In May 1999, we entered into employmentagreement with Daniel L. McPeak, Jr., pursuant to which Mr. McPeak agreed toserve as our Executive Vice President and General Manager.  The McPeak, Jr. employment agreementprovides that Mr. McPeak will receive an annual base salary of $125,000increased to $135,000 on May 1, 2000, and will be reviewed annually.  The McPeak, Jr. employment agreementterminates on May 1, 2004, unless it is terminated earlier.  The term will be automatically extended foran additional five-year term unless either party delivers notice of electionnot to extend the employment at least 90 days prior to the expiration of theinitial term. Mr. McPeak’s employment may be terminated prior to the expirationof the agreement by the mutual written agreement of the parties or Mr. McPeak’sdisability.  For the purposes of the employmentagreement, “disability” means Mr. McPeak’s inability, due to physical or mentalimpairment, to perform his duties and obligations, despite reasonableaccommodation by us, for a period exceeding three months.  Mr. McPeak’s employment may also be terminatedin the event of his death, notice by us of termination for cause (as defined inthe agreement), or written notice by us of termination without, cause uponfourteen (14) days notice.  Mr. McPeakis entitled to compensation for early termination.  If Mr. McPeak is terminated without cause, we will pay to him, asliquidated damages and in lieu of any and all other claims which Mr. McPeak mayhave against us, the amount equal to Mr. McPeak’s monthly base salarymultiplied by the number of months remaining in the term of this agreement, ora payment amount equal to two years of Mr. McPeak’s base salary, whichever isgreater.

 

**1997STOCK OPTION PLAN**

 

Our Board adopted the 1997 Stock Option Plan, or the1997 Plan, in November 1997 and the stockholders approved the 1997 Plan in May1998.  At our meeting of thestockholders held on June 29, 2001, the stockholders approved increasingauthorized shares of common stock to be issued under the 1997 Plan from5,000,000 to 10,000,000, increasing the number of reserved shares of commonstock from 5,000,000 shares to 10,000,000 shares.  As of December 31, 2002, a total of 3,151,000 shares areavailable for future grants.  The 1997Plan provides for the grant of “incentive stock options” as defined in Section422A of the Internal Revenue Code of 1986, as amended, or the Code, to ouremployees.  The 1997 Plan also providesfor the grant of options that are not intended to qualify as incentive stockoptions under Section 422A of the Code to our employees, non-employee directorsand consultants.  The exercise price ofany incentive stock option granted under the 1997 Plan may not be less than100% of the fair market value of our common stock on the date of grant and ofany nonqualified stock option 85% of fair market value and 110% of fair marketvalue in the case of a participant owning stock possessing more than 10% of thevoting rights of our company’s outstanding capital stock.  Shares subject to an option granted underthe 1997 Plan may be purchased for cash, in exchange for shares of common stockowned by the optionee, or other consideration as set forth in the plan.  Our Board administers the 1997 Plan.  Under the 1997 Plan, options vest not lessthan 20% per year and have 10-year terms (except with respect to 10% stockholderswhich have five-year terms).  Ifwe sell substantially all of our assets, are a party to a merger orconsolidation in which we are not the surviving corporation, then we have theright to accelerate unvested options and will give the

 

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option holder written notice of the exercisability and specify a timeperiod in which the option may be exercised. All options will terminate in their entirety to the extent not exercisedon or prior to the date specified in the written notice unless an agreementgoverning any change of control provides otherwise.

** **

**ITEM11.****               SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

The following table sets forth certain information asof March 1, 2003, or the Reference Date, with respect to the beneficialownership of our common stock, by each person known by us to own beneficiallymore than five percent of our common stock, by each executive officer anddirector, and by all officers and directors as a group.  Unless otherwise indicated, all persons havesole voting and investment powers over such shares, subject to communityproperty laws. As of the Reference Date, there were 38,550,151 shares of ourcommon stock outstanding and unexercised warrants and options representing25,359,923 shares.

