**SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

 

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**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 31,2004**

 

**Commission file number: 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 pursuantto 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: Common Shares, $.0167 par value

 

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 byreference in 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

 

 

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The aggregate market value ofthe Registrant’s voting common shares held by non-affiliates of the Registrant,based upon the $3.56 per share closing price of the Registrant’s Common Stockon July 31, 2003 (the last business day of the Registrant’s most recentlycompleted second quarter), was approximately $7,182,852.  For purposes of thiscalculation, the Registrant’s directors and executive officers have beenassumed to be affiliates.

 

The number of Common Sharesoutstanding as of April 28, 2004**: **3,027,796**.**

 

Documents Incorporated By Reference

 

Portions of the Registrant’sdefinitive Proxy Statement for the Annual Meeting of Members to be held on July9, 2004, are incorporated by reference into Part III.

 

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PART I

 

ITEM 1.                                                     BUSINESS

 

*This report contains statements of aforward-looking nature relating to future events or future performance.  These statements are only predictions andactual events or results may differ materially.  In evaluating such statements, you should carefully consider thevarious factors identified in this report which could cause actual results todiffer materially from those indicated in any forward-looking statements,including those set forth in “Risk Factors” in this Annual Report on Form 10-K.*

 

**Introduction**

 

PolydexPharmaceuticals Limited (the “Company”) is engaged in the research,development, manufacture and marketing of biotechnology-based products for thehuman pharmaceutical market, and also manufactures bulk pharmaceuticalintermediates for the worldwide veterinary pharmaceutical industry.

 

The Companyfocuses on the manufacture and sale of Dextran and derivative products,including Iron Dextran and Dextran Sulphate, and other specialtychemicals.  Dextran, a generic nameapplied to certain synthetic compounds formed by bacterial growth on sucrose,is a polymer or giant molecule.  Thename Polydex combines the words “polymer” and “dextran.”

 

The Companywas incorporated under the laws of the Commonwealth of the Bahamas onJune 14, 1979 as Polydex Chemicals Limited, and changed its name onMarch 28, 1984.  The address of itsstatutory office in the Bahamas is c/o Higgs & Johnson, 83 ShirleyStreet, Nassau, Bahamas, telephone (242) 322-8571.

 

The Companyconducts its business operations through its subsidiaries.  The manufacture and sale of Dextran andderivative products is conducted through Dextran Products Limited, incorporatedin Canada in 1966.

 

During thefiscal year ended January 31, 2004 (the “2004 fiscal year”), the Company alsoengaged in the finished product veterinary pharmaceutical business through itssubsidiary Chemdex, Inc., incorporated in Kansas in 1987, which, in turn,conducted its operations through its subsidiary, Veterinary Laboratories, Inc.(“Vet Labs”).

 

On December 1,1992, Vet Labs and Sparhawk Laboratories Inc. (“Sparhawk”) entered into a JointVenture for the purpose of manufacturing and selling veterinary pharmaceuticalproducts.  The majority of the UnitedStates operations of the Company during the 2004 fiscal year were carried outthrough the operations of the Joint Venture.

 

On March 4,2004, the Company sold its finished product veterinary pharmaceutical businessto Sparhawk.  The sale includedsubstantially all of the assets of Vet Labs and its ownership interest in the JointVenture.

 

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**Productsand Sales**

 

***IronDextran***

 

Iron Dextranis a derivative of Dextran produced by complexing iron with Dextran.  Iron Dextran is injected into most pigs atbirth as a treatment for anemia.  TheCompany sells Iron Dextran to independent distributors and wholesalersprimarily in Europe, the United States and Canada, with less significant salesin Pacific Rim countries.  DextranProducts has regulatory approval to sell Iron Dextran from Canadianauthorities, while Chemdex has United States FDA approval for the manufactureand sale of Iron Dextran for veterinary use.

 

***Dextran Sulphate***

 

DextranSulphate is a specialty chemical derivative of Dextran used in researchapplications by the pharmaceutical industry and other centers of chemicalresearch.  Dextran Sulphate manufacturedby the Company is sold primarily to independent distributors and wholesalers inAustralia, France, the Netherlands, New Zealand and the United States, where itis used in limited quantities in the manufacture of film, as well as analyticalchemical applications.  This usagerequires no regulatory approval.

