**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

----

** **

**FORM 10-K**

 
| **ý** | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|-------------------------------------------------------------------------------------------|

 

**For the fiscal year ended January 31,2003**

** **

**Commission filenumber:  1-8366**

** **

**POLYDEX PHARMACEUTICALS LIMITED**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Commonwealth of the Bahamas**                                                  |   | **None**                              |
|----------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other Jurisdiction of  Incorporation or Organization)                  |   | (I.R.S. Employer  Identification No.) |
|                                                                             |   |                                  |
| **421 Comstock Road, Toronto, Ontario, Canada**                                  |   | **M1L 2H5**                           |
| (Address of Principal Executive Offices)                                         |   | (Zip Code)                            |
|                                                                             |   |                                  |
| Registrant’s telephone number, including area code  **(416) 755-2231** |
|                                                                             |
| Securities registered pursuant to Section 12(b) of the Act:                 |

 

| **Title of  Each Class**        |   | **Name of  Each Exchange on Which Registered** |
|---------------------------------|--------|------------------------------------------------|
| Common Shares, $.0167 Par Value |   | Boston Stock Exchange                          |

 

Securities registered pursuantto Section 12(g) of the Act:  **Same**

 

Indicate by check mark whetherthe Registrant:  (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.    Yes   ý     No   o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated by referencein Part III of this Form 10-K or any amendment to thisForm 10-K.    Yes    o     No   ý

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).  Yes o  No ý

 

----

 

The aggregate market value ofthe Registrant’s voting common shares held by non-affiliates of the Registrant,computed by reference to the average bid and ask prices of such stock as of May15, 2003:** **$6,107,356**.**

 

 

The number of Common Sharesoutstanding as of May 15, 2003**: **3,027,796.

 

Documents Incorporated By Reference

 

Portions of the Registrant’sdefinitive Proxy Statement for the Annual Meeting of Members to be held on July16**,**2003, are incorporated byreference into Part III.

 

----

 

PART I

 

ITEM 1.                                                     BUSINESS

 

*This report contains statements of a forward-looking nature relating tofuture events or future performance. These statements are only predictions and actual events or results maydiffer materially.  In evaluating suchstatements, you should carefully consider the various factors identified inthis report which could cause actual results to differ materially from thoseindicated in any forward-looking statements, including those set forth in “RiskFactors” in this Annual Report on Form 10-K.*

 

Introduction

 

Polydex Pharmaceuticals Limited (the“Company” or the “Registrant”) was incorporated under the laws of theCommonwealth of the Bahamas on June 14, 1979 as Polydex Chemicals Limited,and changed its name on March 28, 1984. The address of its statutory office in the Bahamas is c/o Higgs &Johnson, 83 Shirley Street, Nassau, Bahamas:  telephone (242) 322-8571. The Registrant’s current business is conducted through two of itssubsidiaries, Polydex Chemicals (Canada) Limited, a wholly-owned Canadiancorporation incorporated in 1969, which itself conducts its business throughits wholly-owned subsidiary, Dextran Products Limited, incorporated in Ontarioin 1966, and Chemdex, Inc., a 90% owned Kansas corporation formed in 1987.

 

On November 30, 1992, Chemdex acquiredfrom Continental Grain Company 100% of the issued and outstanding share capitalof Veterinary Laboratories Inc., a Kansas corporation, which previously hadbeen wholly-owned by the Registrant.  OnDecember 1, 1992, Vet Labs and Sparhawk Laboratories Inc. entered into ajoint venture for the purpose of manufacturing and selling veterinarypharmaceutical products.  Sparhawk isnot an affiliated company, but is owned by the management of the Vet Labs -Sparhawk Joint Venture.  The Registrantcontrols the Vet Labs - Sparhawk Joint Venture through its control of the boardof directors.

 

2

----

 

On May 9, 1995, the Registrant acquiredfrom its then Chairman (now Vice-Chairman), Thomas C. Usher, a 90%interest in Novadex International Inc., a Bahamian corporation.  The Registrant acquired the remaining 10%interest in Novadex International from an unaffiliated third person onJuly 14, 1997.  The principal assetof Novadex International is a patent, developed by Mr. Usher, for the useof Cellulose Sulphate in a number of applications including the development ofa new contraceptive gel.

 

General

 

The current business of the Registrant is themanufacture and sale of Dextran and several of its derivatives, including IronDextran and Dextran Sulphate, veterinary pharmaceutical products and otherspecialty chemicals, and cosmetic raw materials, with some related research anddevelopment.  The Registrant isinvestigating the potential human applications of some of its products althoughit is impossible to determine at this time if the products will reach market.

 

Dextran, a generic name applied to certainsynthetic compounds formed by bacterial growth on sucrose, is a polymer orgiant molecule.  The name Polydexcombines the words “polymer” and “dextran.”

 

Description,Usage and Regulated Aspects of the Products

 

The operations of the Registrant arepresently carried on through Dextran Products and Vet Labs.  These subsidiaries operate in two industrysegments:  the manufacture and sale ofDextran and derivatives and the manufacture and sale of veterinarypharmaceutical products

 

Iron Dextran

 

A.  Description

 

Iron Dextran is a derivative of Dextranproduced by complexing Iron with Dextran. Iron Dextran is injected into most pigs at birth as a treatment foranemia.

 

B.  Regulation andUsage

 

Sales presently are being made by theRegistrant in the following countries, which have approved the use of IronDextran for animals, require no approval, or accept the Canadian registration:Canada, Denmark, France, Hong Kong, Germany, the Netherlands, Finland, Ecuador,Thailand, Italy, Malaysia, the Philippines, Japan, Brazil, Korea, Spain,Israel, New Zealand, Mexico, and Australia. In the United States, sale for veterinary use requires the approval ofthe U.S. Food and Drug Administration (the “FDA”).  Chemdex has FDA approval for veterinary use of Iron Dextran inthe United States.  For classificationpurposes, the Registrant treats these sales of the Iron Dextran raw materialsas sales of Iron Dextran.

 

3

----

 

DextranSulphate

 

A.  Description

 

Dextran Sulphate is a specialty chemical thatfinds use in research applications of the pharmaceutical industry and othercenters of chemical research.

 

B.  Regulation andUsage

 

The Dextran Sulphate manufactured by theRegistrant is sold in Australia, France, the Netherlands, New Zealand and theUnited States, where it is used in limited quantities in the manufacture offilm, as well as analytical chemical applications.  This usage requires no regulatory approval.

 

VeterinaryProducts

 

A.  Description

 

The Registrant manufactures sterileinjectable products, tablets and boluses, internal and external solutions,ointments and powders.

 

B.  Regulation andUsage

 

The products are sold in the United Statesand are predominantly used by large animal veterinarians and by farmers for thetreatment of various diseases and conditions that affect farm animals.  The Vet Labs facility is regulated and inspectedby the FDA and the U.S. Drug Enforcement Agency.

 

Sales,Distribution and Reliance Upon Foreign Countries

 

Iron Dextranand Dextran Sulphate

 

The Registrant sells Iron Dextran on anexclusive basis in certain countries and on a non-exclusive basiselsewhere.  Dextran Sulphate is sold ona non-exclusive basis throughout the world. For the fiscal year ended January 31, 2003, no single customeraccounted for 10% or more of total sales.

 

The Registrant has not changed its mode ofdistribution of Iron Dextran or Dextran Sulphate during the past sixteen fiscalyears.  The Registrant sells its productprimarily to independent distributors and wholesalers throughout theworld.  Orders are forwarded to theRegistrant’s manufacturing facilities in Toronto, Ontario, Canada where theyare processed and shipped.  The CanadianEmbassies and Consulates in various countries also assist the Registrant bymaking available information regarding the Registrant and its products.

 

4

----

 

Veterinary Products

 

Vet Labs' sales for the fiscal year endedJanuary 31, 2003 were within the United States.  Distribution is achieved through private label buying groups whothen distribute to their own distributors, and through full service independentdistributors who purchase products under Vet Labs’ house labels.  Private label products accounted forapproximately 95% of sales with house label sales contributing approximately5%.  In addition, Vet Labs also does“contract filling” for other industry companies.  Four customers (all private label buying groups) accounted for66% of sales at Vet Labs, with individual customer shares ranging from lessthan 1% to 22%.  Management does notbelieve that the loss of any one or more of these customers would have amaterial adverse effect upon Vet Labs’ results of operations.

 

WorkingCapital Requirements

 

There are no special inventory requirementsor credit terms extended to customers that would have a material adverse effectupon the Registrant’s working capital.

 

Patents,Trademarks and Licenses

 

Iron Dextran

 

Effective February 1, 1995, theRegistrant entered into an agreement with Novadex Corp., an affiliated company,whereby Novadex Corp. granted the Registrant the exclusive worldwide license touse a certain process developed by Novadex Corp. for producing IronDextran.  This process allows theRegistrant to produce Iron Dextran at a lower cost than would otherwise bepossible.  The license agreement expireswhen the related patent expires.  TheRegistrant pays a license fee based on production volumes.** **Upon the expiration of the license, the technology relatingto the process described above will belong to the Registrant, with no furtherobligation to make royalty payments to Novadex Corp.

 

During July 1999, Novadex Corp. was liquidated,and all assets and liabilities of Novadex Corp. were assumed by the soleshareholder of Novadex Corp., the Vice Chairman of the Registrant.  The above-referenced license agreement wasincluded in the assets transferred to the Vice Chairman.  As of the effective date of the transfer,the Registrant is obligated to pay the license fee to the Vice Chairman.

 

The technology in the field of Dextran andits derivatives is undergoing continuous expansion and development.  The manufacture of Dextran and its derivativesmay be achieved by different processes and variations (including glycoside,which is in the public domain). Therefore, the Registrant does not believe that the license agreementdescribed above gives it any substantial competitive advantage.

 

5

----

 

DextranSulphate

 

This material was patented under U.S. patentnumber 4,855,410 in August, 1989 and has been tested with other drugs forefficacy in controlling the HIV virus. At this time research has been halted so that the Registrant can focusits resources on projects relating to Cellulose Sulphate.  Once these projects have been completed, theRegistrant expects to return its attention to Dextran Sulphate.

 

VeterinaryProducts

 

Vet Labs holds a New Animal Drug Applicationfrom the FDA for the production of 10% Iron Hydrogenated Dextran forinjection.  In addition, Chemdex holds aDrug Master File for the manufacture of 10% Bulk Iron Hydrogenated Dextranwhich makes it the only approved source of Bulk Iron in the United States.

 

Elastin andCollagen

 

These materials were patented under U.S.patent numbers 4,659,740 and 4,784,986 on April 21, 1987 andNovember 15, 1988, respectively. The patents cover a process whereby the materials are modified in such away as to penetrate the skin and act as a hydrating agent.

 

CelluloseSulphate

 

During the fiscal year ended January 31,1996, a patent for a new method of manufacture of Cellulose Sulphate waspurchased for $1 million.  The processwas patented under U.S. patent number 5,378,828 in June of 1995.  Prior to development of the patented processthe manufacture of the compound required the use of dangerous andenvironmentally sensitive chemicals. The new method is safer, and appears to produce a more consistentproduct.  This material appears to haveapplications in film manufacture and capsule production and is presently beinginvestigated in conjunction with the Rush Medical Center in Chicago, Illinoisas a potential contraceptive which also has antiviral capabilities.

 

During fiscal year 2001 U.S. patent number6,063,773, was granted to the Registrant and Co-inventors entitled “CelluloseSulphate for use as Antimicrobial and Contraceptive Agent”. Further clinicaltrials are planned to show its safety and efficacy.

 

6

----

 

CysticFibrosis

 

EffectiveApril 1, 1994, the Registrant entered into a Research Agreement with anaffiliated company and the University of British Columbia.  On April 1, 1996, the UBC Research Agreementwas amended and expanded to include a number of Canadian hospitals.  Under the terms of the UBC ResearchAgreement, the Registrant has agreed to provide equipment and funding in returnfor continuing research on cystic fibrosis to be carried out in connection withtwo patents issued in 1996.  U.S. patentnumber 5,441,938 is held jointly by UBC and the Registrant, whereas U.S. patentnumber 5,514,665 is held by UBC and licensed to the Registrant.  In conjunction with the UBC ResearchAgreement, UBC granted the Registrant, through a sub-licensing agreement withan affiliated company, an exclusive worldwide license to manufacture,distribute and sell products derived or developed from the researchperformed.  During fiscal 2000, theRegistrant and UBC licensed the cystic fibrosis product to BCY LifesciencesInc. (formerly BCY Ventures Inc.), located in Canada.  Under this license agreement, BCY Lifesciences will pay a royaltyto both the Registrant and UBC based on sales and sublicensing revenue in returnfor the exclusive right to sublicense, manufacture, distribute and sell thedeveloped products.

 

Suppliers andSales

 

Iron Dextranand Dextran Sulphate

 

With regard toits basic raw materials, the Registrant utilizes one basic supplier for itssugar requirements and one basic supplier for its iron.  Both of these materials, as well as othersused by the Registrant, are readily available from numerous suppliers atcompetitive prices in the market.  TheRegistrant has no long-term contracts with any of its suppliers.

 

The Registrantis dependent upon a single source for a certain raw material used in theproduction of Dextran Sulphate.  Suchsupply was adequate in fiscal 2003 and no shortages are anticipated in the nearterm.  However, any curtailment in availabilityof such raw material could be accompanied by production or other delays as wellas increased raw material costs, with consequent adverse effect on theRegistrant’s results of operations.

 

VeterinaryProducts

 

Raw materialsare readily available from a variety of suppliers at competitive prices in themarket.  The Registrant has no long-termcontracts with any of its suppliers.

 

7

----

 

Backlog andSeasonality

 

TheRegistrant’s backlog as at January 31, 2003 was approximately $900,000whereas backlog as at January 31, 2002 was approximately $1,300,000.  All of these orders are expected to befilled within the current fiscal year. The Registrant’s veterinary pharmaceutical business may be characterizedas seasonal in that many end-users of its products require fewer vitamins andother supplements during the summer months when livestock are put out topasture.  However, the Registrant doesnot believe that such seasonality is material to its financial results as awhole.

 

Competition

 

The Registrantis the only Canadian manufacturer of Iron Dextran and, as a result of itsownership of Vet Labs, the Registrant is also the only manufacturer of the 10%Bulk Solution in the United States. There exist several European sources of Iron Dextran.  However, the only other major supplier ofIron Dextran is located in Denmark.  Dextran Sulphate is manufactured by several manufacturers in the U.S.and Europe.  With regard to Iron Dextranand Dextran Sulphate, the Registrant competes on the basis of quality, serviceand price.

 

The Registrantcurrently produces approximately 35 veterinary products includinganalgesics, anti-diarrheals, topical antiseptics, nutritional supplements,local and general anesthesia agents and euthanizing agents.  Primary market segments include beef anddairy cattle, swine, equine and to a small extent, companion animals (dogs andcats).  With the exception of Iron Dextranand Nitrofurazone ointment, the product offering is generic or non-licensed(non-NADA).  As such, all products aresubject to numerous competition.  Inaddition to competing on the basis of quality, service and price, theRegistrant differentiates itself from competitors through its ability to supplymultiple product dosage forms (i.e., injectables, boluses, tablets, liquids andpowders) and provide customers with technical and regulatory support andassistance from in-house quality control and regulatory departments.

 

EnvironmentalCompliance

 

The Registrantbelieves that it is in substantial compliance with all existing applicableforeign, federal, state and local environmental laws and does not anticipatethat such compliance will have a material effect on its future capitalexpenditures, earnings or competitive position.

 

Employees

 

As ofMarch 31, 2003, the Registrant employed 82** **employees, of whom 52****wereengaged in production, 18 in quality control, 2 in research and development, 7in administration and 3 in marketing and sales activities.  Of such employees, 57 were employed by VetLabs and****25by Dextran Products.  None of theRegistrant’s employees are covered by collective bargaining agreements.  Management considers its relations withemployees to be good.

 

8

----

 

Research andDevelopment

 

Expenditures and Tax Credits

 

During thefiscal years ended January 31, 2003, 2002, and 2001, the Registrantexpended $193,284, $506,980 and $1,158,729, respectively, on research anddevelopment relating primarily to the development of Cellulose Sulphate.  The decreases in fiscal 2003 and 2002 are aresult of sustained funding by research and development partners.  During the years ended January 31, 2003,2002 and 2001, the Registrant recognized investment tax credit benefits of$21,186, $42,375 and $52,246, respectively.

 

New Products — Cystic Fibrosis

 

Cystic fibrosis is a geneticdisease which causes a cascade of effects, the most severe being a build up ofmucus in the lungs.  This mucus isdifficult to remove and also permits the colonization of bacteria which thencause secondary infections and often death. Research relating to cystic fibrosis has shown that a special form ofDextran, Usherdex 4, is effective in preventing the colonization of bacteriain the mouth and in stimulating the macrophages in the lungs to remove thebacteria present and lessen secondary infections.  BCY entered the first patient into the Phase II trial on January7, 2003.  Enrollment in the trial hascontinued at numerous sites, with over one-half of the patients planned for thetrial, now enrolled.  Eleven of thesepatients have completed therapy and the subsequent follow-up visit.  As is normal in clinical trials, somepatients who have started in the trial have subsequently withdrawn.  However, this number is lower than thenumber that had been allowed for in the trial design.  As the trial is double blinded, BCY will not know until theconclusion of the trial which patients were on active medication or placebo.  If enrollment continues at the present rate,the trial should be finished mid year 2003.