** **
| **Name (1)**                                                                          |   | **Amount  & Nature   of Beneficial Owner (2)** |   | **Percent of  Class** |   |
|---------------------------------------------------------------------------------------|--------|----------------------------------------------------|--------|-----------------------|--------|
| Monsanto   800 N. Lindbergh, St. Louis, MO 63167                                      |   | 7,167,479                                          |   | 11.21                 | %      |
| Daniel L.  McPeak, Sr., Chairman of the Board and Chief Executive Officer             |   | 5,949,095                                          | (3)    | 9.31                  | %      |
| Intermark Group  Holdings, LLC   10707 Club Chase, Fisher, IN 46038                   |   | 5,803,574                                          | (4)    | 9.08                  | %      |
| Gilbert L.  McCord, Sr.   7029 E. Hill Road, Grand Blac, MI 48439                     |   | 5,803,571                                          | (5)    | 9.08                  | %      |
| Intermark  Partners Strategic Management, LLC   484 East Carmel Dr., Carmel, IN 46032 |   | 5,078,215                                          | (6)    | 7.95                  | %      |
| Kirit Kamdar,  Director                                                               |   | 2,001,250                                          | (7)    |                  |   |
| Steven W.  Saunders, Director                                                         |   | 1,050,000                                          | (7)    |                  |   |
| Kenneth L.  Miller, Director                                                          |   | 300,000                                            | (7)    |                  |   |
| Todd C. Crow,  Chief Financial Officer                                                |   | 1,335,000                                          | (7)    |                  |   |
| Ike E. Lynch,  V.P. Operations                                                        |   | 1,523,864                                          | (7)    |                  |   |
| Daniel L.  McPeak, Jr., V.P. General Manager                                          |   | 1,090,500                                          | (7)    |                  |   |
|                                                                                  |   |                                               |   |                  |   |
| All directors  and executive officers, as a group   (7 persons)                  |   | 13,249,709                                         |   | 20.73                 | %      |

 

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(1)                Except asotherwise noted, the address for each person is c/o The RiceX Company, 1241Hawk’s Flight Court, El Dorado Hills, California 95762.

(2)                Unless otherwisenoted, we believe that all persons named in the table have sole voting andinvestment power with respect to all shares of common stock listed asbeneficially owned by them.  A person isdeemed to be the beneficial holder of securities that can be acquired by suchperson within 60 days from the Reference Date upon the exercise of warrants oroptions.  Each beneficial owner’spercentage ownership is determined by including shares, underlying options orwarrants which are exercisable by such person currently, or within 60 daysfollowing the Reference Date, and excluding shares underlying options andwarrants held by any other person.

(3)                Includes optionsto purchase 2,375,000 shares of common stock, 1,708,225 shares in Mr. McPeak’sname and 1,665,870 shares in his wife’s name, Ms. Patricia McPeak, and 200,000shares held in a joint trust.

 

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(4)                Includes warrantsto purchase 4,017,859 shares of common stock. The warrants are currently exercisable. Warrants to purchase 2,232,144shares are restricted from sale and, or transfer until such time when ourrevenues at various stages reach an annualized equivalent of $12,000,000 and$25,000,000.

(5)                Includes warrantsto purchase 4,017,857 shares of common stock. The warrants are currently exercisable. Warrants to purchase 2,232,143shares are restricted from sale and, or transfer until such time when our revenuesat various stages reach an annualized equivalent of $12,000,000 and$25,000,000.

(6)                Representswarrants to purchase 5,078,215 shares of common stock.  The warrants are currently exercisable.Warrants to purchase 3,250,000 shares are restricted from sale and, or transferuntil such time when our revenues at various stages reach an annualizedequivalent of $12,000,000 and $25,000,000.

(7)                Includes optionsfor the purchase of common stock as follows: Kirit S. Kamdar, 250,000; StevenW. Saunders, 250,000; Kenneth L. Miller, 150,000; Todd C. Crow, 1,335,000; IkeE. Lynch, 1,165,000, also includes 14,409 shares of common stock and 32,000options for the purchase of common stock held by Mr. Lynch’s wife to which Mr.Lynch disclaims beneficial ownership; Daniel L. McPeak, Jr., 1,085,000.