 

***Veterinary Products***

 

During the2004 fiscal year, the Company manufactured sterile injectable products, tabletsand boluses, internal and external solutions, ointments and powders through itsVet Labs subsidiary and the Joint Venture. These products are predominantly used by large animal veterinarians andby farmers for the treatment of various diseases and conditions that affectfarm animals.  The products are sold toprivate label buying groups who then distribute to their own distributors, andto full service independent distributors who purchase products under Vet Labs’house labels.  Vet Labs also doescontract filling for other industry companies. In the 2004 fiscal year, private label products accounted forapproximately 95% of sales, with house label sales contributing approximately5%.

 

During the2004 fiscal year, sales by the Joint Venture of various veterinary products tothree separate customers each accounted for greater than 10% of the Company’sconsolidated sales.  Purchases by WalcoInternational, Inc. of veterinary products from the Joint Venture accounted for16% of the Company’s consolidated sales, purchases by Agri Laboratories, Inc.accounted for 12% of the Company’s consolidated sales and purchases by Durvet,Inc. accounted for 10% of the Company’s consolidated sales.

 

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On March 4,2004, the Company sold its finished product veterinary pharmaceutical businessto Sparhawk.  The sale includedsubstantially all of the assets of Vet Labs and its ownership interest in theJoint Venture.

 

**Patents,Trademarks and Licenses**

 

***Cellulose Sulphate***

 

During the fiscalyear ended January 31, 1996, a patent for a new method of manufacture ofCellulose Sulphate was purchased for $1 million.  The process was patented under U.S. patent number 5,378,828 inJune 1995.  Prior to development of thepatented process the manufacture of the compound required the use of dangerousand environmentally sensitive chemicals. The new method is safer and produces a more consistent product.

 

During fiscal year 2001U.S. patent number 6,063,773 was granted to the Company and Co-inventorsentitled “Cellulose Sulphate for use as Antimicrobial and Contraceptive Agent”.Various clinical trials with respect to the safety and efficacy of this producthave been completed or are in process, and further trials are planned by theCompany.

 

***Cystic Fibrosis***

 

The Company isa party to a Research Agreement with the University of British Columbia, anumber of Canadian hospitals and a company owned by an affiliate.  Under the terms of this Research Agreement,the Company agreed to provide equipment and funding for continuing research oncystic fibrosis treatment in exchange for an exclusive worldwide license tomanufacture, distribute and sell any products developed from the research.  Two patents with respect to researchproducts were issued by the United States in 1996.  U.S. patent number 5,441,938 is held jointly by the University ofBritish Columbia and the Company, and U.S. patent number 5,514,665 is held bythe University of British Columbia and licensed to the Company.  Rights to a certain cystic fibrosistreatment product, a low molecular weight dextran, were licensed to BCYLifeSciences, Inc. of Canada in 1999. Under this license agreement, BCY LifeSciences will pay a royalty toboth the Company and the University of British Columbia based on sales andsublicensing revenue in return for the exclusive right to sublicense,manufacture, distribute and sell developed products.

 

***Iron Dextran***

 

EffectiveFebruary 1, 1995, the Company entered into an agreement with NovadexCorp., an affiliated company, whereby Novadex granted the Company the exclusiveworldwide license to use a certain process developed by Novadex for producingIron Dextran.  This process allows theCompany to produce Iron Dextran at a lower cost than would otherwise bepossible given the Company’s plant and equipment.  The license agreement expires when the related patent expires in2014.  The Company pays a license feebased on production volumes.** **Uponthe expiration of the license, the technology relating to the process describedabove will belong to the Company, with no further obligation to make royaltypayments.

 

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During July1999, Novadex was liquidated, and all of its assets and liabilities, includingthe above-referenced license agreement, were assumed by its sole shareholder,the current Vice Chairman of the Company. The Company is obligated under the license agreement to pay the licensefee to the Vice Chairman.

 

***Dextran Sulphate***

 

The Companywas granted U.S. patent number 4,855,410 in August 1989 with respect to DextranSulphate.

 

***Elastin and Collagen***

 

Certainprocesses with respect to these materials were patented by the Company underU.S. patent numbers 4,659,740 and 4,784,986 on April 21, 1987 and November 15,1988, respectively.  These patents covera process whereby the materials are modified in such a way as to penetrate theskin and act as a hydrating agent.