 

New Products — CelluloseSulphate

 

As discussedabove, research is underway in the United States to evaluate the use of thismaterial as a contraceptive gel with antiviral capabilities.  During fiscal year 2000, the Registrantsuccessfully completed a Phase I human clinical trial with support from theConsortium for Industrial Collaboration in Contraceptive Research.  The Registrant’s strategic partner in theCellulose Sulphate research, the Contraceptive Research and Development Program****(CONRAD), with funding from variousprivate and public sector sources, has been successful in obtaining furtherdevelopment collaboration from the Family Health International, the WorldHealth Organization, the Centers for Disease Control and the HIV PreventionTrials Network.

 

Ushercell is the Registrant’s leading humanpharmaceutical compound, a high molecular weight cellulose sulphate envisionedfor topical vaginal use primarily in the prevention of transmission of AIDS andother sexually transmitted diseases, as well as unplanned pregnancies. Studiesto assess efficacy in contraception and prevention of HIV and other STD’s, are 

 

9

----

 

scheduled to begin in late 2003 and will require approximately 2.5million doses of the developed compound.

 

The GMP-certified (Good ManufacturingPractices) production firms of OrganichemCorporation, a world leader in contract manufacturing for bulk activepharmaceuticals and advanced intermediates, and Patheon, Inc., another leading global provider of outsourceddrug development and manufacturing services, will produce the individual dosageunits for these clinical trials.

 

Ushercell continues to show positive resultsin ongoing Phase I/II safety, tolerance and acceptability studies in variousdomestic and international clinical sites. In a recent Development Plan provided to the Registrant by CONRAD, fiveadditional phase I/II clinical trials are reported as being underway in Uganda, Nigeria, India, Cameroon and theUnited States.  The finalanalysis is currently underway from a further completed trial conducted in theUnited States, and additional Phase I/II trials are being planned for sites inBelgium and the United States.

 

Highlights of certain clinical studiesincluded in CONRAD’s DevelopmentPlan are as follows:

 

•                  Aclinical study of 48 sexually active women conducted in collaboration with FHI in Cameroon, has been completed.  The final report is expected in May 2003.

 

•                  Studies underway in collaboration with the WHO have been completed in Uganda andare ongoing in Nigeria and India.  Theclinical aspects and final analysis of these studies, which enrolled 180healthy women, are expected by the end of 2003.

 

•                  Recruitment has begun for a clinical study on the use ofUshercell by HIV-infected women being carried out in collaboration with HPTN to establish the safetyand tolerance of the product among HIV-infected women prior to entering intoclinical trials designed to assess HIV prevention.  This study will involve 96 women and up to 48 male partners infour sites in the United States and it is expected to be complete by the end of2003.

 

•                  A tolerancestudy of 42 HIV-infected men which could begin by the end of 2003 is beingplanned in collaboration with the******Institute of Tropical Medicine inBelgium.

 

•                  A further studywhich could also begin by the end of 2003 is planned in collaboration with the University ofCalifornia to be conductedwith 180 sexually active women in Zimbabwe to assess the safety andacceptability of Ushercell in use with a diaphragm.

 

•                  Late stage human clinical trials arealso planned to begin in 2003.  Acontraceptive efficacy study involving 600 women will be conducted in varioussites in 

 

10

----

 

the UnitedStates.  The protocol for this clinicaltrial is currently under review by the FDA.

 

•                  A further large-scale Phase III clinicaltrial is planned to assess the effect of Ushercell on vaginal HIVacquisition.  This study design enrollsmore than 2,000 sexually active women at high risk of HIV.  High-risk patients are defined as havingmore than 3 sexual partners per month, or cohabitating and having sex with anHIV seropositive partner.  The protocolremains under development, but the projected start timeline is fall of 2003.

 

Shouldcontinued positive results be generated from this work, the Registrant has beenadvised that the funding from CICCR will continue through final Phase IItrials.  The Registrant has alreadysolidified its material supply capabilities with third-party manufacturers inthe United States in connection with planned future clinical trials.  The Registrant maintains an exclusiveworldwide license for this product.

 

New Products—Activated Collagenand Elastin

 

Collodex, amodified collagen, has been formulated as a principal ingredient of a cosmeticskin cream.  During fiscal 2003, theRegistrant continued to work with several marketing companies for the promotionof this product.  To date, efforts bythese companies have met with limited success. At the present time, minor sales are being made to cosmeticmanufacturers in the Pacific Rim with the potential for increased sales in thefuture.

 

Elastin, amaterial with similar applications, has been developed by the Registrant.  It has not been commercialized, however, andno sales are expected to occur in the current fiscal year.

 

SegmentedInformation

 

Theinformation regarding the geographic distribution of revenue, operating resultsand assets set forth in Note 15 to the Registrant’s Consolidated FinancialStatements included in the Registrant’s Annual Report to Shareholders for thefiscal year ended January 31, 2003 is incorporated herein by reference.

 

ITEM 2.                                                     PROPERTIES

 

TheRegistrant’s wholly-owned subsidiary, Polydex Chemicals (Canada) Limited,maintains its executive and sales offices and its manufacturing plant ofapproximately 30,000 square feet in Toronto, Ontario, Canada.

 

The Registrantoperates a fermentation plant in Toronto, Ontario, Canada, having the capacityto produce both 10% and 20% Iron Dextran at the rate of up to 11,000liters a week (there are 1.057 quarts in one liter).  Present production is approximately 8,000 liters a week.  Complexing of the Iron Dextran takes placein Toronto, Ontario, Canada.

 

11

----

 

DextranSulphate presently is manufactured at the Registrant’s plant in Toronto,Ontario, Canada where reactors and spray drying equipment are available.  The Registrant presently manufactures approximately250 kilos of Dextran Sulphate per quarter (there are 2.2 pounds in one kilo),and has the capacity to manufacture 500 kilos per month simultaneously with the11,000 liters per week of Iron Dextran.

 

Through itssubsidiary, Vet Labs, the Registrant manufactures tablets and boluses, internaland external solutions, ointments, powders and injectable products.  The manufacturing facility is located on 8acres of land in Lenexa, Kansas.  Theplant is 55,000 square feet with separate production areas for each of theabove product groups.  The plant has thecapacity to manufacture over 200,000 boluses per day, 4,000 gallons of liquidsper day, 1,500 pounds of powder per day and 1,000 gallons of injectable productsper day.  The facility is currently runningat approximately 50% of capacity.

 

Each of theproperties described above is owned by the Registrant.  Management believes that the Registrant’sfacilities are adequate for its present requirements.  These facilities have additional capacity for expansion ofproduction of existing and new products. The Registrant considers its current equipment to be in good conditionand suitable for the operations involved.

 

ITEM 3.                                                     LEGALPROCEEDINGS

 

The Vet Labs — Sparhawk JointVenture has been terminated as of December 1, 2002 and is in the process ofbeing wound up and dissolved.  OnNovember 4, 2002, Sparhawk filed a petition in the District Court of JohnsonCounty, Kansas against Vet Labs, Chemdex and the Registrant for judicialsupervision during the winding up of the Joint Venture, a request forpreliminary injunctive relief allowing Sparhawk management access to themanufacturing operations during the winding up, and a declaratory judgmentregarding certain interpretations of the Joint Venture Agreement that are indispute.  No monetary damages have beensought by Sparhawk.  Areceiver has been appointed by the court to supervise the operations of theJoint Venture during the winding up process. The Registrant and Sparhawk have agreed to continue the Joint Ventureoperations until the court accepts the receiver’s final dissolutionrecommendation.  The Registrant, Chemdexand Vet Labs have filed counterclaims for breach of contract against Sparhawk,breach of fiduciary duty against Bert Hughes and John Bascom, the principals ofSparhawk, and for declaratory judgment. No evaluation of the prospectsof the declaratory judgment count of Sparhawk’s lawsuit or any of theRegistrant’s counterclaims can be made by the Registrant at this time.  The Registrant and Sparhawk are activelyattempting to settle this dispute.

 

ITEM 4.                                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submitted to a vote ofsecurity holders, through the solicitation of proxies or otherwise, during theRegistrant’s fourth quarter ended January 31, 2003.

 

12

----

 

PART II

 

ITEM 5.                                                     MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

 

The Company’s shares are listed for tradingon the Nasdaq SmallCap Market System under the symbol POLXF, and on the BostonStock Exchange under the symbol PXL.

 

The reported high and low bid prices of thecommon shares on the Nasdaq SmallCap Market System for the past two calendaryears were as follows (similar prices were quoted on the Boston StockExchange):

 
| **Stock Price (Low and High Bid)  Quarter Ended** |   | **2003** |        | **2002** |        | **2001**    |        |
|---------------------------------------------------|--------|----------|-------------|----------|-------------|-------------|-------------|
| March 31                                          |   | $        | 2.430-2.510 |     | $           | 2.950-3.050 |        | $ | 3.063-3.125 |   |
| June 30                                           |   |     |        | $        | 2.100-2.260 |        | 2.860-2.860 |   |
| September 30                                      |   |     |        | $        | 1.640-1.700 |        | 1.950-2.050 |   |
| December 31                                       |   |     |        | $        | 2.000-2.080 |        | 2.050-2.340 |   |
|                                                   |        |          |             |          |             |             |             |  |  |  |

 

The quotations set out above represent theprices for the specific dates between dealers and do not include retailmark-up, mark-down or commission.  Theydo not represent actual transactions. These quotations have been supplied by the National Association ofSecurities Dealers, Inc.

 

As of May 15, 2003 there were approximately714 holders of record of the Company’s Common Shares

 

The Company has paid no dividends in the pastand does not consider likely the payment of any dividends in the foreseeablefuture.

 

There are no governmental laws, decrees orregulations in the Commonwealth of the Bahamas applicable to the Company thatrestrict the export or import of capital, including foreign exchange controls,or that affect the remittance of dividends or other payments to nonresidentholders of the Company’s Common Shares. Furthermore, U.S. holders of the Company’s Common Shares are not subjectto taxes under Bahamian law.

 

13

----

 

ITEM 6.                                                     SELECTEDFINANCIAL DATA

 

**Polydex Pharmaceuticals LimitedFinancial HighlightsJanuary 31, 2003**

 
|                                         |   | **2003**   |   | **2002**   |   | **2001**   |   | **2000**   |   | **1999**   |   |
|----------------------------------------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|------------|--------|
| Sales from continuing operations             |   | 12,786,343 |   | 12,167,530 |   | 13,646,158 |   | 13,096,449 |   | 11,721,020 |   |
| Net income (loss) from continuing operations |   | (673,741   | )      | (206,880   | )      | 131,284    |   | 969,843    |   | 572,393    |   |
| Net income (loss) per common share           |   | (0.22      | )      | (0.07      | )      | 0.04       |   | 0.32       |   | 0.19       |   |
| Total Assets                                 |   | 9,712,574  |   | 10,080,880 |   | 11,217,326 |   | 11,814,833 |   | 10,456,264 |   |
| Long-term borrowings                         |   | 1,188,603  |   | 1,724,159  |   | 2,031,660  |   | 2,385,541  |   | 1,158,187  |   |

 

ITEM 7.                                                     MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The Company’s fiscal year ends on January 31sttherefore fiscal year 2003 refers to the Company’s year ended January 31,2003.  The Company’s financialstatements are prepared in accordance with United States generally acceptedaccounting principles.  All amounts arein United States dollars, unless otherwise denoted.  The following discussion should be read in conjunction with thefinancial statements and notes thereto included elsewhere in this report.

 

Results ofOperations

 

The operations of the Company are carried onthrough Dextran Products Limited in Canada and through Chemdex, Inc. in theUnited States.  The operations ofChemdex are carried on through its wholly-owned subsidiary, VeterinaryLaboratories, Inc.  Each of DextranProducts and Chemdex operates as a strategic business unit.  Dextran Products manufactures and sells bulkquantities of Dextran and several of its derivatives to large pharmaceuticalcompanies throughout the world.  Chemdexmanufactures and sells veterinary pharmaceutical products and specialtychemicals in the United States.  Theprimary customers are distributors and private labelers, who in turn sell tothe end-user of these products.

 

Sales of the Company increased 5% or $618,813to $12,786,343 in fiscal 2003 from $12,167,530 in fiscal 2002.  There were sales increases at both operatingsubsidiaries in fiscal 2003.  Sales ofthe Company decreased 11% or $1,478,628 to $12,167,530 in fiscal 2002 from$13,646,158 in fiscal 2001.  The declinein sales in 2002 was primarily attributable to a decline in volume at Chemdex.

 

14

----

 

Sales at Dextran Products increased by 8% or$328,724 to $4,575,359 in fiscal 2003 from $4,246,635 in fiscal 2002, andaccounted for 36% of the Company’s sales in fiscal 2003.  Dextran Products sales accounted for 35% ofthe Company’s sales in fiscal 2002.  Demand for Dextran and related products increased from the prior yearand management expects such demand to continue.  Sales levels are expected to increase slightly next year due tocontinuing demand.

 

Sales at Chemdex increased by 4% or $290,089to $8,210,984 in fiscal 2003 from $7,920,895 in fiscal 2002, and accounted for64% of the Company’s sales in fiscal 2003. The introduction, in the fourth quarter of fiscal 2003, of a new productmanufactured under contract accounted for $225,110 of this sales increase.  Chemdex sales accounted for 65% of theCompany’s sales in fiscal 2002.

 

Chemdex products are broken down into 4product lines.  Injectables is thelargest product line accounting for 53% and 55% of Chemdex sales for fiscal2003 and fiscal 2002, respectively. Sales of injectable products increased by 2% or $89,360 to $4,480,327 infiscal 2003 from $4,390,967 in fiscal 2002. Overall market demand was weak in the food producing animal sectorduring fiscal 2002.  This weakness indemand along with unit sales price reductions caused by competitive pricingresulted in decreased sales levels during fiscal 2002.  This market weakness continued into fiscal2003, as expected, with modest improvements in the third and fourth quarters.  These market conditions decreased both salesand gross margins in fiscal 2002. Modest improvements in margins at Chemdex were achieved in fiscal 2003over fiscal 2002.

 

The Company’s gross profit increased 19% or$520,963 to $3,257,384 in fiscal 2003 from $2,736,421 in fiscal 2002. As apercentage of sales, the Company’s gross profit increased to 25% from 22% infiscal 2002.  Dextran Products’ grossprofit, excluding profit on intercompany sales, was $1,889,001 in fiscal 2003as compared to $1,593,497 in fiscal 2002. As a percentage of Dextran Products’ sales, Dextran Products’ grossprofit increased to 41% in fiscal 2003 from 38% in fiscal 2002. The increase ingross profit in fiscal 2003 is a result of increased sales levels, particularlyof higher margin products.  The majorityof Dextran Products’ costs are incurred in Canadian dollars, while the majorityof its sales are in U.S. dollars. Therefore if the Canadian dollar decreases inrelation to the U.S. dollar, margins increase. Exchange rate fluctuations had no significant impact on margins atDextran Products this year.

 

Chemdex’ gross profit increased 22% or$230,097 to $1,281,409 in fiscal 2003 from $1,051,312 in fiscal 2002. As apercentage of Chemdex sales, Chemdex’ gross profit increased to 16% in fiscal2003 from 13% in fiscal 2002.  Thisincrease in gross profit and margin at Chemdex was primarily attributable toincreased sales levels.  Higher saleslevels resulted in lower average fixed costs.

 

15

----

 

Other revenue of $182,400 in fiscal 2001resulted from a payment from a collaborator on a research and developmentproject.  There were no similar paymentsreceived in fiscal 2002 or fiscal 2003.

 

Selling, promotion, general andadministrative expenses increased by 8% to $1,799,292 in fiscal 2003 from$1,670,338 in fiscal 2002.  Thisincrease is a result of senior management bonus accruals of $75,000 in fiscal2003.  In fiscal 2002, there were nosenior management bonuses paid.  Inaddition, there are increased management salaries and recruiting costs atChemdex due to the hiring of a new general manager in the fourth quarter offiscal 2003 to oversee the management of the Vet Labs – Sparhawk Joint Ventureoperations on behalf of the Company.  Selling,promotion, general and administrative expenses decreased by 6% in fiscal 2002from $1,776,925 in fiscal 2001.  Thisdecrease was a result of senior management foregoing bonuses in fiscal2002.  Senior management bonuses totaled$135,000 in fiscal 2001.  As apercentage of sales, selling, promotion, general, and administrative expensesremained constant at 14% in both fiscal 2002 and fiscal 2003.

 

In fiscal 2003, the Company spent$193,284 on research and development expenditures as compared to $506,980 infiscal 2002 and $1,158,729 in fiscal 2001. This decrease of $313,696 or 62% from fiscal 2002 to fiscal 2003 is aresult of sustained funding by research and development partners.  The current stage of the cellulose sulphateproject is such that a lesser portion of development is being performedin-house and there is significant funding from research and developmentpartners for the current phase of the project. There has been a reduction in research and development costs at Chemdexin fiscal 2003 while the Company awaits FDA approval on the several newproducts that have been submitted.  Thedecrease of $651,749 or 56% from fiscal 2001 to fiscal 2002 was a result ofsustained funding by research and development partners.  Although funding from all sources for theCompany’s research and development projects is expected to continue in fiscal2004, the Company expects its portion of these costs to return to the levels offiscal 2002.

 

Investment tax credits are claimed by DextranProducts to offset the cost of research and development.  The total investment tax credit benefitrecognized in fiscal 2003 was $21,186 as compared to $42,375 in fiscal 2002 and$52,246 in fiscal 2001.  As a result,the Company recorded research and development expense, net of investment taxcredits, of $172,098, $464,605 and $1,106,483 in fiscal 2003, fiscal 2002 andfiscal 2001, respectively.