** **

**Item 12.**                                                    CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

Mr. Daniel McPeak, Sr. has served the Chairman of ourBoard since our formation in 1989.  InNovember 1998, Mr. McPeak was re-appointed as our CEO.  Mr. McPeak previously served as our CEO fromMay 1989 to April 1997.  Mr. McPeak isthe spouse of Ms. Patricia McPeak (see below) and the father of Daniel L.McPeak, Jr.  On January 2, 2002, weissued Mr. McPeak a non-statutory stock option agreement to purchase 175,000shares of common stock at an exercise price of $0.36 per share.  One third of the option shares were fullyvested upon date of grant.  One third ofthe option shares vest and become exercisable at $0.36 per share on the firstanniversary of the award date.  Onethird of the option shares vest and become exercisable at $0.36 per share onthe second anniversary of the award date. The market price on the date of grant was $0.36 per share.  The expiration date of the option agreementis January 2, 2012.  In February 2001,we issued Mr. McPeak non-statutory stock option agreements to purchase 150,000shares of common stock at an exercise price of $0.39 per share.  The market price on the date of grant was$0.39 per share.  These options werefully vested upon date of grant.  Theexpiration date of the option agreements is February 22, 2011.  Upon the anniversary date of Mr. McPeak’sappointment to our Board, in June, 2001, we issued to him a non-statutory stockoption agreement to purchase 50,000 shares of common stock at an exercise priceof $0.40 per share.  Market price on thedate of grant was $0.40 per share.  Theoption will be fully vested at the end of one year, or on the anniversary date.  The expiration date of the option agreementis June 1, 2011.  See Part III, Item 9,“Director Compensation” for further discussions.  These stock options were issued in accordance with our EmployeeStock Option program, which was ratified by our Board in 1997.

 

Ms. Patricia McPeak served as a director on our Boardfrom our formation in 1989 until the expiration of her term on June 29,2001.  From February 1989 to March 2000,Ms. McPeak also served the President of our company.  Ms. McPeak, who resigned that position on March 31, 2000 retainedher seat on our Board until June 29, 2001, at which time her term expired.  She is the spouse of Daniel L. McPeak, Sr.,Chairman of our Board and our CEO.  InFebruary 2001, we issued Ms. McPeak a non-statutory stock option agreement topurchase 150,000 shares of common stock at an exercise price of $0.39 pershare.  The market price on the date ofgrant was $0.39 per share.  Theseoptions were fully vested upon date of grant. Upon the anniversary date of Ms. McPeak’s appointment to our Board, inJune, 2001, we issued her a non-statutory stock option agreement to purchase50,000 shares of common stock at an exercise price of $0.40 per share.  The market price on the date of grant was$0.40 per

 

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share.  These options will befully vested at the end of one year, or on the anniversary date.  In accordance with the non-statutory stockoption agreement, these options will expire 90 days after a Board member leavesour Board.  See Part III, Item 9,“Director Compensation” for further discussions.  Since Ms. McPeak’s directorship ended on June 29, 2001 and shedid not exercise her stock options, the non-statutory stock option agreementsexpired effective September 29, 2001.

 

During 2000, we entered into an exclusive distributionagreement, or the Original Agreement, with NutraStar Incorporated, a Nevadacorporation, or NutraStar, to develop products and market them into thenutraceutical and value added functional foods markets for humannutrition.  Under this arrangement, werecognized sales to NutraStar of $443,793 and $72,000 during 2002 and 2001,respectively.  See Part II, Item 7,“Financial Statements” for further discussions of NutraStar.  Ms. McPeak is an officer and director ofNutraStar and also became an officer and director of NutraStar California.

 

In early 2001 we suspended NutraStar’s exclusivityarrangement and began making direct sales to the customer base, which waspreviously acquired by NutraStar under the Original Agreement.  We continued NutraStar’s pricing, which washigher than what we had previously charged these customers.  We recognized the price differential ofapproximately $156,000 as a commission expense.  After paying NutraStar $56,000, we applied the remaining $100,000price differential to the receivable balance from NutraStar.  The net effect of these transactionsresulted in a remaining balance of $130,000 due from NutraStar, which wassubsequently exchanged for shares of NutraStar California’s Series A preferredstock as discussed below.  The OriginalAgreement between NutraStar and us subsequently was canceled in 2001 because ofissues related to payment for outstanding goods shipped by us.