 

***Veterinary Products***

 

The Vet Labsfacility is regulated and inspected by the FDA and the U.S. Drug EnforcementAgency.  During the 2004 fiscal year,Vet Labs owned in its own name or for the benefit of the Joint Venture a numberof FDA and DEA licenses, permits and drug applications.

 

On March 4,2004, the Company sold its finished product veterinary pharmaceutical businessto Sparhawk.  The sale includedsubstantially all of the assets of Vet Labs and its ownership interest in theJoint Venture.

 

**Suppliers**

 

***Dextran Products***

 

In themanufacture of Dextran and Dextran derivative products, the Company uses asingle supplier for its sugar raw material requirements.  The Company also uses a single supplier forits iron requirements with respect to the manufacture of Iron Dextran.  Both sugar and iron are readily availablefrom numerous suppliers at competitive prices in the market.

 

The Company isdependent upon a single source for a certain raw material used in theproduction of Dextran Sulphate.  Suchsupply was adequate in fiscal year 2004and no shortages are anticipated in the near term.  However, any curtailment in availability of such raw materialcould be accompanied by production or other delays as well as increased rawmaterial costs, with consequent adverse effect on the Company’s results ofoperations.  The Company has no long-termcontracts with any of its suppliers.

 

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***Veterinary Products***

 

During fiscal year 2004, raw materials usedin the production of veterinary products by the Joint Venture were readilyavailable from a variety of suppliers at competitive prices in the market.  There are no long-term contracts with anyJoint Venture suppliers.  On March 4,2004, the Company sold its finished product veterinary pharmaceutical businessto Sparhawk.  The sale includedsubstantially all of the assets of Vet Labs and its ownership interest in theJoint Venture.

 

**Backlogand Seasonality**

 

The Company’sbacklog as at January 31, 2004 was approximately $750,000, whereas backlog asat January 31, 2003 was approximately $900,000.  All of these orders are expected to be filled within the currentfiscal year.  The Company’s bulkpharmaceutical intermediate business may be characterized as seasonal in thatmany end-users of the finished product veterinary pharmaceuticals manufacturedfrom these intermediates require fewer vitamins and other supplements duringthe summer months when livestock are put out to pasture.  However, the Company does not believe thatsuch seasonality is material to its financial results as a whole.

 

**Competition**

 

The Company isthe only Canadian manufacturer of Iron Dextran and, as a result of itsownership of Chemdex during fiscal year2004, the Company was also the only manufacturer of 10% bulk IronDextran solution in the United States. The only other major supplier of Iron Dextran is located in Denmark,although there exist several smaller European sources of Iron Dextran.  Dextran Sulphate is manufactured by severalmanufacturers in the U.S. and Europe. With regard to Iron Dextran and Dextran Sulphate, the Company competeson the basis of quality, service and price.

 

The technologyin the field of Dextran and its derivatives is undergoing continuous expansionand development.  The manufacture ofDextran and its derivatives may be achieved by different processes andvariations (including by means of a process known as glycoside, which is in thepublic domain).  Therefore, the Companydoes not believe that its licensed, patented process for the production of IronDextran gives it any substantial competitive advantage.

 

**During fiscal year 2004, the JointVenture produced approximately 35 veterinary products, including analgesics,anti-diarrheals, topical antiseptics, nutritional supplements, local andgeneral anesthesia agents and euthanizing agents.  Primary market segments included beef and dairy cattle, swine,equine and to a smaller extent, companion animals (dogs and cats).  With the exception of Iron Dextran andNitrofurazone ointment, the product offering is generic or non-licensed.  As such, all products are subject tosignificant competition.  In addition tocompeting on the basis of quality, service and price, the Joint Ventureattempted to differentiate itself from competitors in fiscal year 2004 throughits ability to supply multiple product dosage forms (i.e., injectables,boluses, tablets, liquids and powders) and provide customers with technical andregulatory support and assistance from in-house quality control and regulatorydepartments.  On**

 

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March 4, 2004, the Company soldits finished product veterinary pharmaceutical business to Sparhawk.  The sale included substantially all of theassets of Vet Labs and its ownership interest in the Joint Venture.