 

Depreciation and amortization increased by 4%or $23,198 to $572,129 in fiscal 2003 from $548,931 in fiscal 2002.  This increase is primarily attributable tonew production equipment purchased in the fourth quarter of fiscal 2002 atDextran Products.

 

Interest expense decreased by 27% or $55,524to $150,527 in fiscal 2003 from $206,051 in fiscal 2002.  This decrease is primarily attributable to adecrease in imputed interest on long-term payables of $22,585 to $33,177 infiscal 2003 from $55,762 in fiscal 2002. The decrease in imputed interest is due to the repayment of thisnon-interest bearing debt.

 

16

----

 

The Company incurred a foreign exchange lossof $113,602 in fiscal 2003 at Dextran Products due to the Canadian dollarincreasing in value relative to the United States dollar.  Dextran Products has a net exposure to theUnited States dollar because the majority of its accounts receivable balance isdenominated in United States dollars. In fiscal 2002, there was a foreign exchange gain at Dextran Products of$77,809 because the Canadian dollar declined in value relative to the UnitedStates dollar.

 

Other expenses amounted to $372,111 in fiscal2003 as compared to other income of $37,797 in fiscal 2002.  In fiscal 2003, other expenses relateprimarily to legal costs associated with the judicial supervision during thewinding up of the Vet Labs – Sparhawk Joint Venture.  In fiscal 2003, legal and receiver fees in connection with thisprocess totaled $238,197.  In addition,the Company has provided an allowance for the entire receivable balance of$132,614 due from Sparhawk due to the uncertainty related to thissituation.  In fiscal 2002, Chemdexreceived a final settlement payment of $48,643 from a class action lawsuitagainst various vitamin suppliers, resulting in the other income realized inthat period.  In fiscal 2002, DextranProducts incurred a loss of $27,269 on disposal of production equipment thatwas netted against other income.

 

Income before income taxes for the Company infiscal 2003 totaled $77,265 as compared to loss before income taxes of $37,898in fiscal 2002.  Income before incometaxes at Dextran Products in fiscal 2003 was $872,291, an increase of $201,739or 30% from $670,552 in fiscal 2002. This increase in income before income taxes is a result of the increasein sales and profit margins, as described above.

 

Chemdex experienced a loss before incometaxes of $247,682 in fiscal 2003, as compared to income before income taxes of$20,745 in fiscal 2002.  This decreasein income before income taxes is a result of the significant increase in otherexpenses, as discussed above.

 

The provision for income taxes in fiscal 2003was $751,366 as compared to $168,982 in fiscal 2002.  The provision for income taxes significantly exceeds incomebefore income taxes because of the losses incurred in the Bahamas, for whichthere is no tax recovery, and because a full valuation allowance has been takenagainst the deferred tax assets relating to non-operating losses at Chemdex,due to the significant uncertainty of the future of the Vet Labs – SparhawkJoint Venture as a result of the litigation with Sparhawk.

 

A tax provision of $430,886 relating toDextran Products was recorded in fiscal 2003 as compared to $202,650 in fiscal2002.  The increase in the Canadian taxprovision is a result of the increase in profitability and an increase in taxreserves at Dextran Products in fiscal 2003. The Canadian operations continue to have significant research anddevelopment tax pools to offset current taxes payable.

 

As a result of the foregoing, the Companyrecorded a net loss of $673,741 in fiscal 2003 as compared to $206,880 infiscal 2002.

 

17

----

 

Certain eventsoccurring in fiscal 2003 could have an impact on future results as follows.

 

The company is conducting part of itsresearch and development activities through collaboration with scientists fromthe Program for the Topical Prevention of Conception and Disease based at theRush-Presbyterian-St. Luke’s Medical Center and the University of Illinois inChicago.  The company continues to besupported by assistance from the Contraceptive Research and DevelopmentProgram.  At the present time there are four safety studies underway, with furtherstudies planned for future periods.

 

•                  A Phase IExpanded Safety Study is underway in collaboration with the World HealthOrganization in Uganda, Nigeria and India. This study will involve 180 women in two treatment groups and twocohorts. The final report on this study is expected during the fourth quarterof fiscal 2004.

 

•                  The second studyis a Safety Study in HIV-Infected women. This is being carried out in collaboration with the HIV PreventionTrials Network of NIAID in four sites in the United States.  The study will involve 96 women and 48 malepartners.  The study is expected to becompleted during the fourth quarter of fiscal 2004.

 

•                  The third studyis an expanded safety study in the United States at three sites.  This study involves 60 healthy women and isexpected to be completed by the fourth quarter of fiscal 2004.

 

•                  The fourth studyis a Safety Study in Cameroon being carried out in collaboration with FamilyHealth International (FHI).  The finalreport is expected in May 2003.

 

Usherdex licensee BCY LifeSciences hasidentified Usherdex (now DCF 987) as its lead drug candidate, completed Phase Ihuman clinical trials and commenced Phase II human clinical trials.  The Phase II trial is designed to study theutility of DCF 987 when treating cystic fibrosis.  DCF 987, a low molecular weight dextran, is delivered by inhalationto the lungs of CF patients. The compound appears to have utility in thinningthe thick mucus associated with CF, while also preventing the adhesion ofbacteria to lung epithelial cells.  Itis believed that these two actions can be of significant importance to the CFsufferer.  If DCF 987 is able to help inthe thinning of mucus, it should enable CF patients to more readily expel themucus from the respiratory tract, and preventing or reducing the adhesion ofbacteria which may help control infection. The trial is being conducted at six centers in Canada and involves someof Canada’s leading CF physicians.

 

TheVet Labs – Sparhawk Joint Venture

** **

In 1992, Vet Labs and Sparhawkentered into the Joint Venture for the manufacture and sale of veterinarypharmaceutical products.  Vet Labs andSparhawk each own 50% of the Joint Venture. Sparhawk is not affiliated with the Company and is owned by themanagement of the 

 

18

----

 

Joint Venture.  The Company controls the Joint Venture through its control of theBoard of Directors and therefore consolidates its assets, liabilities, revenueand expenses in these financial statements.

 

The Joint Venture has beenterminated as of December 1, 2002 and is in the process of being wound up anddissolved.  On November 4, 2002,Sparhawk filed a petition in the District Court of Johnson County, Kansasagainst Vet Labs, Chemdex and the Company for judicial supervision during thewinding up of the Joint Venture, a request for preliminary injunctive reliefallowing Sparhawk management access to the manufacturing operations during thewinding up, and a declaratory judgment regarding certain interpretations of theJoint Venture Agreement that are in dispute. No monetary damages have been sought by Sparhawk.  A receiver has been appointedby the court to supervise the operations of the Joint Venture during thewinding up process.  The Company andSparhawk have agreed to continue the Joint Venture operations until the courtaccepts the receiver’s final dissolution recommendation.  The Company, Chemdex and Vet Labs have filedcounterclaims for breach of contract against Sparhawk, breach of fiduciary dutyagainst Bert Hughes and John Bascom, the principals of Sparhawk, and fordeclaratory judgment.  No evaluation of the prospects of thedeclaratory judgment count of Sparhawk’s lawsuit or any of the Company’scounterclaims can be made by the Company at this time.  The Company and Sparhawk are activelyattempting to settle this dispute.

 

Sparhawk had an option topurchase 40% of the assets held by Vet Labs. The purchase price would be equal to 40% of the fair market value of theland, building and equipment owned by Vet Labs plus $1,000,000.  The land and building have been appraised ata valuation of $2,450,000 as of November 15, 2002  The equipment has been appraised at a valuation of $230,900 as ofJanuary 22, 2003.  Sparhawk notified theCompany of its intention to exercise this option in October 2002, but has notyet delivered the purchase price.  Underthe terms of the joint venture agreement, the joint venture and the optionterminated on December 1, 2002.  TheCompany believes that this option has now expired because of Sparhawk's failureto deliver its purchase price.  Sparhawkis disputing this position.  The Companycannot at this time estimate the likelihood of Sparhawk consummating theexercise of the option and delivering the purchase price.

 

Subject to the exercise of the Option, uponwinding up of the Joint Venture, all assets used in the Joint Ventureoperations that were owned by the respective members of the Joint Venture priorto the formation of the Joint Venture will be returned to the respectiveowner.  There are no assets of Sparhawkincluded in the consolidated financial statements of the Company.  Sparhawk does own certain generic productscurrently produced by the Joint Venture, all of which belong to the liquidsproduct line, that will be returned to Sparhawk.  Year to date sales of products owned by Sparhawk amount toapproximately $1,065,000 at January 31, 2003. Several of the products currently produced by the Joint Venture,including iron dextran, are owned by the Company and will be returned to theCompany.  Year to date sales of productsowned by Vet Labs amount to approximately $5,112,000 at January 31, 2003,although ownership of certain of these products may be disputed bySparhawk.  If the lawsuit is notsettled, and the operations of the Joint Venture are would up under judicialsupervision, the Company expects to continue production of the Vet Labsproducts after the winding up, and has hired a general manager to manage thisbusiness.  However, no assurance can begiven that sales of these products by the Company after the dissolution of theJoint Venture will be consistant with those achieved by the Joint Venture.

 

19

----

 

Any assets that were purchased by the JointVenture and any products that were developed by the Joint Venture will bedistributed to the members of the Joint Venture as part of the winding upprocess.  Assets and liabilities ownedby the Joint Venture are currently included in the Company’s financialstatements with a book value of $2,247,652 and $1,398,853, respectively.  The Company may not receive ownership of theproducts developed by the Joint Venture, depending upon the allocation of theJoint Venture assets upon dissolution. Year to date sales of products developed by the Joint Venture amount toapproximately $2,034,000.

 

It is possible that a negotiated settlementwith Sparhawk will be reached that would prevent the winding up of the JointVenture.  Such a settlement would likelyresult in one of the parties purchasing the other’s interest in the JointVenture.  There would be no significantimpact on the Company’s results of operations if the Company were to purchaseSparhawk’s interest in the Joint Venture because the Joint Venture operationsare currently fully consolidated in the Company’s financial results.

 

If a negotiated settlement resulted in theCompany selling its interest in the Joint Venture to Sparhawk or a third party,there would be a significant decline in operating revenues of the Company, anda decline in income before income taxes of the Company which would potentiallybe offset by the consideration received by the Company in such a sale.  During fiscal 2003, sales of the JointVenture amounted to $8,209,947 and income before income taxes totaled$31,520.  The Company does not expectthat a sale of its Joint Venture interest would have an adverse effect on theoperations of Dextran Products, as sales by Dextran Products to Chemdex and theJoint Venture are not material to the Company’s overall financial results.

 

Liquidity andCapital Resources

 

In fiscal 2003 the Company generated cash of$941,559 from its operating activities compared to $443,765 for fiscal2002.  The decrease in earnings infiscal 2003 discussed above resulted from non-cash expenses, includingdepreciation, deferred income taxes and the write-down of a loan to Sparhawk.  The Company maintained $1,520,942 of workingcapital and a current ratio of 1.6:1 as of January 31, 2003, compared to$1,481,138 of working capital and a current ratio of 1.8:1 as of January 31,2002.

 

At January 31, 2003, the Company had accountsreceivable of $1,351,515 and $2,265,963 in inventory compared to $1,067,709 and$2,112,854, respectively, at January 31, 2002. The increase in accountsreceivable was due to timing of sales at year-end.  Dextran Products had significantly higher sales in January 2003than January 2002, which increased the year-end receivables balance.  The increase in inventory levels was due tostocking of a new product at Chemdex and additional finished goods to be dropshipped for a customer.

 

At January 31, 2003, the Company had accountspayable of $1,205,383 compared to $935,419 at January 31, 2002.  The increase in accounts payable was due totiming of supplier payments and the increase in accounts receivable andinventory.

 

20

----

 

During fiscal 2003, capital expenditurestotaled $367,868 as compared to $434,157 in fiscal 2002.  The majority of these capital expenditureswere for production equipment at the Dextran Products plant in Toronto in bothfiscal 2002 and 2003.

 

The change in the accumulated othercomprehensive income is entirely attributable to the currency translationadjustment of Dextran Products.  DextranProducts’ functional currency is the Canadian dollar.  This currency translation adjustment arises from the translationof Dextran Products’ financial statements to U.S. dollars.

 

Dextran Products has a CDN$750,000(US$491,000) line of credit.  Managementanticipates using the credit line for the purposes of funding a portion of thecosts associated with the refurbishment of the Toronto facility.  The Joint Venture has a $175,000 line ofcredit to fund operations.

 

There have been no new advances of long-termdebt or capital lease obligations during fiscal 2003.  The significant decrease in long-term debt and capital leaseobligation balances is due to continuing repayments by the Company.  The large increase in the current portion oflong-term debt at January 31, 2003 is because the term loan at the JointVenture is due within one year.  Theterm has not been extended pending resolution of the Joint Venturedispute.  All long-term debt is due inthe next two years.  Capital leaseobligations are due over the next four years.

 

The amount due from shareholder decreasedfrom $1,098,142 at January 31, 2002 to $981,153 at January 31, 2003, due tomonthly repayments from the shareholder.  The amount due a different shareholder increased to $682,225 atJanuary 31, 2003 from $681,963 at January 31, 2002, due to interest chargesexceeding the monthly payments made by the Company.

 

No changes in accounting principles or theirapplication have been implemented in the reporting period that would have amaterial effect on reported income. Changes in the relative values of the Canadian dollar and the U.S.dollar occur from time to time and may, in certain instances, materially affectthe Company’s results of operations. The Company does not believe that the impact of inflation and changingprices on its operations are material.

 

Management expects the primary source of itsfuture capital needs to be a combination of company earnings and borrowings.  The Company, at present, does not have anymaterial commitments for capital expenditures, although management intends tocontinue the plant refurbishment process at Dextran Products in Toronto.

 

The Company believes that based upon thecurrent levels of revenues and spending, and taking into account the JointVenture litigation, its existing working capital resources will be sufficientto support continuing operations for at least the next 12 months.

 

21

----

 

ManagementObjectives

 

Management’s primary objectives for thecoming year are to increase sales and profitability, to further clinical trialson Ushercell and to resolve the dispute with its Joint Venture partner atChemdex.

 

Critical Accounting Policies

 

The Company’s consolidated financialstatements are prepared in accordance with United States generally acceptedaccounting principles, applied on a consistent basis.  The critical accounting policies include the use of estimates andallowances and their impact on accounts receivable, the useful lives of assetsand the realizability of deferred tax assets.

 

Management is required to make estimates andassumptions, in preparing the consolidated financial statements, that affectthe reported amounts of assets and liabilities, the disclosure of contingentassets and liabilities at the date of the consolidated financial statements andthe reported amounts of revenue and expenses during the periods.  The actual results could differ from theseestimates.  Significant estimates madeby management include the calculation of reserves for uncollectible accounts,inventory allowances, useful lives of long-lived assets and the realizabilityof deferred tax assets.

 

Revenue is recognized when product is shippedto the customer provided the Company has not retained any significant risks ofownership or future obligations with respect to the product shipped.  Since returns are rare and generally notaccepted, management has not made provision for returns.  In addition, product sold in bulk quantitiesis tested, prior to release for shipment, to ensure that it meets customerspecifications, and in many cases, customers receive samples for their owntesting.  Approval is obtained from thecustomer prior to shipping.  A significantchange in these estimates could have a material impact on the results ofoperations.

 

Accounts receivable are stated net ofallowances for doubtful accounts. Allowances for doubtful accounts are determined by each reporting uniton a specific item basis.  Managementreviews the credit worthiness of individual customers and past payment historyto determine the allowance for doubtful accounts.  Since the majority of sales at Dextran Products are export,Dextran Products maintains credit insurance through a crown corporation for themajority of its customers receivables.

 

Long-lived assets are stated at cost, lessaccumulated depreciation or amortization computed using the straight-linemethod based on their estimated useful lives ranging from three to fifteenyears.  Useful life is the period overwhich the asset is expected to contribute to the Company’s future cashflows.  A significant change in theseestimates could have a material impact on the results of operations.

 

Management has recorded a valuation allowanceon deferred tax assets primarily related to operating loss carryforwards of theU.S. operations based on the uncertainty involved with the Joint Venture.  A change in the outlook for future taxableincome in the U.S. operations could 

 

22

----

 

result in the recognition of some portion or all of these losscarryforwards, which could result in a material increase in the results ofoperations through the recovery of deferred tax assets.

 

Risk Factors

 

In addition to the risks and uncertaintiesdiscussed in the Joint Venture section above, the risks, uncertainties andother factors described below could materially and adversely affect theCompany’s business, financial condition, operating results and prospects.

* *

*The Company’s product development efforts may be reduced ordiscontinued due to difficulties or delays in clinical trials.*

 

To achieve sustained profitability, theCompany must, alone or with corporate partners and collaborators, successfullyresearch, develop and commercialize identified technologies or productcandidates.  Current developmentalproduct candidates are in various stages of clinical and pre-clinicaldevelopment and will require significant further funding, research,development, preclinical and/or clinical testing, regulatory approval andcommercialization testing, and are subject to the risks of failure inherent inthe development of products based on innovative or novel technologies.  They are also rigorously regulated by theU.S. federal government, particularly the FDA, and by comparable agencies instate and local jurisdictions and in foreign countries.  Specifically, each of the following ispossible with respect to any one of the Company’s developmental productcandidates:

 

•                  that the Companywill not be able to maintain its current research and development schedules;

 

•                  that the Companywill not be able to enter into human clinical trials because of scientific,governmental or financial reasons, or that it will encounter problems inclinical trials that will cause a delay or suspension of the development of thedevelopmental product candidate;

** **

•                  that thedevelopmental product will be found to be ineffective or unsafe;

 

•                  that governmentregulations will delay or prevent the product’s marketing for a considerableperiod of time and impose costly procedures upon the Company’s activities;

 

•                  that the FDA orother regulatory agencies will not approve the product or the process by whichthe product is manufactured, or will not do so on a timely basis; and/or

 

•                  that the FDA’spolicies may change and additional government regulations and policies may beinstituted, which could prevent or delay regulatory approval of the product.