 

In late 2001, NutraStar entered into a plan andagreement of exchange, or the Reorganization, dated November 9, 2001 withAlliance Consumer International, Inc., or Alliance.  Pursuant to the Reorganization, NutraStar became a wholly ownedsubsidiary of Alliance, and Alliance thereafter changed its name to NutraStarIncorporated, a California corporation, or NutraStar California.  In addition, several creditors of NutraStar,including us, agreed to cancel certain indebtedness owed by NutraStar inexchange for shares of NutraStar California’s Series A preferred stock.  Pursuant to this arrangement, during December2001 we agreed to cancel $190,000 of NutraStar’s indebtedness in exchange for190,000 shares of NutraStar California’s Series A preferred stock.  Concurrent with the Reorganization, weentered into a new five-year exclusive distribution agreement with NutraStar,or the Exclusive Distribution Agreement, whereby we granted NutraStar anexclusive license to sell certain of our brand products for distribution intothe nutraceutical market.  The ExclusiveDistribution Agreement covers the United States and all of its territories andany additional countries or regions of the countries that NutraStar and wemutually agree upon in writing. NutraStar has agreed to meet certain escalating minimum purchaserequirements throughout the term of the contract.   NutraStar has paid a $135,000 security deposit.  A prepayment deposit of fifty percent isrequired for each purchase order for the first six months of the agreement anddecreases to zero as long as there are no defaults during the first twelvemonths.  The agreement also provides forthe option to extend for two additional periods of five years each.  In exchange for the exclusive license in thenutraceutical market, we will receive license fees.  In July 2002, we terminated the Exclusive Distribution withNutraStar for its failure to meet certain performance

 

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requirements as specified in the Exclusive Distribution Agreement.  Ms. McPeak is an officer and director ofNutraStar and also became an officer and director of NutraStar California.

 

Mr. Kirit Kamdar has been a director of our companysince August 5, 1998 and was a director of our company from January 1990 toSeptember 1992.  From January 1990 toApril 1994, Mr. Kamdar served as our Executive Vice President.  Upon the anniversary date of Mr. Kamdarappointment to our Board, in September, 2002, we issued him a non-statutorystock option agreement to purchase 50,000 shares of common stock at an exerciseprice of $0.26 per share.  Market priceon the date of grant was $0.26 per share. The option will be fully vested at the end of one year, or on theanniversary date.  The expiration dateof the option agreement is September 23, 2012. In February 2001, we issued Mr. Kamdar non-statutory stock optionagreements to purchase 100,000 shares of common stock at an exercise price of$0.39 per share. The market price on the date of grant was $0.39 pershare.  These options were fully vestedupon date of grant.  The expiration dateof the option agreements is February 22, 2011. Upon the anniversary date of Mr. Kamdar appointment to our Board, inSeptember, 2001, we issued him a non-statutory stock option agreement topurchase 50,000 shares of common stock at an exercise price of $0.30 pershare.  The market price on the date ofgrant was $0.30 per share.  The optionwill be fully vested at the end of one year, or on the anniversary date.  The expiration date of the option agreementis September 23, 2011.  See Part III,Item 9, “Director Compensation” for further discussions.  Mr. Kamdar currently owns 2,001,250 sharesof our common stock and common stock options, or 3.13%.  Since July 1974, Mr. Kamdar has beenChairman of the Board and Chief Executive Officer of Kamflex Corporation, amanufacturer of extrusion and conveyor equipment.