 

**EnvironmentalCompliance**

 

The Company believes that it is insubstantial compliance with all existing applicable foreign, federal, state andlocal environmental laws and does not anticipate that such compliance will havea material effect on its future capital expenditures, earnings or competitiveposition.

 

**Employees**

 

As ofMarch 31, 2004, the Company employed 26 employees, of whom 16 were engagedin production, 6 in quality control, 1 in research and development, 2 inadministration and 1 in marketing and sales activities.  None of the Company’s employees are coveredby collective bargaining agreements. Management considers its relations with employees to be good.

 

**Researchand Development**

 

During thefiscal years ended January 31, 2004, 2003, and 2002, the Company expended$73,635, $193,284 and $506,980, respectively, on research and development,primarily relating to the development of Cellulose Sulphate.  Decreases in research and developmentexpenditures are a result of sustained funding by research and developmentpartners.  During the years endedJanuary 31, 2004, 2003 and 2002, the Company recognized investment tax creditbenefits of $12,684, $21,186 and $42,375, respectively.

 

***Cellulose Sulphate(Ushercell)***

 

Ushercell, the Company’sleading human pharmaceutical compound, is a high molecular weight CelluloseSulphate envisioned for topical vaginal use primarily in the prevention oftransmission of AIDS and other sexually transmitted diseases, as well asunplanned pregnancies.

 

Research and developmentwith respect to the Company’s Cellulose Sulphate product is being conductedwith the assistance and financial support of CONRAD, formerly known as theContraceptive Research and Development Program, with funding from variousprivate and public sector sources. CONRAD provides direct financial assistance in support of, and/oractually conducts specific research studies involving the Cellulose Sulphateproduct in conjunction with various public health-oriented entities, such asFamily Health International, the World Health Organization, the Centers forDisease Control and the HIV Prevention Network.

 

During fiscalyear 2004 phase I/II clinical trials were conducted and concluded in Uganda,Nigeria, India, Cameroon, the Dominican Republic and the United States, asoutlined in a Development Plan provided to the Company by CONRAD.  Additional Phase I/II trials were commencedat sites in Belgium and in the United States.

 

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Highlights ofselected completed clinical studies outlined in CONRAD’s Development Plan are as follows:

 

•                  A clinical studyof 48 sexually active women conducted in collaboration with Family HealthInternational in Cameroon, has been completed.  The final report concluded that 3.5 ml 6% Cellulose Sulphate gelwas as safe and acceptable to users as a placebo compound, and remained acceptablewhen used four times per day for 14 days.

 

•                  A study incollaboration with the World Health Organization of 180 healthy women inUganda, Nigeria and India has been completed. The final report concluded that****twice daily vaginal applications of 6%Cellulose Sulphate appeared to be as safe and well tolerated as the placebocompound also used in the study.

 

•                  A studyconducted by the HIV Prevention Trials Network to establish the safety andtolerance of the product among HIV-infected women, as a precursor to clinicaltrials designed to assess the product’s HIV prevention capabilities, wascompleted in fiscal year 2004, with the final report expected in fiscal year2005.

 

•                  A Phase I studyin collaboration with Family Health International involving 60 healthy women inthe United States to assess the safety and acceptability among sexually activeand abstinent women of Cellulose Sulphate used intra-vaginally twice daily for14 consecutive days has been completed. The final report from this study is expected in the second quarter offiscal year 2005.

 

Additionally,the following clinical studies have been commenced or are being activelyplanned:

 

•                  A tolerancestudy of 42 HIV-infected men in collaboration with the******Institute of Tropical Medicine in Belgiumwhich began in September 2003 and is expected to be completed in the secondquarter of fiscal year 2005.

 

•                  A further studyplanned in collaboration with the University of California to be conductedwith 180 sexually active women in Zimbabwe to assess the safety andacceptability of Ushercell in use with a diaphragm was commenced in the firstquarter of calendar year 2004.

 

•                  Large-scale Phase II human clinical trials ofthe contraceptive efficacy of Ushercell involving 600 women in the UntiedStates began in January and February 2004 in collaboration with the CaliforniaFamily Health Council.