 

If any of the risks set forthabove occurs, the Company may not be able to successfully develop itsidentified developmental product candidates.

 

*The Company’s developmental product commercialization efforts may notbe successful.*

 

It is possible that, for reasonsincluding, but not limited to those set forth below, the Company may be unableto commercialize or receive royalties from the sale of any given 

 

23

----

 

developmental product, even if it is show itis uneconomical or if the market for the product does not develop ordiminishes;

 

•                  the Company is not able to enter intoarrangements or collaborations to commercialize and/or market the product;

 

•                  the product is not eligible for third-partyreimbursement from government or private insurers;

 

•                  n to be effective,if:

 

•                  others holdproprietary rights that preclude the Company from commercializing the product;

 

•                  others havebrought to market similar or superior products;

 

•                  others havesuperior resources to market similar products or technologies;

 

•                  government regulationimposes limitations on the indicated uses of the product, or later discovery ofpreviously unknown problems with the product results in added restrictions onthe product or results in the product being withdrawn from the market; and/or

 

•                  the product hasundesirable or unintended side effects that prevent or limit its commercialuse.

* *

*The Company depends on partnerships with third parties for thedevelopment and commercialization of its products.*

 

The Company’s strategy for development andcommercialization of its products is to rely on licensing agreements with thirdparty partners.  As a result, theability of the Company to commercialize future products is dependent upon thesuccess of third parties in performing clinical trials, obtaining regulatoryapprovals, manufacturing and successfully marketing its products.  There can be no assurance that such thirdparty collaborations will be successful. If any of the Company’s current research and development partnershipsare discontinued, it may not be able to find others to develop andcommercialize its current product candidates.

* *

*The Company does not currently have agreements with third parties tomarket many of its developmental products.*

 

The commercialization of any of the Company’sdevelopmental products that receive FDA approval will depend upon the Company’sability to enter into agreements with companies that have sales and marketingcapabilities.  The Company currentlyintends to sell its products in the United States and internationally incollaboration with one or more marketing partners.  The Company may not be able to enter into any such collaborationto market its developmental products in a timely manner or on commerciallyreasonable terms, if at all.

 

24

----

 

Forward-lookingStatements 

 

This Annual Report, includingthe Management’s Discussion and Analysis, contains various “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, as amended,which represent the Company’s expectations or beliefs concerning future events,including, but not limited to statements regarding management’s expectations ofregulatory approval and the commencement of sales.  In addition, statements containing expressions such as“believes”, “anticipates” or “expects” used in this Annual Report and theCompany’s periodic reports on Forms 10-K and 10-Q filed with the Securities andExchange Commission are intended to identify forward-looking statements.  The Company cautions that these and similarstatements in this Annual Report and in previously filed periodic reportsincluding reports filed on Forms 10-K and 10-Q are further qualified byimportant factors that could cause actual results to differ materially fromthose in the forward-looking statements. These factors include, withoutlimitation, changing market conditions, the progress of clinical trials, andthe results obtained, the establishment of new corporate alliances, the impactof competitive products and pricing, and the timely development, FDA approvaland market acceptance of the Company’s products, none of which can be assured.Results actually achieved may differ materially from expected results includedin these statements as a result of these or other factors.

 

25

----

 

ITEM 7A.                                           QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Exchange RateSensitivity

 

The Company’s operations consist ofmanufacturing activities in the United States and Canada.  The Company’s products are sold in theUnited States, Canada, Europe and the Pacific Rim.  Sales are primarily made in U.S. dollars, except for a relativelysmall portion of the sales in Canada. The Company’s operating results are exposed to changes in exchange ratesbetween the U.S. and the Canadian dollar, but only to the extent of operatingexpenses in Canada.  When the Canadiandollar rises in relation to the U.S. dollar, the gross margin will decrease.  Management monitors the margin in Canada toensure that an acceptable margin level is maintained.  Management has the ability, to some extent, to adjust salesprices to maintain an acceptable margin level.

 

The following table presents informationabout the Company’s financial instruments that are sensitive to changes inforeign currency exchange rates.  Allfinancial instruments are held for other than trading purposes.  The table presents principal cash flows andrelated weighted average interest rates by expected maturity dates.

 
|                 |   | **Expected  Maturity Date** |   |        |   | **Fair   Value** |   |
|----------------------|--------|-----------------------------|--------|-------------|--------|------------------|--------|
|                 |   | **1/31/04**                 |   | **1/31/05** |   | **1/30/06**      |   | **1/31/07** |   | **1/31/08** |   | **Thereafter** |   | **Total** |   |   |
|                 |   | **(US$  Equivalent)**       |   |
| **Liabilities**:     |   |                        |   |        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt:      |   |                        |   |        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate ($CDN)    |   | 110,388                     |   | 117,703     |   | 101,035          |   | 100,863 |   | — |   | — |   | 429,990 |   | 429,990 |   |
| Average interestrate |   | 8.45                        | %      | 8.49        | %      | 9.00             | %      | 9.00 | % | — |   | — |   | 8.73 | % |   |   |

 

26

----

 

Interest RateSensitivity

 

The Company has no significant interestearning assets and the majority of its debt is at fixed rates.  The variable rate debt represents theshareholder loan payable, which is approximately offset with the shareholderloan receivable.  Both of thesefinancial instruments carry the same interest rate.  As such, the Company has no significant risk exposure to changesin interest rates.

 

The following table presents informationabout the Company’s financial instruments that are sensitive to changes ininterest rates.  All financial instrumentsare held for other than trading purposes. The table presents principal cash flows and related weighted averageinterest rates by expected maturity dates.

 

 
|                  |   | **Expected  Maturity Date** |   |        |   | **Fair   Value** |   |
|-----------------------|--------|-----------------------------|--------|-------------|--------|------------------|--------|
|                  |   | **1/31/04**                 |   | **1/31/05** |   | **1/30/06**      |   | **1/31/07** |   | **1/31/08** |   | **Thereafter** |   | **Total** |   |   |
|                  |   | **(US$  Equivalent)**       |   |
| **Assets:**           |   |                        |   |        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Notes receivable:     |   |                        |   |        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| (Variable rate ($US)  |   | 47,899                      |   | 50,773      |   | 53,819           |   | 57,049 |   | 60,471 |   | 247,178 |   | 517,190 |   | 517,190 |   |
| Average interestrate  |   | 6.00                        | %      | 6.00        | %      | 6.00             | %      | 6.00 | % | 6.00 | % | 6.0 | % | 6.00 | % |   |   |
|                  |   |                        |   |        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**:      |   |                        |   |        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt:       |   |                        |   |        |   |             |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate ($US)      |   | 280,365                     |   | —      |   | —           |   | — |   | — |   | — |   | 280,365 |   | 280,365 |   |
| Average interestrate  |   | 8.11                        | %      | —      |   | —           |   | — |   | — |   | — |   | 8.11 | % |   |   |
| Fixed rate ($CDN)     |   | 110,388                     |   | 117,703     |   | 101,035          |   | 100,863 |   | — |   | — |   | 429,990 |   | 429,990 |   |
| Average interest rate |   | 8.45                        | %      | 8.49        | %      | 9.00             | %      | 9.00 | % | — |   | — |   | 8.73 | % |   |   |
| Variable rate ($US)   |   | (1,932                      | )      | 952         |   | 1,009            |   | 1,069 |   | 1,133 |   | 679,976 |   | 682,207 |   | 682,207 |   |
| Average interest rate |   | 6.00                        | %      | 6.00        | %      | 6.00             | %      | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % |   |   |

 

27

----

 

ITEM 8.                                                     FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

**Polydex Pharmaceuticals LimitedQuarterly Financial HighlightsJanuary 31, 2003**

 
|                                         |   | **Fourth Quarter** |   | **Third Quarter** |   | **Second Quarter** |   | **First Quarter** |   |
|----------------------------------------------|--------|--------------------|--------|-------------------|--------|--------------------|--------|-------------------|--------|
|                                         |   | **2003**           |   | **2002**          |   | **2003**           |   | **2002**          |   | **2003** |   | **2002** |   | **2003** |   | **2002** |   |
|                                         |   |               |   |              |   |               |   |              |   |   |   |   |   |   |   |   |   |
| Sales from continuing operations             |   | 3,358,668          |   | 3,095,468         |   | 3,455,665          |   | 3,126,682         |   | 2,647,400 |   | 2,884,189 |   | 3,324,610 |   | 3,061,191 |   |
| Gross Profit                                 |   | 828,075            |   | 629,048           |   | 758,867            |   | 809,441           |   | 701,247 |   | 617,867 |   | 969,195 |   | 680,065 |   |
| Net income (loss) from continuing operations |   | (771,391           | )      | 7,470             |   | (11,512            | )      | 49                |   | (35,840 | ) | (149,544 | ) | 145,002 |   | (64,855 | ) |
| Net income (loss) per common share           |   | (0.26              | )      | —            |   | —             |   | —            |   | (0.01 | ) | (0.05 | ) | 0.05 |   | (0.02 | ) |

 

28

----

 

**MANAGEMENT’S REPORT**

 

Theaccompanying consolidated financial statements are the responsibility ofmanagement and have been prepared by management in conformity with UnitedStates generally accepted accounting principles and have been approved by theBoard of Directors.  In preparing theseconsolidated financial statements, management selects appropriate accountingpolicies and uses its judgement and best estimates to report events andtransactions as they occur.  Managementhas determined such amounts on a reasonable basis in order to ensure that theconsolidated financial statements are presented fairly, in all material respects.  Financial data included throughout theAnnual Report is prepared on a basis consistent with that of the consolidatedfinancial statements.

 

In fulfillingits responsibilities, management has developed a system of internal accountingcontrols designed to provide reasonable assurance, at a reasonable cost, thatassets are safeguarded from loss and unauthorized use and that financialrecords are reliable for the purpose of preparing the consolidated financialstatements.  This system is supported bywritten policies and procedures for key business activities; the hiring ofqualified, competent staff; and by a continuous planning and monitoring system.

 

Ernst &Young LLP, the independent auditors appointed by the shareholders of theCompany, have audited the consolidated financial statements in accordance withUnited States generally accepted auditing standards and they provide anobjective independent review of the fairness of reported operating results andfinancial position.

 

The Board ofDirectors is responsible for ensuring that management fulfills itsresponsibility for financial reporting and is ultimately responsible forreviewing and approving the consolidated financial statements.  The Board carries out the responsibilityprincipally through its Audit Committee. The members of the Audit Committee are outside directors.  The Audit Committee meets with financialmanagement and the independent auditors to review accounting, auditing,internal accounting controls and financial reporting matters.  Ernst & Young LLP has full and freeaccess to the Audit Committee.

 

 
| /s/ George G. Usher                  |   | /s/ Sharon Wardlaw      |
|--------------------------------------|--------|-------------------------|
| **George G. Usher**                  |   | **Sharon Wardlaw**      |
| Chairman and Chief Executive Officer |   | Chief Financial Officer |

 

29

----

 

**REPORT OF INDEPENDENTAUDITORS**

 

To the Board of Directors andShareholders of

**Polydex Pharmaceuticals Limited**

 

We have audited theaccompanying consolidated balance sheets of **Polydex Pharmaceuticals Limited**asof January 31, 2003 and 2002 and the related consolidated statements ofshareholders’ equity, operations and cash flows for each of the years in thethree-year period ended January 31, 2003. These financial statements are the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted our audits inaccordance with United States generally accepted auditing standards.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles usedand significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financialstatements referred to above present fairly, in all material respects, theconsolidated financial position of **Polydex Pharmaceuticals Limited** as ofJanuary 31, 2003 and 2002 and the consolidated results of its operationsand its cash flows for each of the years in the three-year period endedJanuary 31, 2003 in conformity with United States generally acceptedaccounting principles.

 

 
| Toronto,  Canada, | /s/ Ernest  & Young LLP |   |
|-------------------|-----------------------------|--------|
| March 20,  2003.  | Chartered  Accountants      |

 

30

----

 

**Polydex Pharmaceuticals Limited**

 

**CONSOLIDATED BALANCESHEETS**

[Expressed in United States dollars]

 

As at January 31

 
|                                                     |   | **2003**        |   | **2002**    |   |
|----------------------------------------------------------|--------|-----------------|--------|-------------|--------|
|                                                     |   | **$**           |   | **$**       |   |
|                                                     |   |            |   |        |   |
| **ASSETS***[notes 7 and 8]*                              |   |            |   |        |   |
| **Current**                                              |   |            |   |        |   |
| Cash                                                     |   | **280,748**     |   | 123,418     |   |
| Trade  accounts receivable *[note 17]*                   |   | **1,351,515**   |   | 1,067,709   |   |
| Inventories  *[note  3]*                                 |   | **2,265,963**   |   | 2,112,854   |   |
| Prepaid expenses and  other current assets               |   | **72,410**      |   | 48,461      |   |
| **Total current assets**                                 |   | **3,970,636**   |   | 3,352,442   |   |
| Property,  plant and equipment, net *[note 4]*           |   | **4,665,809**   |   | 4,726,458   |   |
| Patents, net *[note 5]*                                  |   | **87,062**      |   | 109,245     |   |
| Due  from Sparhawk Laboratories, Inc. *[note 11[a][ii]]* |   | **—**      |   | 132,614     |   |
| Due  from shareholder *[note 6]*                         |   | **981,153**     |   | 1,098,142   |   |
| Deferred  tax assets *[note 13]*                         |   | **—**      |   | 630,406     |   |
| Other assets                                             |   | **7,914**       |   | 31,573      |   |
|                                                     |   | **9,712,574**   |   | 10,080,880  |   |
|                                                     |   |            |   |        |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**           |   |            |   |        |   |
| **Current**                                              |   |            |   |        |   |
| Bank  indebtedness *[note 7]*                            |   | **—**      |   | 179,286     |   |
| Accounts  payable                                        |   | **1,205,383**   |   | 935,419     |   |
| Accrued  liabilities                                     |   | **423,059**     |   | 314,236     |   |
| Due  to Sparhawk Laboratories, Inc. *[note 11]*          |   | **101,453**     |   | 101,453     |   |
| Customer  deposits                                       |   | **137,343**     |   | 4,936       |   |
| Income  taxes payable                                    |   | **33,010**      |   | 23,020      |   |
| Current portion of  long-term debt*[note 8]*             |   | **439,059**     |   | 215,504     |   |
| Current portion of  capital lease obligations *[note 8]* |   | **110,387**     |   | 97,450      |   |
| **Total  current liabilities**                           |   | **2,449,694**   |   | 1,871,304   |   |
| Long-term  debt*[note 8]*                                |   | **186,776**     |   | 629,300     |   |
| Capital  lease obligations *[note 8]*                    |   | **319,602**     |   | 412,896     |   |
| Due  to shareholder*[note 6]*                            |   | **682,225**     |   | 681,963     |   |
| Deferred  tax liabilities *[note 13]*                    |   | **49,750**      |   | —      |   |
| **Total liabilities**                                    |   | **3,688,047**   |   | 3,595,463   |   |
|                                                     |   |            |   |        |   |
| **Shareholders’  equity**                           |   |            |   |        |   |
| Capital  stock *[notes  10 and 11[b]]*                   |   |            |   |        |   |
| Authorized                                               |   |            |   |        |   |
| 100,000  Class A preferred shares of $0.10 each          |   |            |   |        |   |
| 899,400  Class B preferred shares of $0.0167 each        |   |            |   |        |   |
| 10,000,000  common shares of $0.0167 each                |   |            |   |        |   |
| Issued  and outstanding                                  |   |            |   |        |   |
| 899,400  Class B preferred shares                        |   | **15,010**      |   | 15,010      |   |
| 3,027,777  common shares [2002 - 3,027,477]              |   | **50,434**      |   | 50,434      |   |
| Contributed  surplus                                     |   | **23,224,128**  |   | 23,224,128  |   |
| Deficit                                                  |   | **(16,278,269** | **)**  | (15,604,528 | )      |
| Accumulated  other comprehensive loss                    |   | **(986,776**    | **)**  | (1,199,627  | )      |
| **Total shareholders’ equity**                      |   | **6,024,527**   |   | 6,485,417   |   |
|                                                     |   | **9,712,574**   |   | 10,080,880  |   |

 

*See accompanying notes*

 

31

----

 

**PolydexPharmaceuticals Limited**

 

**CONSOLIDATEDSTATEMENTS OF**

**SHAREHOLDERS’ EQUITY**

[Expressed in United States dollars]

 