 

Mr. Kenneth Miller has been a director of our companysince September 2000 and currently is Manager of GBV Intermark Fund LLC.  In September 2000, we finalized an agreementwith a venture capital firm affiliated with Mr. Miller to convert a $2,500,000note to equity.  On September 29, 2000,we converted the note for 3,571,429 shares of our common stock and warrants topurchase 3,571,429 shares of our common stock at $0.70 per share.  The warrants are immediately exercisable andhave a term of five years.  Inconnection with this conversion, we also granted additional warrants topurchase up to 4,464,285 shares of our common stock at $0.70 per share,exercisable at any time during the five-year period commencing from the date ofgrant.  The warrant shares arerestricted from sale and/or transfer until such time as our revenues at variousstages reach an annualized equivalent of $12,000,000 and $25,000,000.  In connection with this transaction, weissued share of our common stock and warrants to two principal parties, one ofwhich was GBV Intermark Fund, LLC.  Theshares of our common stock and warrants issued to GBV Intermark Fund, LLC wereacquired by Intermark Group Holdings, LLC on April 4, 2002 in a privatetransaction.  In September 2002, on theanniversary date of Mr. Miller’s appointment to our Board, we issued himnonqualified options to purchase 50,000 shares of our common stock at anexercise price of $0.22 per share.  Themarket price of our common stock on the date of grant was $0.22 per share.  The options will be fully vested at the endof one year on the anniversary date of the grant and the expiration date of theoptions is September 29, 2012.  InFebruary 2001, we issued Mr. Miller nonqualified options to purchase 50,000shares of  our common stock at anexercise price of $0.39 per share.  Themarket price of our common stock on the date of grant was $0.39 per share. Theoptions were fully vested upon the date of grant, and the expiration date ofthe options is February 22, 2011.  InSeptember 2001, the anniversary date of Mr. Miller’s appointment to our Board,we

 

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issued him nonqualified options to purchase 50,000 shares of our commonstock at an exercise price of $0.34 per share. The market price of our common stock on the date of grant was $0.34 pershare.  The options will be fully vestedat the end of one year on the anniversary date of the grant and the expirationdate of the options is September 29, 2011. See Part III, Item 9, “Director Compensation” for further discussions.

 

We believe that the transactions set forth above weremade on terms no less favorable to us than could have been obtained fromunaffiliated third parties.  We intendthat all future transactions, including loans, between our officers, directors,principal stockholders and their affiliates, and us be approved by a majorityof our Board, including a majority of the independent and disinterested outsidedirectors who serve on our Board.  Inaddition, we intend that all such transactions be on terms no less favorable tous than could be obtained from unaffiliated third parties.

** **

**Item 13.**                                                    EXHIBITS AND REPORTS ON FORM 8-K

 

(a)           INDEXTO EXHIBITS

 
| **Exhibit  No** |   | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                   |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |   | Certificate of Incorporation of the Company. (1)                                                                                                                                                                                                                                                                                             |
| 3.2             |   | Bylaws. (2)                                                                                                                                                                                                                                                                                                                                  |
| 4.1             |   | Form of Registration Rights Agreement between the  Company and certain officers and directors. (1)                                                                                                                                                                                                                                           |
| 4.2             |   | Form of Warrant Agreement between the Company and  certain investors dated February 9, 1996. (1)                                                                                                                                                                                                                                        |
| 4.3             |   | Form of Directors Stock Option Agreement. (1)(3)                                                                                                                                                                                                                                                                                             |
| 4.4             |   | Form of Non-statutory Stock Option Agreement not  issued under the 1997 Stock Option Plan, governing options granted to  employees by the Company. (1)(3)                                                                                                                                                                                    |
| 4.5             |   | Registration Rights Agreement between the Company  and FoodCeuticals dated December 31, 1998. (4)                                                                                                                                                                                                                                            |
| 4.6             |   | Warrant Agreement number 98-1 between the Company  and FoodCeuticals dated December 31, 1998. (4)                                                                                                                                                                                                                                            |
| 4.7             |   | Warrant Agreement number 99-1 between the Company  and FoodCeuticals dated January 15, 1999. (4)                                                                                                                                                                                                                                             |
| 4.8             |   | Form of non-statutory Stock Option Agreement issued  under the 1997 Stock Option Plan between the Company and employees dated  October 1, 1999. (3)(5)                                                                                                                                                                                       |
| 4.9             |   | Warrant Agreement between the Company and JDK &  Associates dated November 1, 1999. (5)                                                                                                                                                                                                                                                  |
| 4.10            |   | Form of non-statutory Stock Option Agreement issued  under the 1997 Stock Option Plan between the Company and Vice President,  Operations, Ike Lynch dated November 1, 1999. Identical Agreements with Vice  President and General Manager, Daniel McPeak, Jr. and Vice President of  Finance, Chief Financial Officer, Todd C. Crow. (3)(5) |
| 4.11            |   | Form of Subscription Agreement to the Private  Placement Offering 1999. (5)                                                                                                                                                                                                                                                                  |