 

•                  A further large-scale Phase III clinicaltrial is planned to assess the effect of Ushercell on vaginal HIVacquisition.  This study design willenroll more than 2,000 sexually active

 

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women with ahigh risk of HIV infection.  Theprotocol remains under development, but a projected start timeline has beenscheduled for June 2004.

 

Presently, the Companyestimates that approximately 2.5 million doses of the developed compound willbe needed for clinical studies taking place in fiscal year 2005.  The Company has completed arrangements forthe production of individual dosage units for these trials.

 

Should continued positiveresults be generated from this work, the Company has been advised that thefunding from CONRAD will continue through Phase II trials.  The Company maintains an exclusive worldwidelicense for this product.

 

***Cystic Fibrosis***

 

**Cystic fibrosis is a genetic disease,which causes a cascade of effects, the most severe being a build up of mucus inthe lungs.  This mucus is difficult toremove and also permits the colonization of bacteria, which then causesecondary infections and often death. Research relating to cystic fibrosis has shown that a special form ofDextran, named by the Company Usherdex 4, is effective in preventing thecolonization of bacteria in the mouth and in stimulating the macrophages in thelungs to remove the bacteria present and lessen secondary infections.**

** **

As notedabove, in 1999, the Company’s cystic fibrosis product was licensed to BCYLifeSciences.  In November, 2003 BCYLifeSciences announced its completion of the analysis of a Phase II clinicaltrial of the product designed to assess the efficacy and safety of the producton pulmonary function in adult cystic fibrosis patients.  The results indicated that the product(known as DCF 987) was well tolerated and may have shown positive trends in theimprovement of FEV1 (forced expiratory volume in one second), ameasure of lung function, and the reduction of Pseudomonas aeruginosa bacterialload in patient sputum.  BCYLifeSciences was also granted a patent entitled “Use of Dextran and OtherPolysaccharides to Improve Mucus Clearance” by the European Patent Office.  The Company will receive royalty paymentsbased upon sales and other revenues upon approval of any developed productpursuant to its license agreement with BCY LifeSciences.

 

**SegmentedInformation**

 

Theinformation regarding the geographic distribution of revenue, operating resultsand assets set forth in Note 15 to the Company’s Consolidated FinancialStatements included in the Company’s Annual Report to Shareholders for thefiscal year ended January 31, 2004 is incorporated herein by reference.

 

ITEM 2.                                                     PROPERTIES

 

The Company’swholly-owned subsidiary, Polydex Chemicals (Canada) Limited, maintains itsexecutive and sales offices and its manufacturing plant of approximately 30,000square feet in Toronto, Ontario, Canada.

 

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The Companyowns and operates a fermentation plant in Toronto, Ontario, Canada.  This plant has the capacity tosimultaneously produce both 10% and 20% Iron Dextran at the rate of up to11,000 liters per week (there are 1.057 quarts in one liter), and 500 kilograms(there are 2.2 pounds in one kilogram) per month of Dextran Sulphate.  Current production is approximately 8,000liters of Iron Dextran per week and approximately 250 kilos of Dextran Sulphateper quarter.

 

Managementbelieves that the Company’s facility is adequate for its presentrequirements.  The facility has thecapacity for a limited expansion of production of existing and new products.  The Company considers its current equipmentto be in good condition and suitable for the operations involved.

 

During the2004 fiscal year, Vet Labs owned a finished product veterinary pharmaceuticalmanufacturing facility located on eight acres of land in Lenexa, Kansas.  The plant is 55,000 square feet with separateproduction areas for each of the above product groups.  The plant has the capacity to simultaneouslymanufacture over 200,000 boluses per day, 4,000 gallons of liquids per day,1,500 pounds of powder per day and 1,000 gallons of injectable products per day.  On March 4, 2004, the Company sold itsfinished product veterinary pharmaceutical business to Sparhawk.  The sale included substantially all of theassets of Vet Labs and its ownership interest in the Joint Venture.

 

ITEM 3.                                                     LEGALPROCEEDINGS

 

There are no pending legal proceedings to which the Company or any ofits subsidiaries is a party, or to which any of their property is subject.