Years ended January 31, 2003, 2002 and 2001

 
|                                                                                               |   | **Preferred  shares** |       | **Common  shares** |       | **Contributed  surplus** |       | **Deficit**     |   | **Accumulated  other  comprehensive  income (loss)** |   | **Total  shareholders’  equity** |       | **Comprehensive  income (loss)  for the  year** |   |
|----------------------------------------------------------------------------------------------------|--------|-----------------------|------------|--------------------|------------|--------------------------|------------|-----------------|--------|------------------------------------------------------|--------|---------------------------------------|------------|-------------------------------------------------|--------|
|                                                                                               |   | **$**                 |       | **$**              |       | **$**                    |       | **$**           |   | **$**                                                |   | **$**                                 |       | **$**                                           |   |
|                                                                                               |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |                                            |   |
| **Balance, January 31, 2000**                                                                      |   | 15,010                |       | 50,203             |       | 23,121,345               |       | (15,528,932     | )      | (692,992                                             | )      | 6,964,634                             |       | 1,060,393                                       |   |
|                                                                                               |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |                                            |   |
| Exercise  of common share options                                                                  |   | —                |       | 147                |       | 29,740                   |       | —          |   | —                                               |   | 29,887                                |       | —                                          |   |
|                                                                                               |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |                                            |   |
| Common  shares issued in exchange for research and development                                     |   | —                |       | 84                 |       | 20,516                   |       | —          |   | —                                               |   | 20,600                                |       | —                                          |   |
|                                                                                               |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |                                            |   |
| Common  share options issued in exchange for research and development and other  services provided |   | —                |       | —             |       | 49,503                   |       | —          |   | —                                               |   | 49,503                                |       | —                                          |   |
| Comprehensive  income (loss)                                                                       |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |                                            |   |
| Net  income for the year                                                                           |   | —                |       | —             |       | —                   |       | 131,284         |   | —                                               |   | 131,284                               |       | 131,284                                         |   |
| Currency translation  adjustment                                                                   |   | —                |       | —             |       | —                   |       | —          |   | (202,273                                             | )      | (202,273                              | )          | (202,273                                        | )      |
| **Balance,  January 31, 2001**                                                                     |   | 15,010                |       | 50,434             |       | 23,221,104               |       | (15,397,648     | )      | (895,265                                             | )      | 6,993,635                             |       | (70,989                                         | )      |
|                                                                                               |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |                                            |   |
| Common  share options issued in exchange for research and development and other  services provided |   | —                |       | —             |       | 3,024                    |       | —          |   | —                                               |   | 3,024                                 |       | —                                          |   |
| Comprehensive  income (loss)                                                                       |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |                                            |   |
| Net  loss for the year                                                                             |   | —                |       | —             |       | —                   |       | (206,880        | )      | —                                               |   | (206,880                              | )          | (206,880                                        | )      |
| Currency  translation adjustment                                                                   |   | —                |       | —             |       | —                   |       | —          |   | (304,362                                             | )      | (304,362                              | )          | (304,362                                        | )      |
| **Balance, January 31, 2002**                                                                      |   | 15,010                |       | 50,434             |       | 23,224,128               |       | (15,604,528     | )      | (1,199,627                                           | )      | 6,485,417                             |       | (511,242                                        | )      |
|                                                                                               |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |                                            |   |
| Comprehensive  income (loss)                                                                       |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |                                            |   |
| Net  loss for the year                                                                             |   | —                |       | —             |       | —                   |       | (673,741        | )      | —                                               |   | (673,741                              | )          | (673,741                                        | )      |
| Currency translation  adjustment                                                                   |   | —                |       | —             |       | —                   |       | —          |   | 212,851                                              |   | 212,851                               |       | 212,851                                         |   |
| **Balance, January 31, 2003**                                                                      |   | **15,010**            | ** ** | **50,434**         | ** ** | **23,224,128**           | ** ** | **(16,278,269** | **)**  | **(986,776**                                         | **)**  | **6,024,527**                         | ** ** | **(460,890**                                    | **)**  |

* *

*Seeaccompanying notes*

 

32

----

 

**PolydexPharmaceuticals Limited**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

[Expressed in United States dollars]

 

Years ended January 31

 
|                                       |   | **2003**       |      | **2002**   |   | **2001**   |   |
|--------------------------------------------|--------|----------------|-----------|------------|--------|------------|--------|
|                                       |   | **$**          |      | **$**      |   | **$**      |   |
|                                       |   |           |      |       |   |       |   |
| **Sales**                                  |   | **12,786,343** |      | 12,167,530 |   | 13,646,158 |   |
| Cost  of goods sold                        |   | **9,528,959**  |      | 9,431,109  |   | 9,998,862  |   |
| **Gross profit**                           |   | **3,257,384**  |      | 2,736,421  |   | 3,647,296  |   |
|                                       |   |           |      |       |   |       |   |
| Other revenue *[note 12]*                  |   | **—**     |      | —     |   | 182,400    |   |
|                                       |   |           |      |       |   |       |   |
| **Expenses**                               |   |           |      |       |   |       |   |
| General  and administrative                |   | **1,659,011**  |      | 1,527,316  |   | 1,596,830  |   |
| Depreciation                               |   | **549,946**    |      | 526,748    |   | 579,518    |   |
| Research  and development, net *[note 12]* |   | **172,098**    |      | 464,605    |   | 1,106,483  |   |
| Interest  *[note  6]*                      |   | **150,527**    |      | 206,051    |   | 286,779    |   |
| Selling  and promotion                     |   | **140,281**    |      | 143,022    |   | 180,095    |   |
| Amortization                               |   | **22,183**     |      | 22,183     |   | 22,183     |   |
| Foreign  exchange loss (gain)              |   | **113,602**    |      | (77,809    | )      | (88,564    | )      |
|                                       |   | **2,807,648**  |      | 2,812,116  |   | 3,683,324  |   |
| Income (loss) before  the following        |   | **449,736**    |      | (75,695    | )      | 146,372    |   |
| Other income (expense) *[notes 9  and 11]* |   | **(372,111**   | )         | 37,797     |   | 128,515    |   |
| Income  (loss) before income taxes         |   | **77,625**     |      | (37,898    | )      | 274,887    |   |
| Provision for income  taxes *[note  13]*   |   | **751,366**    |      | 168,982    |   | 143,603    |   |
| **Net income (loss) for the year**         |   | **(673,741**   | )         | (206,880   | )      | 131,284    |   |
|                                       |   |           |      |       |   |       |   |
| **Per  share information**                 |   |           |      |       |   |       |   |
| Earnings (loss) per  common share          |   |           |      |       |   |       |   |
| Basic                                      |   | **$**          | **(0.22** | **)**      | $      | **(0.07**  | **)**  | $ | 0.04 |   |
| Diluted                                    |   | **$**          | **(0.22** | **)**      | $      | **(0.07**  | **)**  | $ | 0.04 |   |

 

*Seeaccompanying notes*

 

33

----

 

**PolydexPharmaceuticals Limited**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

[Expressed in United States dollars]

 

Years ended January 31

 
|                                                                                       |   | **2003**     |       | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------------------------|--------|--------------|------------|----------|--------|----------|--------|
|                                                                                       |   | **$**        |       | **$**    |   | **$**    |   |
|                                                                                       |   |         |       |     |   |     |   |
| **OPERATING  ACTIVITIES**                                                                  |   |         |       |     |   |     |   |
| Net  income (loss) for the year                                                            |   | **(673,741** | **)**      | (206,880 | )      | 131,284  |   |
| Add  (deduct) items not affecting cash                                                     |   |         |       |     |   |     |   |
| Depreciation  and amortization                                                             |   | **572,129**  |       | 548,931  |   | 601,701  |   |
| Imputed  interest on long-term debt                                                        |   | **33,177**   |       | 55,762   |   | 107,025  |   |
| Deferred  income taxes                                                                     |   | **684,474**  |       | 125,947  |   | 73,734   |   |
| Loss  on disposal of equipment                                                             |   | **—**   |       | 27,269   |   | —   |   |
| License  fee and interest income charged to due from shareholder                           |   | **68,276**   |       | 46,389   |   | 117,487  |   |
| Provision  for due from Sparhawk Laboratories, Inc. *[note 11]*                            |   | **132,614**  |       | —   |   | —   |   |
| Accrued  interest income charged to due from Sparhawk Laboratories, Inc.                   |   | **—**   |       | —   |   | (14,650  | )      |
| Common  shares issued in exchange for research and development *[note 10]*                 |   | **—**   |       | —   |   | 20,600   |   |
| Options  issued in exchange for research and development and other services*****[note 10]* |   | **—**   |       | 3,024    |   | 49,503   |   |
| Net  change in non-cash working capital balances related to operations *[note 14]*         |   | **124,630**  |       | (156,677 | )      | (248,730 | )      |
| **Cash provided by operating activities**                                                  |   | **941,559**  |       | 443,765  |   | 837,954  |   |
|                                                                                       |   |         |       |     |   |     |   |
| **INVESTING  ACTIVITIES**                                                                  |   |         |       |     |   |     |   |
| Additions  to property, plant and equipment and patents                                    |   | **(367,868** | **)**      | (434,157 | )      | (595,293 | )      |
| Repayment  from (advance to) Sparhawk Laboratories, Inc.                                   |   | **—**   |       | 5,633    |   | (52,160  | )      |
| Decrease  in due from shareholder                                                          |   | **48,713**   |       | 106,669  |   | 27,928   |   |
| Proceeds  from sale of equipment                                                           |   | **—**   |       | 110,000  |   | —   |   |
| **Cash used in investing activities**                                                      |   | **(319,155** | **)**      | (211,855 | )      | (619,525 | )      |
|                                                                                       |   |         |       |     |   |     |   |
| **FINANCING  ACTIVITIES**                                                                  |   |         |       |     |   |     |   |
| Proceeds  from long-term debt                                                              |   | **—**   |       | —   |   | 58,354   |   |
| Repayment  of long-term debt                                                               |   | **(252,256** | **)**      | (442,077 | )      | (548,761 | )      |
| Repayment  of capital lease obligations                                                    |   | **(73,599**  | **)**      | (128,361 | )      | (115,576 | )      |
| Increase  (decrease) in due to shareholder                                                 |   | **262**      | ** ** | (40,259  | )      | 49,456   |   |
| Increase  (decrease) in bank indebtedness                                                  |   | **(179,286** | **)**      | 179,286  |   | —   |   |
| Exercise  of common share options                                                          |   | **—**   | ** ** | —   |   | 29,887   |   |
| **Cash used in financing activities**                                                      |   | **(504,879** | **)**      | (431,411 | )      | (526,640 | )      |
| Effect of exchange rate  changes on cash                                                   |   | **39,805**   |       | (80,284  | )      | (88,151  | )      |
|                                                                                       |   |         |       |     |   |     |   |
| **Net  increase (decrease) in cash during the year**                                       |   | **157,330**  |       | (279,785 | )      | (396,362 | )      |
| Cash, beginning of year                                                                    |   | **123,418**  |       | 403,203  |   | 799,565  |   |
| **Cash, end of year**                                                                      |   | **280,748**  |       | 123,418  |   | 403,203  |   |

 

*Seeaccompanying notes*

 

34

----

 

**PolydexPharmaceuticals Limited**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

[Expressed inUnited States dollars except where otherwise noted]

 

**1.GENERAL**

 

PolydexPharmaceuticals Limited [the “Company”] is incorporated in the Commonwealth ofthe Bahamas and its principal business activities, carried on throughsubsidiaries, include the manufacture and sale of veterinary pharmaceuticalproducts and specialty chemicals.  Theseconsolidated financial statements have been prepared in accordance with UnitedStates generally accepted accounting principles.

 

**2.SIGNIFICANT ACCOUNTING POLICIES**

 

**Basisof consolidation**

 

The consolidatedfinancial statements include the accounts of the Company and itssubsidiaries.  All inter-companyaccounts and transactions have been eliminated on consolidation.

 

**Useof estimates**

 

The preparation offinancial statements in conformity with United States generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidated financialstatements and the reported amounts of revenue and expenses during thereporting period.  Actual results coulddiffer from these estimates.

 

**Inventories**

 

Inventories of rawmaterials are stated at the lower of cost and net realizable value, cost beingdetermined on a first-in, first-out basis. Work-in-process and finished goods are valued at the lower of cost andnet realizable value, and include the cost of raw materials, direct labour andoverhead expenses.

 

**Property,plant and equipment and patents**

 

Property, plantand equipment are recorded at cost. Depreciation is provided on a straight-line basis over the estimated usefullives of the assets as follows:

 
| Buildings               |   | 15 years      |   |
|-------------------------|--------|---------------|--------|
| Machinery and equipment |   | 3 to 10 years |   |

 

35

----

 

Patents areamortized on a straight-line basis over their estimated useful lives of tenyears.

 

Costs related toplant refurbishments and equipment upgrades that represent improvements toexisting facilities are capitalized. Costs related to repair and maintenance of buildings and equipment areexpensed.  The Company has no majorplanned maintenance activity other than the plant refurbishment at one of itssubsidiaries.

 

**Revenuerecognition**

 

All revenue isfrom sales of bulk and finished dosage manufactured products and is recognizedupon shipment to customers.

 

Product sold inbulk quantities is tested, prior to release for shipment, to ensure that itmeets customer specifications, and in many cases, customers receive samples fortheir own testing.  Approval is obtainedfrom the customer prior to shipping. Further purchases by a customer of a bulk product with the samespecifications do not require approvals. Returns of bulk product are rare and generally are not accepted.

 

No testing andapproval is required for finished dosage product because of its nature.  Returns of finished dosage product are rareand generally are not accepted.

 

**Shippingand handling costs**

 

Shipping andhandling costs incurred by the Company for shipment of products to customersare classified as cost of goods sold.

 

**Researchand development**

 

Research anddevelopment costs are expensed as incurred and are stated net of investment taxcredits earned.

 

**Foreigncurrency translation**

 

The functionalcurrency of the Company’s Canadian operations has been determined to be theCanadian dollar.  All asset andliability accounts of these companies have been translated into United Statesdollars using the current exchange rates at the consolidated balance sheetdates.

 

36

----

 

Revenue and expense items are translated using the average exchange ratesfor the year.  The resulting gains andlosses have been reported separately as other comprehensive loss withinshareholders’ equity.

 

**Stock options**

 

The Company haselected to follow Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” [“APB 25”] and related interpretations inaccounting for its employee stock options rather than the alternative fairvalue accounting provided for under Statement of Financial Accounting StandardsNo. 123, “Accounting for Stock-Based Compensation” [“SFAS 123”].  Under APB 25, because the exerciseprice of the Company’s employee stock options equals the market price of theunderlying stock on the date of grant, no compensation expense is recognized.

 

**Earnings(loss) per common share**

 

Basic earnings(loss) per common share are computed using the weighted average number ofshares outstanding of 3,027,777 at January 31, 2003 [2002 - 3,027,477; 2001 -3,027,049].  Diluted earnings (loss) percommon share are computed using the weighted average number of sharesoutstanding adjusted for the incremental shares, using the treasury stockmethod, attributed to outstanding options to purchase common stock.  Incremental shares of nil, nil and 145,205in 2003, 2002 and 2001, respectively, were used in the calculation of dilutedearnings (loss) per common share. Options to purchase 431,550, 419,550 and 25,000 common shares in 2003,2002 and 2001, respectively, were not included in the computation of dilutedearnings (loss) per common share because their effect was anti-dilutive.

 

**3.INVENTORIES**

 

Inventoriesconsist of the following:

 
|            |   | **2003**      |   | **2002**  |   |
|-----------------|--------|---------------|--------|-----------|--------|
|            |   | $             |   | $         |   |
|            |   |          |   |      |   |
| Finished  goods |   | **1,678,250** |   | 1,479,941 |   |
| Work-in-process |   | **59,478**    |   | 58,593    |   |
| Raw materials   |   | **528,235**   |   | 574,320   |   |
|            |   | **2,265,963** |   | 2,112,854 |   |

 

37

----

 

**4.PROPERTY, PLANT AND EQUIPMENT**

 

Property, plantand equipment consist of the following:

 
|                    |   | **2003**       |       | **2002**                      |       |
|-------------------------|--------|----------------|------------|-------------------------------|------------|
|                    |   | **Cost**       |       | **Accumulated  depreciation** |       | **Net  book  value** |   | **Cost** |   | **Accumulated  depreciation** |   | **Net  book  value** |   |
|                    |   | **$**          |       | **$**                         |       | **$** |   | **$** |   | **$** |   | **$** |   |
|                    |   |           |       |                          |       |   |   |   |   |   |   |   |   |
| Land  and buildings     |   | **3,346,727**  | ** ** | **1,054,986**                 | ** ** | **2,291,741** |   | 3,265,741 |   | 910,808 |   | 2,354,933 |   |
| Machinery and equipment |   | **7,564,097**  | ** ** | **5,190,029**                 | ** ** | **2,374,068** |   | 7,006,467 |   | 4,634,942 |   | 2,371,525 |   |
|                    |   | **10,910,824** |       | **6,245,015**                 | ** ** | **4,665,809** |   | 10,272,208 |   | 5,545,750 |   | 4,726,458 |   |

 

Included inmachinery and equipment are assets under capital lease with a total cost of$775,703 [2002 - $742,224] and accumulated depreciation of $220,406 [2002 -$137,359].  Depreciation of assets undercapital lease is included in depreciation expense.