 

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| 4.12 |   | Form of Warrant Agreement to the Private Placement  Offering 1999. (5)                                                                                                                                |
|------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.13 |   | Warrant agreement between the Company and GBV  Intermark Fund, LLC dated September 29, 2000. (7)                                                                                                      |
| 4.14 |   | Warrant agreement between the Company and Gilbert L.  McCord, Sr. dated September 29, 2000. (7)                                                                                                       |
| 4.15 |   | Definitive agreement between the Company and Intermark  Partners, LLC dated September 29, 2000. (7)                                                                                                   |
| 4.16 |   | Form of Warrant Agreement between the Company and  certain former employees dated as of March 31, 2000. (8)                                                                                           |
| 4.17 |   | Non-statutory Stock Option Agreement issued under  the 1997 Stock Option Plan between the Company and Daniel L. McPeak, Sr.  dated October 27, 2000. (3)(8)                                           |
| 4.18 |   | Warrant agreement between the Company and Intermark  Partners Strategic Management, LLC representing the Class I Warrant dated  October 2, 2000. (8)                                                  |
| 4.19 |   | Warrant agreement between the Company and Intermark  Partners Strategic Management, LLC representing the Class II Warrant dated  October 2, 2000. (8)                                                 |
| 4.20 |   | Warrant agreement between the Company and Intermark  Partners Strategic Management, LLC representing the Class III Warrant dated October  2, 2000. (8)                                                |
| 4.21 |   | Form of Board Member Non-statutory Stock Option  Agreement issued under the 1997 Stock Option Plan between the Company and the  Board Members dated February 22, 2001, September 23 and 29, 2001. (9) |
| 4.22 |   | Preferred Stock Subscription Agreement between the  Company and Alliance Consumer International, subsequently named NutraStar,  Inc., dated December 10, 2001. (10)                                   |
| 4.23 |   | Alliance Consumer International, Inc. Exchange Offer  For The Common Stock Of NutraStar dated December 11, 2001. (10)                                                                                 |
| 4.24 |   | Put/Call agreement between the Company and  NutraStar, Inc. dated January 15, 2002. (11)                                                                                                              |
| 4.25 |   | Form Non-statutory Stock Option Agreement issued  under the 1997 Stock Option Plan between the Company and employees dated  January 2, 2000. (12)                                                     |
| 4.26 |   | Form of Non-statutory Stock Option Agreement issued  September 23, 2002 between the Company and the Board of Directors.                                                                               |
| 10.1 |   | Form of Indemnification Agreement by and among the  Company and certain officers and directors. (1)(3)                                                                                                |
| 10.2 |   | Commercial Lease and Deposit Receipt between  Roebbelen Land Company and the Company dated December 23, 1991. (1)                                                                                     |
| 10.3 |   | First Amendment of Lease between Roebbelen Land  Company and the Company dated January 19, 1994. (1)                                                                                                  |
| 10.4 |   | Second Amendment of Lease between Roebbelen Land Company  and the Company dated July 11, 1996. (1)                                                                                                    |
| 10.5 |   | Third Amendment of Lease Agreement between Roebbelen  Land Company and the Company dated February 1, 1998. (1)                                                                                        |
| 10.6 |   | Lease Agreement between Roebbelen Land Company and  the Company dated July 11, 1996. (1)                                                                                                              |
| 10.7 |   | First Amendment of Lease between Roebbelen Land  Company and the Company dated September 1996. (1)                                                                                                    |

 