 

**Thelitigation involving the Joint Venture, *SparhawkLaboratories, Inc. v. Veterinary Laboratories, Inc., et al*, Case No.02CV07426, County of Johnson, State of Kansas, was settled on March 4, 2004,and a Motion of Approval of Settlement and Stipulation of Dismissal withPrejudice was filed with the Court on that date.**

** **

ITEM 4.                                                     SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matters were submittedto a vote of security holders, through the solicitation of proxies orotherwise, during the Company’sfourth quarter ended January 31, 2004.

 

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PART II

 

ITEM 5.                                                     MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES

 

The Company’sshares are listed for trading on the Nasdaq SmallCap Market System under thesymbol POLXF, and on the Boston Stock Exchange under the symbol PXL.

 

The reportedhigh and low sale price of the common shares as reported on the Nasdaq SmallCapMarket for each full quarterly period within the two most recent fiscal yearsof the Company were as follows (similar prices were quoted on the Boston StockExchange):

 
| **Fiscal Year 2004  fiscal quarter ended:** |   | **High and  Low Sale Price** | ** **  |
|---------------------------------------------|--------|------------------------------|-------------|
|                                        |   |                         |        |
| April 30, 2003                              |   | $                            | 2.03 - 2.67 |   |
| July 31, 2003                               |   |                         | 2.26 - 4.85 |   |
| October 31, 2003                            |   |                         | 3.20 - 6.00 |   |
| January 31, 2004                            |   |                         | 5.01 - 8.62 |   |

 
| **Fiscal Year 2003  fiscal quarter ended:** |   | **High and  Low Sale Price** | ** **  |
|---------------------------------------------|--------|------------------------------|-------------|
|                                        |   |                         |        |
| April 30, 2002                              |   | $                            | 2.15 - 3.95 |   |
| July 31, 2002                               |   |                         | 1.81 - 3.10 |   |
| October 31, 2002                            |   |                         | 1.60 - 2.49 |   |
| January 31, 2003                            |   |                         | 1.83 - 3.11 |   |

 

The quotationsset out above represent the prices for the specific dates between dealers anddo not include retail mark-up, mark-down or commission.  They do not represent actual transactions.

 

As of April28, 2004 there were approximately 361****holdersof record of the Company’s Common Shares.

 

The Companyhas paid no dividends in the past and does not consider likely the payment ofany dividends in the foreseeable future.

 

There are nogovernmental laws, decrees or regulations in the Commonwealth of the Bahamasapplicable to the Company that restrict the export or import of capital,including foreign exchange controls, or that affect the remittance of dividendsor other payments to nonresident holders of the Company’s Common Shares.  Furthermore, U.S. holders of the Company’sCommon Shares are not subject to taxes under Bahamian law.

 

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ITEM 6.                                                     SELECTEDFINANCIAL DATA

 

The followingselected historical consolidated financial and other data are qualified byreference to, and should be read in conjunction with, the financial statementsand notes thereto included elsewhere in this report.  The Company’s financial statements are prepared in accordancewith United States generally accepted accounting principles.  All amounts are in United States dollars.

 
|                                         |   | **Fiscal  year ended January 31,** |   |
|----------------------------------------------|--------|------------------------------------|--------|
|                                         |   | **2004**                           |   | **2003** |   | **2002** |   | **2001** |   | **2000** |   |
| Sales from continuing operations             |   | 14,092,189                         |   | 12,786,343 |   | 12,167,530 |   | 13,646,158 |   | 13,096,449 |   |
| Net income (loss) from continuing operations |   | (5,999                             | )      | (673,741 | ) | (206,880 | ) | 131,284 |   | 969,843 |   |
| Net income (loss) per common share           |   | —                             |   | (0.22 | ) | (0.07 | ) | 0.04 |   | 0.32 |   |
| Total Assets                                 |   | 10,510,513                         |   | 9,712,574 |   | 10,080,880 |   | 11,217,326 |   | 11,814,833 |   |
| Long-term borrowings                         |   | 1,013,701                          |   | 1,188,603 |   | 1,724,159 |   | 2,031,660 |   | 2,385,541 |   |

 

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

 

*The Company’s fiscal year ends on January 31stof each year.  In this report, fiscalyear 2004 refers to the Company’s fiscal year ended January 31, 2004.  The following discussion should be read inconjunction with the financial statements and notes thereto included elsewherein this report.  The Company’s financialstatements are prepared in accordance with United States generally acceptedaccounting principles.  All amounts arein United States dollars, unless otherwise denoted.*

 

**Overview**

 

The Company isengaged in the research, development, manufacture and marketing ofbiotechnology-based products for the human pharmaceutical market, and alsomanufactures bulk pharmaceutical intermediates for the worldwide veterinary pharmaceuticalindustry.  The Company conducts itsbusiness operations through its subsidiaries, which operate as strategicbusiness units:  Dextran Products andChemdex.