 

**5.PATENTS**

 

Patents consist ofthe following:

 
|                           |   | **2003**    |   | **2002** |   |
|--------------------------------|--------|-------------|--------|----------|--------|
|                           |   | **$**       |   | **$**    |   |
|                           |   |        |   |     |   |
| Cost                           |   | **395,133** |   | 395,133  |   |
| Less accumulated  amortization |   | **308,071** |   | 285,888  |   |
|                           |   | **87,062**  |   | 109,245  |   |

 

38

----

 

**6.RELATED PARTY TRANSACTIONS**

 

Amounts due from (to) shareholder consist of thefollowing:

 
|                                |   | **2003**     |   | **2002**  |   |
|-------------------------------------|--------|--------------|--------|-----------|--------|
|                                |   | **$**        |   | **$**     |   |
|                                |   |         |   |      |   |
| Amounts due from  shareholder *[i]* |   | **981,153**  |   | 1,098,142 |   |
|                                |   |         |   |      |   |
| Amounts due to  shareholder *[ii]*  |   | **(682,225** | **)**  | (681,963  | )      |

 

----

[i]                         Amountsdue from shareholder are due from an officer and director, who is also a majorshareholder of the Company [the “Major Shareholder”], and bear interest at theCanadian banks’ prime lending rate plus 1.5% [2003 - 6%; 2002 - 5.25%], exceptfor an amount of $676,454 [2002 - $744,730] which is non-interest bearing.  These amounts have no fixed terms ofrepayment.  The Major Shareholder haspledged 328,051 shares of the Company and has pledged future license feepayments from the iron dextran process license agreement *[note 12[a]]*as collateralfor this loan.  During 2003, $66,727[2002 - $47,346; 2001 - $72,087] of license fee payments were made.  This amount due is net of a provision onaccrued interest of $212,491 [2002 - $182,198; 2001 - $131,671].

 

[ii]                Amountsdue to shareholder bear interest at the Canadian banks’ prime lending rate plus1.5% [2003 - 6%; 2002 - 5.25%].  TheCompany is required to make monthly payments, inclusive of accrued interest, of$1,000.  Upon the death of either theshareholder or the Major Shareholder, the required monthly payment increases to$5,000.  This loan may not be called.

 

39

----

 

Interest recordedwith respect to amounts due from and due to shareholder are as follows:

 
|             |   | **2003**   |   | **2002** |   | **2001** |   |
|------------------|--------|------------|--------|----------|--------|----------|--------|
|             |   | **$**      |   | **$**    |   | **$**    |   |
|             |   |       |   |     |   |     |   |
| Interest income  |   | **30,293** |   | 50,527   |   | 75,500   |   |
|             |   |       |   |     |   |     |   |
| Interest expense |   | **39,263** |   | 48,578   |   | 61,455   |   |

 

**7.BANK INDEBTEDNESS**

 

The Company has a Canadian operating line of credit of Cdn. $750,000[U.S. $491,000] [2002 - Cdn. $750,000, U.S. $471,000], none of which wasutilized at January 31, 2003 and 2002. The Company also has a U.S. operating line of credit of $175,000 [2002 -$175,000].  At January 31, 2003, thisline was not utilized [2002 - $175,000]. The Canadian line of credit bears interest at the Canadian banks’ primelending rate plus 1.25% [2003 - 5.75%; 2002 - 5%].  The U.S. line of credit bears interest at the U.S. bank’s primelending rate plus 0.5% [2003 - 4.75%; 2002 - 5.25%].  Bank indebtedness is collateralized by a general securityagreement over the Company’s assets.

 

40

----

 

**8.LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS**

 

[a]          Long-termdebt consists of the following:

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **2003**    |   | **2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|----------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **$**       |   | **$**    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |        |   |     |   |
| Note  payable to bank, maturing April 23, 2003, bearing interest at 9%,  collateralized by assignments of land, building and equipment with a carrying  value of $1,632,670 as at January 31, 2003                                                                                                                                                                                                                                                                                                                                   |   | **280,365** |   | 307,863  |   |
| Share  value guarantee payable in semi-annual repayments of  $90,000 on May 30 and November 30 for each  of the next two years and a lump-sum payment for the balance of $105,343 on  November 30, 2004.  The total amount  of repayments are presented at their net present value using a discount rate  of 9%.  The payments are non-interest  bearing and are collateralized by the assets of Veterinary Laboratories, Inc.  which have a carrying value of $3,149,000 as at January 31, 2003 *[note  11[a]]* |   | **345,470** |   | 492,293  |   |
| Lawsuit  settlement payable in 24 monthly payments of $13,542 commencing on March 15,  2000.  The payments are non-interest  bearing.  The total amount of payments  are presented at their net present value using a discount rate of 9% *[note 9]*                                                                                                                                                                                                                                                                       |   | **—**  |   | 13,290   |   |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **—**  |   | 31,358   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **625,835** |   | 844,804  |   |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **439,059** |   | 215,504  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **186,776** |   | 629,300  |   |

 

41

----

 

Repayments on the long-term debt are as follows:

 
|                                       |   | **$**   |   |
|--------------------------------------------|--------|---------|--------|
|                                       |   |    |   |
| 2004                                       |   | 460,365 |   |
| 2005                                       |   | 195,343 |   |
| Total repayments                           |   | 655,708 |   |
| Less amount  representing imputed interest |   | 29,873  |   |
|                                       |   | 625,835 |   |

 

On April 9, 2003, the terms of the share value guarantee were amendedsuch that the Company will pay quarterly repayments on May 1, August 1,November 1, and February 1 of $50,000 for each of the next two years.

 

[b]         Capitallease obligations consist of the following:

 
|                                                                                                                                                                                                                                                                                             |   | **2003**    |   | **2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|----------|--------|
|                                                                                                                                                                                                                                                                                             |   | **$**       |   | **$**    |   |
|                                                                                                                                                                                                                                                                                             |   |        |   |     |   |
| Obligation  [Cdn.$78,395] under a capital lease, repayable in monthly instalments, bearing  interest at 6.65%, and maturing December 2004.  The Company has an option to purchase the asset for $1 at the  end of the lease term                                                            |   | **51,272**  |   | 72,547   |   |
| Obligation  [Cdn.$579,059] under a capital lease, repayable in monthly instalments, bearing  interest at 9%, and maturing November 2006.   The Company has an option to purchase the asset for $73,000  [Cdn.$111,500] in April 2006, or at fair market value at the end of the lease  term |   | **378,717** |   | 437,799  |   |
|                                                                                                                                                                                                                                                                                             |   | **429,989** |   | 510,346  |   |
| Less current portion                                                                                                                                                                                                                                                                             |   | **110,387** |   | 97,450   |   |
|                                                                                                                                                                                                                                                                                             |   | **319,602** |   | 412,896  |   |

 

42

----

 

Future annual minimum lease payments on the capital lease obligationsare as follows:

 
|                                       |   | **$**   |   |
|--------------------------------------------|--------|---------|--------|
|                                       |   |    |   |
| 2004                                       |   | 143,668 |   |
| 2005                                       |   | 141,287 |   |
| 2006                                       |   | 115,106 |   |
| 2007                                       |   | 97,093  |   |
| Total minimum lease payments               |   | 497,154 |   |
| Less amount  representing imputed interest |   | 67,165  |   |
|                                       |   | 429,989 |   |

 

**9.OTHER INCOME**

 

During each of theyears ended January 31, 2002 and 2001, the Company received settlement as partof a class action lawsuit against a group of suppliers, recording gains of$48,643 and $83,266, respectively.

 

**10.CAPITAL STOCK**

 

**[a]**          Share capital issued andoutstanding

 

**[i]****                                    Commonshares**

 

On January 11, 1999, the Company entered into an agreement to grantcommon shares and common share options to individuals involved in obtainingresearch grants for the Company.  OnJanuary 11, 1999, 20,000 common shares were granted.  A further 5,000 common shares were granted to these individualson each of January 11, 2000 and January 11, 2001.  The 5,000 common shares issued on January 11, 2000 and January11, 2001 were valued at $21,415 and $20,600, respectively, using the closingmarket price on the issue date.  The20,000 common shares issued on January 11, 1999 were valued at $68,760, usingthe closing market price on that day. The value of the common shares issued was charged to research anddevelopment expense.

 

During the year ended January 31, 2001, the Company issued 8,800 commonshares, through the exercise of common share options, for cash consideration of$29,887.  During the same year, 8,240common shares held in treasury were cancelled.

 

43

----

 

**[ii]****        ClassA preferred shares**

 

The Class A preferred shares will carry dividends, will be convertibleinto common shares of the Company and will be redeemable, all at rates as shallbe determined by resolution of the Board of Directors.  No Class A preferred shares have been issuedto date.

 

**[iii]****    ClassB preferred shares**

 

The Class B preferred shares carry no dividends, are non-convertibleand entitle the holder to two votes per share.

 

**[b]**          Share option plan

 

**[i]****            Optionsoutstanding**

 

The Company maintains an incentive share option plan for managementpersonnel for 1,000,000 options to purchase common shares.  The Company also issues options to certain consultantsfor services provided to the Company.

 

All options granted have terms ranging from two to five years and vestimmediately.  At January 31, 2003,the Company has 431,550 options outstanding at exercise prices ranging from$2.50 to $6.80 and a weighted average exercise price of $3.88.  The options, which are immediatelyexercisable and expire on dates between January 11, 2004 and January 31, 2008,entitle the holder of an option to acquire one common share of the Company.

 

Pursuant to the agreement entered into on January 11, 1999 to grantcommon shares and common share options to individuals involved in obtainingresearch grants for the Company *[note 10[a]],*7,500 common shareoptions were granted on January 11, 1999. A further 3,750 common share options were granted to these individualson each of January 11, 2000 and January 11, 2001.  The value of the common share options issued on January 11, 1999was not significant and, therefore, was not recorded in the accounts.  The common share options issued on January11, 2000 and January 11, 2001 were valued at $9,878 and $6,615, respectivelyusing a Black-Scholes option pricing model. The value of these options was charged to research and developmentexpense.  All common share optionsgranted to these individuals have an exercise price of $3.50 and a term of 5years from the date of issue.

 

44

----

 

During the year ended January 31, 2001, 24,000 common share optionswere also issued to certain individuals for services provided to theCompany.  These options were valued at$42,888 using a Black-Scholes option pricing model.

 

During the year ended January 31, 2002, 3,000 common share options wereissued to a certain individual for services provided to the Company.  These options were valued at $3,024 using aBlack-Scholes option pricing model and were charged to research and developmentexpense.

 

Details of the outstanding options, which are all currentlyexercisable, are as follows:

 
|                                                                |   | **Share options** |   | **Weighted average  exercise price per share** |   |
|---------------------------------------------------------------------|--------|-------------------|--------|------------------------------------------------|--------|
|                                                                |   | **2003**          |   | **2002**                                       |   | **2001** |   | **2003** |   | **2002** |   | **2001** |   |
|                                                                |   | **#**             |   | **#**                                          |   | **#** |   | **$** |   | **$** |   | **$** |   |
|                                                                |   |              |   |                                           |   |   |   |   |   |   |   |   |   |
| **Options  outstanding, beginning of year**                         |   | **419,550**       |   | 420,600                                        |   | 620,627 |   | **3.91** |   | 4.05 |   | 5.47 |   |
| Granted                                                             |   | **12,000**        |   | 13,950                                         |   | 69,350 |   | **2.50** |   | 2.80 |   | 5.64 |   |
| Exercised                                                           |   | **—**        |   | —                                         |   | (8,800 | ) | **—** |   | — |   | 3.40 |   |
| Expired                                                             |   | **—**        |   | (15,000                                        | )      | (260,577 | ) | **—** |   | 6.80 |   | 8.53 |   |
| **Options outstanding, end of year**                                |   | **431,550**       |   | 419,550                                        |   | 420,600 |   | **3.88** |   | 3.91 |   | 4.05 |   |
|                                                                |   |              |   |                                           |   |   |   |   |   |   |   |   |   |
| **Weighted average fair value of options granted during the  year** |   |              |   |                                           |   |   |   | **$** | **1.28** |   | $ | 1.49 |   | $ | 3.12 |   |
|                                                                     |        |                   |        |                                                |        |  |  |  |  |  |  |  |  |  |  |  |

 

45

----

 

The following table summarizes information relating to the optionsoutstanding at January 31, 2003:

** **
| **Exercise  price  $** |   | **Number  outstanding** |       | **Weighted average  remaining  contractual life  [months]** |       |
|------------------------|--------|-------------------------|------------|-------------------------------------------------------------|------------|
|                   |   |                    |       |                                                        |       |
| **2.50**               |   | **12,000**              | ** ** | **60**                                                      | ** ** |
| **2.75**               |   | **10,950**              | ** ** | **48**                                                      | ** ** |
| **3.00**               |   | **3,000**               | ** ** | **40**                                                      | ** ** |
| **3.50**               |   | **15,000**              | ** ** | **21**                                                      | ** ** |
| **3.75**               |   | **340,000**             | ** ** | **16**                                                      | ** ** |
| **4.59**               |   | **6,600**               | ** ** | **36**                                                      | ** ** |
| **5.00**               |   | **4,000**               | ** ** | **40**                                                      | ** ** |
| **5.25**               |   | **30,000**              | ** ** | **24**                                                      | ** ** |
| **6.80**               |   | **10,000**              | ** ** | **28**                                                      | ** ** |
|                   |   | **431,550**             |       | **20**                                                      |       |

 

**[ii]****        Proforma information**

 

As required by SFAS 123, pro forma information regarding net income(loss) and earnings (loss) per share has been determined as if the Company hadaccounted for its employee stock options under the fair value method.  The fair value for these options wasestimated at the date of grant using a Black-Scholes option pricing model withthe following weighted average assumptions for 2003:  risk-free interest rates of 2.96% [2002 - 4.47%; 2001 -6.22%]; dividend yields of nil [2002 – nil; 2001 - nil]; volatility factors ofthe expected market price of the Company’s common stock of 0.660 [2002 - 0.634;2001 - 0.668], and an expected life of the options of 5 years [2002 – 5 years;2001 - 4.19 years].  Since changes insubjective input assumptions can materially affect the fair value estimate, inmanagement’s opinion, the above pro forma adjustments for SFAS 123 are notnecessarily a reliable single measure of the fair value of the Company’semployee stock options.  For purposes ofpro forma disclosures, the estimated fair value of the options is expensedimmediately.

 

46

----

 

The Company’s pro forma net income (loss) and earnings (loss) percommon share following SFAS 123 are as follows:

 
|                                        |   | **2003**     |   | **2002** |   | **2001** |   |
|---------------------------------------------|--------|--------------|--------|----------|--------|----------|--------|
|                                        |   | **$**        |   | **$**    |   | **$**    |   |
|                                        |   |         |   |     |   |     |   |
| Pro  forma net income (loss)                |   | **(682,957** | **)**  | (216,341 | )      | 50,964   |   |
| Pro  forma earnings (loss) per common share |   |         |   |     |   |     |   |
| Basic                                       |   | **(0.23**    | **)**  | (0.07    | )      | 0.02     |   |
| Diluted                                     |   | **(0.23**    | **)**  | (0.07    | )      | 0.02     |   |

 

**11.VETERINARY LABORATORIES, INC.**

 

**[a]**          Sparhawk Laboratories,Inc.

 

[i]           In1992, Veterinary Laboratories, Inc. [“Vet Labs”] and Sparhawk Laboratories,Inc. [“Sparhawk”] entered into a joint venture [collectively referred to as the“Joint Venture”] for the purpose of manufacturing and selling veterinarypharmaceutical products.  Sparhawk is acompany owned primarily by the management of the Joint Venture.  The Company controls the Joint Venturethrough its control of the Joint Venture Policy Committee and thereforeconsolidated its assets, liabilities, revenue and expenses in theseconsolidated financial statements.  TheCompany has funded the Joint Venture’s losses since 1992 and, accordingly, hasrecorded 100% of these losses in the consolidated financial statements.  Subsequent income will be allocated 50% toVet Labs and 50% to Sparhawk.

 

Sparhawk had an option to purchase 40% of the assets held by VetLabs.  The purchase price would be 40%of the fair market value of the land, building and equipment owned by Vet Labsplus $1,000,000.  The land and buildinghave been appraised at a valuation of $2,450,000 as of November 15,2002.  The equipment has been appraisedat a valuation of $230,900 as of January 22, 2003.  Sparhawk notified the Company onOctober 16, 2002 of its intention to exercise this option, but has not yetdelivered the purchase price.  Under theterms of the Joint Venture agreement, the Joint Venture agreement and theoption terminated on December 1, 2002. The Company believes that this option has now expired because ofSparhawk’s failure to deliver the purchase price.  Sparhawk is disputing this fact.

 

47

----

 

On December 6, 2002, the Company and Sparhawk entered into astandstill agreement requiring both parties to continue to operate under theJoint Venture agreement.  OnDecember 16, 2003, the court appointed a receiver to supervise the wind-upof the Joint Venture. As at January 31, 2003, the Company has continued toconsolidate the Joint Venture. Legal and receiver costs are included in otherincome (expense) on the consolidated statements of operations.

 

Uponwinding up of the Joint Venture, all assets used in the Joint Ventureoperations that were owned by the respective members of the Joint Venture priorto the formation of the Joint Venture will be returned to the respectiveowner.  There are no assets of Sparhawkincluded in the consolidated financial statements of the Company.  Sparhawk owns rights to manufacture certaingeneric products currently produced by the Joint Venture, all of which belongto the liquids product line, that will be returned to Sparhawk.  Sales of products owned by Sparhawk amountedto approximately $1,065,000 during 2003. Vet Labs owns rights to manufacture certain of the products currentlyproduced by the Joint Venture, including iron dextran that will be returned toVet Labs.  Sales of products owned byVet Labs amounted to approximately $5,112,000 during 2003, although ownershipof certain of these products may be disputed by Sparhawk.  The Company plans to continue production ofproducts owned by Vet Labs after the winding up of the Joint Venture and hashired a general manager to manage this business.

 

Any assets that were purchased by the Joint Venture and any productsthat were developed by the Joint Venture will be distributed to the members ofthe Joint Venture as part of the winding up process.  Assets and liabilities owned by the Joint Venture are currentlyincluded in the Company’s consolidated financial statements with a book valueof $2,247,652 and $1,398,853, respectively. The Company may not receive ownership of the products developed by theJoint Venture, depending upon the allocation of the Joint Venture assets upondissolution.  Sales of productsdeveloped by the Joint Venture amounted to approximately $2,034,000 during2003.