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| 10.8  |   | Second Amendment of Lease Agreement between  Roebbelen Land Company and the Company dated February 1, 1998. (1)                                      |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | Executive Employment Agreement for Daniel L. McPeak  Jr., Executives Todd C. Crow and Ike Lynch have similar employment  agreements. (3)             |
| 10.10 |   | Stabilized Rice Bran Processing, Sales, and  Marketing Agreement between Farmers’ Rice Cooperative and the Company dated  May 1, 2002. (3)(12)* |
| 10.11 |   | Sublease Agreement between the Company and  NutraStar, Inc. effective November 1, 1999. (6)                                                          |
| 10.12 |   | Employment Agreement between Daniel L. McPeak, Sr.  and the Company dated April 1, 2000. (3)(8)                                                      |
| 10.13 |   | Consulting Agreement between JDK and Associates,  Inc. and the Company executed as of March 15, 2001. (9)                                            |
| 10.14 |   | Exclusive Distribution Agreement between the Company  and NutraStar, Inc., dated December 21, 2001. (10)                                             |
| 10.15 |   | License Agreement between the Company and NutraStar  Technologies, Inc. dated January 9, 2002. (10)                                             |
| 10.16 |   | Indemnity Agreement between the Company and  NutraStar, Inc. dated December 13, 2001. (10)                                                      |
| 10.17 |   | Contract for Services between the Company and Dr.  Glenn H. Sullivan dated January 1, 2002. (10)                                                |
| 10.18 |   | Agreement on Exclusive Distribution in Europe  between the Company and KREGLINGER EUROPE N.V. dated October 1, 2002.                                 |
| 21    |   | List of   Subsidiaries (6)                                                                                                                      |
| 99.1  |   | Certification of the Chief Executive Officer of The  RiceX Company dated August 12, 2002. (12)                                                  |
| 99.2  |   | Certification of the Chief Financial Officer of The  RiceX Company dated August 12, 2002. (12)                                                  |
| 99.3  |   | Certification of the Chief Executive Officer of The  RiceX Company dated March 31, 2003.                                                        |
| 99.4  |   | Certification of the Chief Financial Officer of The  RiceX Company dated March 31, 2003.                                                        |

 

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| (1) |   | Previously filed as an exhibit to the Company’s  Registration Statement No. 000-24285 filed with the Commission on May 18,  1998.                           |
|-----|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Previously filed as an exhibit to the Company’s  Amendment No. 2 to the Registration Statement No. 000-24285 filed with the  Commission on August 26, 1998. |
| (3) |   | Represents a management contract or compensatory  plan or arrangement.                                                                                           |
| (4) |   | Previously filed as an exhibit to the Company’s Form  10-KSB filed with the Commission on April 15, 1999.                                                   |
| (5) |   | Previously filed as an exhibit to the Company’s Form  10-KSB filed with the Commission on March 30, 2000 and incorporated herein by  reference.             |
| (6) |   | Previously filed as an exhibit to the Company’s Form  10-QSB filed with the Commission on August 18, 2000 and incorporated herein  by reference.            |
| (7) |   | Previously filed as an exhibit to the Company’s Form  10-QSB filed with the Commission on November 14, 2000 and incorporated herein  by reference.          |
| (8) |   | Previously filed as an exhibit to the Company’s Form  10-KSB filed with the Commission on April 17, 2001 and incorporated herein by  reference.             |

 

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| (9)                                                                   |   | Previously filed as an exhibit to the Company’s Form  10-QSB filed with the Commission on August 10, 2001 and incorporated herein  by reference and incorporated herein by reference. |
|-----------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (10)                                                                  |   | Previously filed as an exhibit to the Company’s Form  10-KSB filed with the Commission on March 29, 2002 and incorporated herein by  reference.                                       |
| (11)                                                                  |   | Previously filed as an exhibit to the Company’s Form  10-QSB filed with the Commission on May 10, 2002 and incorporated herein by  reference.                                         |
| (12)                                                                  |   | Previously filed as an exhibit to the Company’s Form  10-QSB filed with the Commission on August 12, 2002 and incorporated herein  by reference.                                      |
|                                                                  |   |                                                                                                                                                                                       |
| *    Confidential treatment granted as to certain portions. |

 

(b)           REPORTS ON FORM 8-K

 

As reported on October 29, 2002, Press release ofRegistrant’s common stock buy-back plan.