 

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***Dextran ProductsBusiness***

 

The manufactureand sale of bulk quantities of Dextran and derivative products for sale tolarge pharmaceutical companies throughout the world is conducted through aCanadian subsidiary, Dextran Products.

 

*Management Objectives for Fiscal 2005*.  In fiscal 2005 management intends to focuson the core businesses of Dextran Products that have historically been thebackbone of the Company.  Opportunitiesto implement distribution chains for existing Dextran products in untappedmarkets, such as India, China and Russia are being explored by management.  Expanding current market opportunities andthe potential for new market penetration has led management to make plantrefurbishment and the expansion of production capacity a priority for fiscal2005 with respect to Dextran Products operations.

 

Research and developmentof the Company’s human pharmaceutical products is co-ordinated at the DextranProducts facility.  Ushercell, theCompany’s leading human pharmaceutical compound, is a high molecular weight CelluloseSulphate envisioned for topical vaginal use primarily in the prevention oftransmission of AIDS and other sexually transmitted diseases, as well asunplanned pregnancies.  Multipleclinical trials have been completed, and additional trials have commenced or arebeing actively planned, to evaluate various aspects of the use of CelluloseSulphate as a contraceptive gel with antiviral capabilities.  The Company also intends to significantlyexplore the use of Ushercell as a treatment for Bacterial Vaginosis (BV), themost common vaginal disorder among reproductive-age women.  If effective, BV treatment may present anopportunity for commercial viability of Ushercell in advance of the completionof the much lengthier required testing for its use as an antiviral contraceptivegel.

 

***Chemdex, Vet Labsand the Joint Venture Business***

 

During fiscalyear 2004, the Company also engaged in the finished product veterinarypharmaceutical business through its United States subsidiary Chemdex, which, inturn, conducted its operations through its subsidiary, Vet Labs.  On December 1, 1992, Vet Labs and SparhawkLaboratories Inc. entered into a Joint Venture for the purpose of manufacturingand selling veterinary pharmaceutical products.  The majority of the United States operations of the Companyduring fiscal year 2004 were carried out through the operations of the JointVenture.

 

*Subsequent events*.  On January 13, 2004, the Company, Chemdexand Vet Labs entered into an Asset Purchase Agreement with Sparhawk pursuant towhich the Company agreed to sell its finished product veterinary pharmaceuticalbusiness, including substantially all of the assets of Vet Labs and itsownership interest in the Joint Venture, to Sparhawk for $5,500,000 incash.  The sale was completed on March4, 2004.  Simultaneously with theclosing, Chemdex advanced $350,000 to Sparhawk in exchange for an unsecuredsubordinated promissory note bearing interest at 13% per annum and a warrant topurchase 4% of the equity of Sparhawk. The promissory note is payable in full on March 4, 2009.  Interest is payable annually, but can bedeferred and added to the principal balance of the promissory note each year atSparhawk’s discretion.  The warrantbecomes exercisable on March 5, 2009 and expires at the earlier of payment infull of the promissory note or March 4, 2014. Chemdex also entered into a supply agreement with Sparhawk to supplyferric hydroxide and hydrogenated dextran solution to

 

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Sparhawk on an exclusive basisin the United States for 10 years.  Inconnection with the sale, the litigation involving the Joint Venture, *Sparhawk Laboratories, Inc. v. VeterinaryLaboratories, Inc., et al*, Case No. 02CV07426, County of Johnson,State of Kansas, was settled, and a Motion of Approval of Settlement andStipulation of Dismissal with Prejudice was filed with the Court on March 4,2004.

 

Managementconsiders the finished goods veterinary pharmaceuticals industry to be a highlycompetitive, mature industry, and believes that meaningful growth in thisindustry will require significant investment in new product development.  The Company’s investment in this industrythrough the Joint Venture required the sharing of profits with itspartner.  Management believes that the Companycan expect to obtain a higher return on investment by focusing on its currentDextran Products business and on human pharmaceutical research and developmentprojects.