 

An alternative resolution to winding up the Joint Venture is for oneparty to purchase the other party’s interest in the Joint Venture.  If the Company were to purchase Sparhawk’sinterest in the Joint Venture, the purchase price would be allocated to thespecific assets purchased.  There wouldbe no significant change in the Company’s results because the Joint Venture’soperations are already fully consolidated.

 

48

----

 

If Sparhawkwere to purchase Vet Labs’ interest in the Joint Venture, all assets,liabilities, revenue and expenses of the Joint Venture’s operations would nolonger be included in the Company’s consolidated financial statements.  The sale proceeds would be allocated to theJoint Venture assets and liabilities and any excess would be recorded as again.  At January 31, 2003, thecarrying value of the Joint Venture assets and liabilities is $2,247,652 and$1,398,853, respectively.  During theyear ended January 31, 2003, sales of the Joint Venture’s operationstotalled $8,209,947 and income before income taxes was $31,520.  The sale of the Joint Venture’s operationswould not have a significant impact on the operations of Dextran since sales tothe Joint Venture are not significant.

 

Based on theCompany’s best information and judgement there is no impairment in the JointVenture assets included in the consolidated financial statements as at January31, 2003.  However, due to theuncertainties inherent in the litigation, wind-up process or sale of the JointVenture the ultimate allocation of assets, liabilities and revenues may differfrom management’s expectations and such differences may be material.

 

[ii]          Amountsdue from (to) Sparhawk consist of the following:

 
|                      |   | **2003**     |   | **2002** |   |
|---------------------------|--------|--------------|--------|----------|--------|
|                      |   | **$**        |   | **$**    |   |
|                      |   |         |   |     |   |
| Amounts due from Sparhawk |   | —       |   | 132,614  |   |
| Amounts due to Sparhawk   |   | **(101,453** | **)**  | (101,453 | )      |

 

In 2003 theamount due from Sparhawk has been fully provided for pending the outcome of thelegal dispute with Sparhawk.  The chargeof $132,614 is included in other income (expense).

 

49

----

 

**[b]****          Purchaseobligation to ContiGroup Companies, Inc. [formerly Continental Grain Company][“CGC”]**

 

In 1992, theCompany acquired 100% of the issued and outstanding share capital of Vet Labsfrom CGC for a total purchase price of $3,894,980, which was satisfied byissuing 194,749 common shares of the Company. The Company had guaranteed that CGC would realize a value of $3,894,980on the eventual sale of these shares or CGC could put its remaining shares tothe Company at such price to bring CGC’s total consideration to$3,894,980.  CGC disposed of all of thecommon shares of the Company and a shortfall resulted.  On January 25, 2001, the terms of thepurchase agreement were revised whereby the repayment terms for the outstandingrepurchase obligation were extended. The revised agreement requires the Company to make semi-annual paymentsof $90,000 on each of May 1 and November 1 until May 1, 2004 and a finalpayment of $105,343 on November 1, 2004. This amount is included in long-term debt*[note 8[a]]*.

 

**12. LICENSE AGREEMENTS AND RESEARCH ANDDEVELOPMENT**

 

The Company has made claims forinvestment tax credits on research and development activities.  Research and development expenditures havebeen reduced by investment tax credits as follows:

 
|                                  |   | **2003**    |   | **2002** |   | **2001**  |   |
|---------------------------------------|--------|-------------|--------|----------|--------|-----------|--------|
|                                  |   | **$**       |   | **$**    |   | **$**     |   |
|                                  |   |        |   |     |   |      |   |
| Research and development expenditures |   | **193,284** |   | 506,980  |   | 1,158,729 |   |
| Investment tax credits                |   | **(21,186** | **)**  | (42,375  | )      | (52,246   | )      |
| **Research and development expense**  |   | **172,098** |   | 464,605  |   | 1,106,483 |   |

 

During the year ended January31, 2001, the Company received a payment of $182,400 from a collaborator on aresearch and development project.  Thisamount was recorded as other revenue.

 

**IronDextran process**

 

Effective February 1,1995, the Company entered into an agreement with Novadex Corp., a companycontrolled by the Major Shareholder, whereby Novadex Corp. granted the Companythe exclusive worldwide license to use a certain process developed by NovadexCorp. for producing Iron Dextran.  Thislicense agreement expires in 2014.  TheCompany pays a license fee based on

 

50

----

 

production volumes.  The total license fee incurred during theyear was $66,727 [2002 - $47,346; 2001 - $72,087].

 

During July 1999, Novadex Corp.was liquidated.  All assets andliabilities of Novadex Corp. were assumed by the Major Shareholder.  This license agreement was included in the assetsassumed by the Major Shareholder.  TheCompany now pays this license fee to the Major Shareholder.  These payments are applied to the balanceowing by the Major Shareholder *[note 6[a]]*.

 

**13.INCOME TAXES**

 

[a]          Substantiallyall of the Company’s activities are carried out through operating subsidiariesin Canada and the United States.  TheCompany’s effective income tax rate is dependent on the tax legislation in eachcountry and the operating results of each subsidiary and the parent company.

 

The componentsof income (loss) before income taxes are as follows:

 
|          |   | **2003**     |       | **2002** |   | **2001** |   |
|---------------|--------|--------------|------------|----------|--------|----------|--------|
|          |   | **$**        | ** ** | **$**    |   | **$**    |   |
|          |   |         |       |     |   |     |   |
| Bahamas       |   | **(360,664** | **)**      | (634,637 | )      | (740,138 | )      |
| Canada        |   | **940,088**  | ** ** | 725,475  |   | 342,453  |   |
| United States |   | **(501,799** | **)**      | (128,736 | )      | 672,572  |   |
|          |   | **77,625**   |       | (37,898  | )      | 274,887  |   |

 

51

----

 

The provisionfor income taxes consists of the following:

 
|                                                                              |   | **2003**     |       | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------------------|--------|--------------|------------|----------|--------|----------|--------|
|                                                                              |   | **$**        |       | **$**    |   | **$**    |   |
|                                                                              |   |         | ** ** |     |   |     |   |
| Foreign withholding taxes on Bahamian  income                                     |   | **—**   | ** ** | 812      |   | 2,198    |   |
|                                                                              |   |         | ** ** |     |   |     |   |
| Provision for income taxes based on  Canadian statutory income tax rates          |   | **311,357**  | ** ** | 275,680  |   | 123,283  |   |
| Increase (decrease) in tax reserve                                                |   | **147,012**  | ** ** | (50,820  | )      | (83,333  | )      |
| Increase (decrease) in valuation allowance                                        |   | **3,506**    | ** ** | (8,947   | )      | —   |   |
| Tax rate changes on deferred tax items                                            |   | **(21,612**  | **)**      | 5,913    |   | —   |   |
| Non-taxable income                                                                |   | **(9,377**   | **)**      | (19,176  | )      | —   |   |
| Benefit of research and development  deductions                                   |   | **—**   | ** ** | —   |   | (12,545  | )      |
|                                                                              |   | **430,886**  |       | 202,650  |   | 27,405   |   |
|                                                                              |   |         | ** ** |     |   |     |   |
| Provision for (recovery of) income taxes  based on United States income tax rates |   | **(185,666** | **)**      | (47,632  | )      | 246,000  |   |
| Tax expense (recovery) on joint venture  partner’s                           |   |         | ** ** |     |   |     |   |
| share of income                                                                   |   | **(32,319**  | **)**      | 547      |   | (132,000 | )      |
| Tax on non-deductible items                                                       |   | **—**   | ** ** | 12,605   |   | —   |   |
| Increase in valuation allowance                                                   |   | **538,465**  | ** ** | —   |   | —   |   |
|                                                                              |   | **320,480**  |       | (34,480  | )      | 114,000  |   |
| **Provision for income taxes**                                                    |   | **751,366**  | ** ** | 168,982  |   | 143,603  |   |

 

52

----

 

Significantcomponents of the provision for income taxes attributable to continuingoperations are as follows:

 
|                                     |   | **2003**    |       | **2002** |   | **2001** |   |
|------------------------------------------|--------|-------------|------------|----------|--------|----------|--------|
|                                     |   | **$**       |       | **$**    |   | **$**    |   |
|                                     |   |        | ** ** |     |   |     |   |
| Canadian deferred tax recovery           |   | **(21,307** | **)**      | (61,054  | )      | (109,369 | )      |
| Canadian deferred tax expense            |   | **385,301** | ** ** | 221,481  |   | 69,103   |   |
| Canadian current tax expense             |   | **66,892**  | ** ** | 42,223   |   | 67,671   |   |
| United States deferred tax recovery      |   | **—**  | ** ** | (34,480  | )      | —   |   |
| United States deferred tax expense       |   | **320,480** | ** ** | —   |   | 114,000  |   |
| Bahamian foreign withholding tax expense |   | **—**  | ** ** | 812      |   | 2,198    |   |
|                                     |   | **751,366** |       | 168,982  |   | 143,603  |   |

 

[b]         Deferredtax assets and liabilities have been provided on temporary differences thatconsist of the following:

 
|                                                           |   | **2003**      |       | **2002** |   | **2001**  |   |
|----------------------------------------------------------------|--------|---------------|------------|----------|--------|-----------|--------|
|                                                           |   | **$**         |       | **$**    |   | **$**     |   |
|                                                           |   |          | ** ** |     |   |      |   |
| **Deferred tax assets**                                        |   |          | ** ** |     |   |      |   |
| Canadian                                                       |   |          | ** ** |     |   |      |   |
| Unclaimed research and development expenses                    |   | **342,000**   | ** ** | 526,000  |   | 711,000   |   |
| Net capital losses and other items *[note  13[c]]*             |   | **90,000**    | ** ** | 88,000   |   | 123,000   |   |
| United States                                                  |   |          | ** ** |     |   |      |   |
| Net operating loss carryforwards *[note  13[d]]*               |   | **600,000**   | ** ** | 368,000  |   | 286,000   |   |
|                                                           |   | **1,032,000** |       | 982,000  |   | 1,120,000 |   |
| Less valuation allowance                                       |   | **899,207**   | ** ** | 147,000  |   | 108,000   |   |
|                                                           |   | **132,793**   |       | 835,000  |   | 1,012,000 |   |
| **Deferred tax liabilities**                                   |   |          | ** ** |     |   |      |   |
| Excess of carrying value over tax value of  depreciable assets |   | **(160,000**  | **)**      | (118,000 | )      | (90,000   | )      |
| Investment tax credits and other items                         |   | **(22,543**   | **)**      | (86,594  | )      | (140,236  | )      |
|                                                           |   | **(49,750**   | **)**      | 630,406  |   | 781,764   |   |

 

[c]          TheCanadian subsidiaries have deductions available to reduce future years’ incomefor tax purposes on account of net temporary differences resulting from expenseitems reported for income tax purposes in different periods than for financialstatement purposes totalling

 

53

----

 

approximately$1,283,000 and $835,000 for federal and provincial purposes, respectively.  Certain Canadian subsidiaries also have netcapital losses available for carryforward of approximately $270,000 availableto offset future taxable capital gains. These potential deductions and net capital losses have an indefinitecarryforward period.

 

[d]         TheU.S. subsidiaries of the Company have net operating loss carryforwards forincome tax purposes of approximately $1,621,000 that expire from 2009 to 2018.

 

[e]          TheCompany has not recorded a deferred tax liability related to its investment inforeign subsidiaries.  The Company hasdetermined that its investment in these subsidiaries is permanent in nature anddoes not intend to dispose of or realize dividends from these investments inthe foreseeable future.  However, ifeither of these events were to occur, the Company will be liable forwithholding taxes.  The amount of thedeferred tax liability related to the Company’s investment in foreignsubsidiaries is not reasonably determinable.

 

**14.CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

The net change in non-cashworking capital balances related to operations consists of the following:

 
|                                           |   | **2003**     |       | **2002** |   | **2001** |   |
|------------------------------------------------|--------|--------------|------------|----------|--------|----------|--------|
|                                           |   | **$**        |       | **$**    |   | **$**    |   |
|                                           |   |         | ** ** |     |   |     |   |
| **Decrease (increase) in current assets**      |   |         | ** ** |     |   |     |   |
| Trade accounts receivable                      |   | **(262,397** | **)**      | 39,101   |   | 49,175   |   |
| Inventories                                    |   | **(111,260** | **)**      | 38,394   |   | (183,284 | )      |
| Prepaid expenses and other current assets      |   | **594**      | ** ** | 19,368   |   | 8,756    |   |
|                                           |   | **(373,063** | **)**      | 96,863   |   | (125,353 | )      |
| **Increase (decrease) in current liabilities** |   |         | ** ** |     |   |     |   |
| Accounts payable                               |   | **254,664**  | ** ** | 6,192    |   | (309,352 | )      |
| Accrued liabilities                            |   | **102,453**  | ** ** | (201,844 | )      | 112,119  |   |
| Customer deposits                              |   | **131,744**  | ** ** | (76,906  | )      | 85,795   |   |
| Income taxes payable                           |   | **8,832**    | ** ** | 19,018   |   | (11,939  | )      |
|                                           |   | **124,630**  |       | (156,677 | )      | (248,730 | )      |

 

Cash paid during the year forinterest was $78,087 [2002 - $101,711; 2001 - $118,299].  Cash paid during the year for income taxeswas $14,473 [2002 - $8,139; 2001 - $23,354].

 

54

----

 

Excluded from the consolidatedstatements of cash flows for the year ended January 31, 2001 is the issuance of5,000 common shares of the Company in exchange for services rendered to theCompany *[note10].*

 

**15.SEGMENTED INFORMATION**

 

All of the operations of theCompany are carried on through Dextran in Canada and through Chemdex in theUnited States.  The operations ofChemdex represent the veterinary products business and the operations arecarried out through its wholly-owned subsidiary, Vet Labs.  Each of Dextran and Chemdex operates as astrategic business unit offering different products.  Each subsidiary comprises a reportable segment as follows:

 

•                  Dextran -manufactures and sells bulk quantities of dextran and several of itsderivatives to large pharmaceutical companies throughout the world.

 

•                  Chemdex -manufactures and sells veterinary pharmaceutical products and specialtychemicals in the United States.  Theprimary customers are distributors and private labelers, who in turn sell tothe end user of these products.

 

The Company evaluates segmentperformance based primarily on operating income, excluding unusual items.  The Company accounts for intersegment salesas if the sales were to third parties at current market prices.  The accounting policies of the segments arethe same as those described in the summary of significant accounting policies.

 

55

----

 

[a]          Thefollowing is condensed segment financial information for the years endedJanuary 31, 2003, 2002 and 2001:

 
|                              |   | **2003**      |       |
|-----------------------------------|--------|---------------|------------|
|                              |   | **Dextran**   |       | **Chemdex** |   | **Total** |   |
|                              |   | **$**         |       | **$** |   | **$** |   |
|                              |   |          |       |   |   |   |   |
| Gross sales                       |   | **4,917,446** | ** ** | **8,210,984** | ** ** | **13,128,430** | ** ** |
| Intercompany sales                |   | **342,087**   | ** ** | **—** | ** ** | **342,087** | ** ** |
| Interest expense                  |   | **50,716**    | ** ** | **27,120** | ** ** | **77,836** | ** ** |
| Depreciation and amortization     |   | **388,954**   | ** ** | **167,388** | ** ** | **556,342** | ** ** |
| Income (loss) before income taxes |   | **872,291**   | ** ** | **(247,682** | **)** | **624,609** | ** ** |
| Interest income                   |   | **1,667**     | ** ** | **395** | ** ** | **2,062** | ** ** |
| Segment assets                    |   | **4,918,829** | ** ** | **3,569,090** | ** ** | **8,487,919** | ** ** |
| Capital expenditures              |   | **340,203**   | ** ** | **27,665** | ** ** | **367,868** | ** ** |

 
|                          |   | **2002**    |   |
|-------------------------------|--------|-------------|--------|
|                          |   | **Dextran** |   | **Chemdex** |   | **Total** |   |
|                          |   | **$**       |   | **$** |   | **$** |   |
|                          |   |        |   |   |   |   |   |
| Gross sales                   |   | 4,529,397   |   | 7,920,895 |   | 12,450,292 |   |
| Intercompany sales            |   | 282,762     |   | — |   | 282,762 |   |
| Interest expense              |   | 64,133      |   | 37,578 |   | 101,711 |   |
| Depreciation and amortization |   | 352,481     |   | 180,663 |   | 533,144 |   |
| Income before income taxes    |   | 670,552     |   | 20,745 |   | 691,297 |   |
| Interest income               |   | 7,843       |   | 1,049 |   | 8,892 |   |
| Segment assets                |   | 4,842,192   |   | 4,100,454 |   | 8,942,646 |   |
| Capital expenditures          |   | 348,844     |   | 85,313 |   | 434,157 |   |

 

56

----

 
|                          |   | **2001**    |   |
|-------------------------------|--------|-------------|--------|
|                          |   | **Dextran** |   | **Chemdex** |   | **Total** |   |
|                          |   | **$**       |   | **$** |   | **$** |   |
|                          |   |        |   |   |   |   |   |
| Gross sales                   |   | 4,991,978   |   | 9,142,855 |   | 14,134,833 |   |
| Intercompany sales            |   | 488,675     |   | — |   | 488,675 |   |
| Interest expense              |   | 79,638      |   | 38,661 |   | 118,299 |   |
| Depreciation and amortization |   | 379,118     |   | 206,796 |   | 585,914 |   |
| Income before income taxes    |   | 260,133     |   | 754,892 |   | 1,015,025 |   |
| Interest income               |   | 12,353      |   | 18,839 |   | 31,192 |   |
| Segment assets                |   | 5,546,048   |   | 4,348,354 |   | 9,894,402 |   |
| Capital expenditures          |   | 449,430     |   | 145,863 |   | 595,293 |   |