 

As reported on November 14, 2002, Daniel L. McPeak andTodd C. Crow, the Chief Executive Officer and Chief Financial Officer,respectively, of The RiceX Company, each submitted to the Securities andExchange Commission certifications required pursuant to 18 U.S.C. '1350(Section 906 of the Sarbanes-Oxley Act of 2002).

 

**Item14.                CONTROLS AND PROCEDURES**

 

(a)           We established a compliance committeein 2002 to carry out an evaluation of the effectiveness of our disclosurecontrols and procedures.  An evaluationof our disclosure controls and procedures (as defined in Sections 13(a)- 14(c)and 15(d)-14(c) of the Securities Exchange Act of 1934 (the "Act"))was carried out under the supervision and with the participation of ChiefExecutive Officer and Chief Financial Officer, within the 90-day periodpreceding the filing date of this Form 10-KSB. The procedures as currently in effect are effective in ensuring that theinformation required to be disclosed by us in the reports we file or submitunder the Act are (1) accumulated and communicated to our management (includingthe Chief Executive Officer and Chief Financial Officer) in a timely manner,and (2) recorded, processed, summarized, and reported within the time periodsspecified under the SEC's rules.

 

(b)           In the period ending December 31,2002, we did not make any significant changes in, nor take any correctiveactions regarding, our internal controls subsequent to the date of theevaluation referred to in the previous paragraph, including any correctiveaction with regard to significant deficiencies and material weaknesses.

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**SIGNATURES**

 

In accordance with Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant caused this report to be signedon its behalf by the undersigned, thereunto duly authorized:

 
|                        | THE RICEX COMPANY |
|-----------------------------|-------------------|
|                        |              |   |
| Date:  March  31, 2003 | By:               | /s/ Daniel L. McPeak |   |
|                        |              | Daniel L. McPeak |
|                        |              | Chairman of the Board and   Chief Executive Officer |
|                        |              |   |
| Date:  March  31, 2003 | By:               | /s/ Todd C. Crow |   |
|                        |              | Todd C. Crow |
|                        |              | Director |
|                        |              | Vice President, Finance and   Chief Financial Officer |

 

In accordance with the Securities Exchange Act of1934, this report has been signed below by the following persons on behalf ofthe registrant in the capacities and on the dates indicated.

 
| Date:  March  31, 2003 | By:    | /s/ Kirit S. Kamdar    |   |
|-----------------------------|--------|------------------------|--------|
|                        |   | Kirit S. Kamdar        |
|                        |   | Director               |
|                        |   |                   |
| Date:  March  31, 2003 | By:    | /s/ Steven W. Saunders |   |
|                        |   | Steven W. Saunders     |
|                        |   | Director               |
|                        |   |                   |
| Date:  March  31, 2003 | By:    | /s/ Kenneth L. Miller  |   |
|                        |   | Kenneth L. Miller      |
|                        |   | Director               |

 

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**CERTIFICATIONS**

 

I, Daniel L. McPeak Sr., certify that:

 

1              Ihave reviewed this annual report on Form 10-KSB of The RiceX Company;

 

2.             Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13(a)-14 and 15(d)-14) for the registrant and have:

 

a)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)            evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)             presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

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6.             Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:                     | March 31, 2003 |   |
|---------------------------|----------------|--------|
|                      |
| /s/ Daniel L. McPeak, Sr. |           |
| Daniel L. McPeak, Sr.     |
| Chief Executive Officer   |
|                           |                |        |  |

 

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I, Todd C. Crow, certify that:

 

1.             Ihave reviewed this annual report on Form 10-KSB of The RiceX Company;

 

2.             Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13(a)-14 and 15(d)-14) for the registrant and have:

 

a)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this annual report is being prepared;

 

b)            evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)             presentedin this annual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

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6.             Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:              | March 31, 2003 |   |
|-------------------------|----------------|--------|
|                    |
| /s/ Todd C. Crow        |           |
| Todd C. Crow            |
| Chief Financial Officer |
|                         |                |        |  |

 

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