 

[b]         Thefollowing reconciles segment information presented above to the consolidatedfinancial statements for the years ended January 31:

 
|                           |   | **2003**       |       | **2002**   |   | **2001**   |   |
|--------------------------------|--------|----------------|------------|------------|--------|------------|--------|
|                           |   | **$**          |       | **$**      |   | **$**      |   |
|                           |   |           | ** ** |       |   |       |   |
| **Gross sales**                |   |           | ** ** |       |   |       |   |
| Gross sales from segments      |   | **13,128,430** | ** ** | 12,450,292 |   | 14,134,833 |   |
| Intercompany sales elimination |   | **(342,087**   | **)**      | (282,762   | )      | (488,675   | )      |
|                           |   | **12,786,343** |       | 12,167,530 |   | 13,646,158 |   |

 
|                                             |   | **2003**     |       | **2002** |   | **2001**  |   |
|--------------------------------------------------|--------|--------------|------------|----------|--------|-----------|--------|
|                                             |   | **$**        |       | **$**    |   | **$**     |   |
|                                             |   |         | ** ** |     |   |      |   |
| **Income (loss) before income taxes**            |   |         | ** ** |     |   |      |   |
| Income (loss) before income taxes from  segments |   | **624,609**  | ** ** | 691,297  |   | 1,015,025 |   |
| Unallocated corporate expenses                   |   | **(546,984** | **)**      | (729,195 | )      | (740,138  | )      |
|                                             |   | **77,625**   |       | (37,898  | )      | 274,887   |   |

 

57

----

 
|       |   | **2003**      |   | **2002**   |   |
|------------|--------|---------------|--------|------------|--------|
|       |   | **$**         |   | **$**      |   |
|       |   |          |   |       |   |
| **Assets** |   |          |   |       |   |
| Segment    |   | **8,487,919** |   | 8,942,646  |   |
| Corporate  |   | **1,224,655** |   | 1,138,234  |   |
|       |   | **9,712,574** |   | 10,080,880 |   |

 
|                          |   | **2003**            |       |
|-------------------------------|--------|---------------------|------------|
|                          |   | **Total  segments** |       | **Corporate** |   | **Consolidated  totals** |   |
|                          |   | **$**               |       | **$** |   | **$** |   |
|                          |   |                |       |   |   |   |   |
| **Other significant items**   |   |                |       |   |   |   |   |
| Interest expense              |   | **77,836**          | ** ** | **72,691** | ** ** | **150,527** | ** ** |
| Depreciation and amortization |   | **556,342**         | ** ** | **15,787** | ** ** | **572,129** | ** ** |
| Interest income               |   | **2,062**           | ** ** | **—** | ** ** | **2,062** | ** ** |
| Capital expenditures          |   | **367,868**         | ** ** | **—** | ** ** | **367,868** | ** ** |

 
|                          |   | **2002**            |   |
|-------------------------------|--------|---------------------|--------|
|                          |   | **Total  segments** |   | **Corporate** |   | **Consolidated  totals** |   |
|                          |   | **$**               |   | **$** |   | **$** |   |
|                          |   |                |   |   |   |   |   |
| **Other significant items**   |   |                |   |   |   |   |   |
| Interest expense              |   | 101,711             |   | 104,340 |   | 206,051 |   |
| Depreciation and amortization |   | 533,144             |   | 15,787 |   | 548,931 |   |
| Interest income               |   | 8,892               |   | 331 |   | 9,223 |   |
| Capital expenditures          |   | 434,157             |   | — |   | 434,157 |   |

 

58

----

 
|                          |   | **2001**            |   |
|-------------------------------|--------|---------------------|--------|
|                          |   | **Total  segments** |   | **Corporate** |   | **Consolidated  totals** |   |
|                          |   | **$**               |   | **$** |   | **$** |   |
|                          |   |                |   |   |   |   |   |
| **Other significant items**   |   |                |   |   |   |   |   |
| Interest expense              |   | 118,299             |   | 168,480 |   | 286,779 |   |
| Depreciation and amortization |   | 585,914             |   | 15,787 |   | 601,701 |   |
| Interest income               |   | 31,192              |   | 809 |   | 32,001 |   |
| Capital expenditures          |   | 595,293             |   | — |   | 595,293 |   |

 

[c]          Consolidatedsales by destination are as follows:

 
|          |   | **2003**       |   | **2002**   |   | **2001**   |   |
|---------------|--------|----------------|--------|------------|--------|------------|--------|
|          |   | **$**          |   | **$**      |   | **$**      |   |
|          |   |           |   |       |   |       |   |
| United States |   | **8,923,364**  |   | 8,582,049  |   | 9,544,206  |   |
| Canada        |   | **510,499**    |   | 593,019    |   | 619,764    |   |
| Europe        |   | **1,991,107**  |   | 1,574,065  |   | 1,877,209  |   |
| Pacific Rim   |   | **714,072**    |   | 962,231    |   | 1,169,954  |   |
| Other         |   | **647,301**    |   | 456,166    |   | 435,025    |   |
|          |   | **12,786,343** |   | 12,167,530 |   | 13,646,158 |   |

 

[d]         Long-livedassets by country of domicile are as follows:

 
|          |   | **2003**      |   | **2002**  |   |
|---------------|--------|---------------|--------|-----------|--------|
|          |   | **$**         |   | **$**     |   |
|          |   |          |   |      |   |
| United States |   | **1,695,427** |   | 1,835,151 |   |
| Canada        |   | **3,033,139** |   | 2,960,460 |   |
| Bahamas       |   | **24,305**    |   | 40,092    |   |
|          |   | **4,752,871** |   | 4,835,703 |   |

 

[e]          Forthe year ended January 31, 2003, Chemdex has three [2002 and 2001-three] customers that each account for more than 10% of the Company’s totalsales.  These three customers

 

59

----

 

combinedaccounted for approximately $4,869,000 [2002 - $4,659,000; 2001 -$5,312,000] of the Company’s total sales.

 

**16.****       FAIR VALUE OF FINANCIALINSTRUMENTS**

 

The estimated fair value offinancial instruments has been determined based on available market informationand appropriate valuation methodologies.

 

The carrying values of cash,trade accounts receivable, accounts payable and accrued liabilities approximatetheir fair values at January 31, 2003 because of the short period tomaturity of these financial instruments.

 

The estimated fair values ofthe amounts due from Sparhawk, bank indebtedness, due to shareholder, long-termdebt and capital lease obligations are not materially different from thecarrying values for financial statement purposes as at January 31, 2003and 2002.  The estimated fair value ofthe amount due from shareholder is not determinable because the amount has nofixed terms of repayment.

 

**17.****       OTHER DISCLOSURES**

 

**[a]****          Concentrationof accounts receivable**

 

At January 31,2003, there were three [2002 - four] customers of the Company which comprised45% [2002 - 49%] of the trade accounts receivable balance.  No other customers had trade accountsreceivable outstanding at year-end that represented more than 10% of theCompany’s trade accounts receivable balance.

 

**[b]****          Foreigncurrency risk**

 

The Company isexposed to foreign currency risk through its net investment in its Canadianoperations.  The Company has not enteredinto hedging arrangements related to the foreign currency risk exposure.

 

**18.COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS**

 

The comparative consolidatedfinancial statements have been reclassified from statements previouslypresented to conform to the presentation of the 2003 consolidated financialstatements.

 

60

----

 

ITEM 9.                                                     CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not applicable.

 

PART III

 

ITEM 10.                                               DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The information required under this item isincorporated herein by reference from the material contained under the captions“Board of Directors,” “Proposals,” Executive Officers” and “Section 16(a)Beneficial Ownership Reporting Compliance” in the Registrant’s definitive proxystatement to be filed with the Securities and Exchange Commission pursuant toRegulation 14A, not later than 120 days after the end of the fiscal year.

 

ITEM 11.                                               EXECUTIVECOMPENSATION

 

The information required under this item isincorporated herein by reference from the material contained under the captions“Board of Directors,” “Board Meetings and Committees,” “Compensation ofExecutive Officers,” “Employment Agreements” and “Company Stock Performance” inthe Registrant’s definitive proxy statement to be filed with the Securities andExchange Commission pursuant to Regulation 14A, not later than 120 daysafter the end of the fiscal year.

 

ITEM 12.                                               SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The information required under this item isincorporated herein by reference from the material contained under the caption“Ownership of Voting Securities” in the Registrant’s definitive proxy statementto be filed with the Securities and Exchange Commission pursuant toRegulation 14A, not later than 120 days after the end of the fiscal year.

 

ITEM 13.                                               CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

The information required under this item isincorporated herein by reference from the material contained under the caption“Transactions With the Company” in the Registrant’s definitive proxy statementto be filed with the Securities and Exchange Commission pursuant toRegulation 14A, not later than 120 days after the end of the fiscal year.

 

ITEM 14.                                               CONTROLSAND PROCEDURES

 

(a)                                  Evaluation ofControls and Procedures

 

61

----

 

Within ninety days prior to the date offiling of this report, the Company carried out an evaluation, under thesupervision and with the participation of its management, including the ChiefExecutive Officer and the Chief Financial Officer, of the design and operationof its disclosure controls and procedures. Based on this evaluation, its Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective for gathering, analyzing and disclosing theinformation the Company is required to disclose in the reports it files underthe Securities Exchange Act of 1934, within the time periods specified in theSEC’s rules and forms.

 

(b)                                 Changes in Controlsand Procedures

 

There have been no significant changes in theCompany’s internal controls or in other factors that could significantly affectinternal controls subsequent to the date of the Company’s most recentevaluation.

 

62

----

 

PART IV

 

ITEM 16.                                               EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 

(a)                                  The followingdocuments are filed as a part of this Annual Report on Form 10-K:

 

(1)                                  Financial Statementsincluded in the Registrant’s Annual Report to Shareholders for the fiscal yearended January 31, 2003 and incorporated by reference from Exhibit 13filed herewith

 

Auditors’Report to the Shareholders — Ernst & Young LLP Chartered Accountants

ConsolidatedBalance Sheets

ConsolidatedStatements of Shareholders’ Equity

ConsolidatedStatements of Operations

ConsolidatedStatements of Cash Flows

Notes toConsolidated Financial Statements

 

(2)                                  Financial StatementSchedules

 

Schedules forwhich provision is made in the applicable accounting regulation of theSecurities and Exchange Commission are not required under the relatedinstructions or are inapplicable, and therefore, have been omitted.

 

63

----

 

(3)                                  Exhibits

 

3.1                                 Memorandumof Association of Polydex Pharmaceuticals Limited, as amended (filed asExhibit 3.1 to the Annual Report on Form 10-K filedApril 30, 1997, and incorporated herein by reference)

 

3.2                                 Articlesof Association of Polydex Pharmaceuticals Limited, as amended (filed asExhibit 3.2 to the Quarterly Report on Form 10-Q filed September 13,1999, and incorporated herein by reference)

 

10.1                           EmploymentAgreement between Polydex Pharmaceuticals Limited and Thomas C. Usher datedDecember 22, 1993, as amended on November 1, 1996 (filed asExhibit 10.1 to the Annual Report on Form 10-K filedApril 30, 1997, and incorporated herein by reference)*

 

10.2                           Amendmentto Employment Agreement between Polydex Pharmaceuticals Limited and Thomas C.Usher dated February 1, 1999 (filed as Exhibit 10.2 to the Annual Report onForm 10-K filed April 29, 1999, and incorporated herein by reference)*

 

10.3                           EmploymentAgreement between Polydex Pharmaceuticals Limited and George G. Usherdated December 22, 1993 (filed as Exhibit 10.2 to the Annual Report onForm 10-Kfiled April 30, 1997, and incorporated herein by reference)*

 

10.4                           Amendmentto Employment Agreement between Polydex Pharmaceuticals Limited and George G.Usher dated February 1, 1999 (filed as Exhibit 10.4 to the Annual Report onForm 10-K filed April 29, 1999, and incorporated herein by reference)*

 

10.5                           ResearchAgreement among Dextran Products Limited, Canadian Microbiology Consortium,British Columbia’s Children’s Hospital and the University of British Columbia,dated April 1, 1996 (filed as Exhibit 10.4 to the Annual Report onForm 10-Kfiled April 30, 1997, and incorporated herein by reference)

 

10.6                           JointVenture Agreement among Chemdex, Inc., Veterinary Laboratories Inc. and SparhawkLaboratories, Inc., dated December 1, 1992 (filed as Exhibit 10.5 tothe Annual Report on Form 10-K filed April 30, 1997, andincorporated herein by reference)

 

64

----

 

10.7                           ManufacturingAgreement among Sparhawk Laboratories, Inc., Agri Laboratories, Ltd. andVeterinary Laboratories Inc., dated September 23, 1996 (filed asExhibit 10.6 to the Annual Report on Form 10-K filedApril 30, 1997, and incorporated herein by reference)

 

10.8                           StockSale and Purchase Agreement between Continental Grain Company and PolydexPharmaceuticals Limited dated October 30, 1992, as amended onNovember 22, 1996 (filed as Exhibit 10.8 to the Annual Report onForm 10-Kfiled April 30, 1997, and incorporated herein by reference)

 

21                                    Subsidiariesof Polydex Pharmaceuticals Limited (filedas Exhibit 21 to the Registrant’s Annual Report on From 10-K filed onApril 28, 2000, and incorporated herein by reference)

 

99.1                           Certificationof Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002

 

99.2                           Certificationof Chief Financial Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002

 

----

*  Indicates a management contract or compensatory plan orarrangement

 

(b)                                 Reports on Form 8-K

 

Notapplicable.

 

65

----

 

SIGNATURES AND CERTIFICATIONS

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this Annual Report on Form 10-K to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                        | POLYDEX  PHARMACEUTICALS LIMITED |
|-----------------------------|----------------------------------|
| Date**: **May 16, 2003 | By:                              | /s/ George  G. Usher |
|                        |                             | George G. Usher, President and  Chief Executive Officer |
|                             |                                  |  |  |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this Annual Report on Form 10-K has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 

 
| Date**: **May 16, 2003 | /s/ George  G. Usher                                                                                                            |   |
|-----------------------------|---------------------------------------------------------------------------------------------------------------------------------|--------|
|                        | George G. Usher, Director, President  and Chief Executive Officer  (Principal Executive Officer)                                |
|                        |                                                                                                                            |
| Date:  May  16, 2003   |  /s/  Sharon Wardlaw                                                                                                       |   |
|                        | Sharon Wardlaw, Treasurer, Secretary  and Chief Financial and Accounting  Officer (Principal Financial and  Accounting Officer) |
|                        |                                                                                                                            |
| Date:  May  16, 2003   |  /s/  Joseph Buchman                                                                                                       |   |
|                        | Joseph  Buchman, Director                                                                                                       |
|                        |                                                                                                                            |
| Date:  May  16, 2003   |  /s/  Derek John Michael Lederer                                                                                           |   |
|                        | Derek John  Michael Lederer, Director                                                                                           |
|                        |                                                                                                                            |
| Date:  May  16, 2003   |  /s/  John L.E. Seidler                                                                                                    |   |
|                        | John L.E.  Seidler, Director                                                                                                    |
|                        |                                                                                                                            |
| Date:  May  16, 2003   |  /s/  Ruth L. Usher                                                                                                        |   |
|                        | Ruth L.  Usher, Director                                                                                                        |
|                        |                                                                                                                            |
| Date:  May  16, 2003   |  /s/  Thomas C. Usher                                                                                                      |   |
|                        | Thomas C.  Usher, Director                                                                                                      |

 

66

----

 

Certifications

 

I, George G. Usher, certifythat:

 

(1)                                  Ihave reviewed this annual report on Form 10–K of Polydex PharmaceuticalsLimited;

 

(2)                                  Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary in order to make thestatements made, in light of the circumstances under which such statements weremade, not misleading 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 period presented in this annual report;

 

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

 

(a)                                  designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

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

 

(c)                                  presented in thisannual 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 officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)                                  all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

67

----

 

(6)                                  Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 

Dated:  May 16, 2003

 

 
|   | /s/  George G. Usher        |   |
|--------|----------------------------------|--------|
|   | Chief  Executive Officer         |
|   | Polydex  Pharmaceuticals Limited |

 

68

----

 

Certifications

 

I, Sharon L. Wardlaw,  certify that:

 

(1)                                  Ihave reviewed this annual report on Form 10–K of Polydex PharmaceuticalsLimited;

 

(2)                                  Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary in order to make thestatements made, in light of the circumstances under which such statements weremade, not misleading 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 period presented in this annual report;

 

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

 

(a)                                  designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which thisannual report is being prepared;

 

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

 

(c)                                  presented in thisannual 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 officer and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons performing the equivalentfunction):

 

(a)                                  all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

69

----

 

(6)                                  Theregistrant’s other certifying officer and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 

 

Dated:  May 16, 2003

 

 
|   | /s/  Sharon L. Wardlaw      |   |
|--------|----------------------------------|--------|
|   | Chief  Financial Officer         |
|   | Polydex  Pharmaceuticals Limited |

 

70

----

 

 

Exhibit Index

 
| 99.1   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002      |
|--------|-----------------------------------------------------------------------------------------------------------|
|   |                                                                                                      |
| 99.2   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

 

71

----