 

**Results of Operations**

 

***Fiscal Year ended January 31,2004 compared to Fiscal Year endedJanuary 31, 2003 compared to Fiscal Year ended January 31, 2002***

 

|           |   | **FY 2004** |   | **FY 2003** |   | **FY 2002** |   |
|----------------|--------|-------------|--------|-------------|--------|-------------|--------|
| Net Loss       |   | $           | (5,999 | )           | $      | (673,741    | )      | $ | (206,880 | ) |
|           |   |        |   |        |   |        |   |
| Loss per share |   | 0.00        |   | (0.22       | )      | (0.07       | )      |
|                |        |             |        |             |        |             |        |  |  |  |

 

The fiscalyear 2004 reduction in net loss is attributable to the recovery of income taxexpense.  In fiscal year 2004, there wasa recovery of income taxes of $389,968 as compared to a provision for incometaxes of $751,366 in fiscal year 2003, due to the recognition of the taxbenefit of the non-operating losses at Chemdex, as described below.  The provision for income taxes in fiscalyear 2003 significantly exceeded income before income taxes because of thelosses incurred at the Company level in the Bahamas, for which no tax recoveryis available, and because a full valuation allowance was taken against thedeferred tax assets relating to non-operating losses at Chemdex.

 

| **Income (loss) before** |   |        |     |        |   |        |   | **Fiscal  Years**            |    |
|--------------------------|--------|-------------|----------|-------------|--------|-------------|--------|------------------------------|---------|
| **income taxes**         |   | **FY 2004** |     | **FY 2003** |   | **FY 2002** |   | **04 v 03**                  |    | **03 v 02** |   |
|                     |   |        |     |        |   |        |   | **(%  increase (decrease))** |    |
| Consolidated             |   | $           | (395,967 | )           | $      | 77,265      |   | $                            | (37,898 | ) | (612 | )% | 304 | % |
| Dextran Products         |   | 58,703      |     | 872,291     |   | 670,552     |   | (93                          | )%      | 30 | % |
| Chemdex                  |   | (63,029     | )        | (247,682    | )      | 20,745      |   | 75                           | %       | (1,294 | )% |
|                          |        |             |          |             |        |             |        |                              |         |  |  |  |  |  |

 

15

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The fiscal year 2004 declinein operating results is primarily attributable to the large foreign exchangeloss and gross margin decline at Dextran Products due to the decline in theUnited States dollar relative to the Canadian dollar.  Dextran Products has a significant net asset exposure to theUnited States dollar because the majority of its accounts receivable balanceand intercompany receivables are denominated in United States dollars, whilethe majority of its liabilities and expenses are in Canadian dollars.  Therefore, if the value of the Canadiandollar increases in relation to the United States dollar, marginsdecrease.  Exchange rate fluctuationsresulted in an 8% decrease in margins at Dextran Products in fiscal year 2004.  Management does not expect that the Companywill incur significant foreign exchange losses in fiscal year 2005, due to theexpected repayment of intercompany debts owed by Chemdex to Dextran Products infiscal year 2005.

 

Additionally,in fiscal year 2004 the Company continued to incur significant legal andreceiver costs due to the winding-up of the Joint Venture and resultinglitigation with its joint venture partner. On March 4, 2004, the Company sold its finished product veterinarypharmaceutical business to Sparhawk. The sale included substantially all of the assets of Vet Labs and itsownership interest in the Joint Venture, and settled all outstanding litigationamong the parties.  The Company does notexpect to incur significant legal or receiver costs in connection with Vet Labsor the Joint Venture following the date of sale.

 

*DextranProducts*.  The fiscalyear 2004 decrease in income before income taxes is a result of the rise in thevalue of the Canadian dollar, which resulted in the decrease in profit marginsdescribed above, as well as an increase in selling, general and administrativeexpenses, which are stated in United States dollars, and a foreign exchangeloss.  The fiscal year 2003 increasecompared to fiscal year 2002 was due to increased sales and gross profitlevels.

 

*Chemdex*. The fiscal year 2004 decrease in lossbefore income taxes is a result of the increase in sales and profitmargins.  The fiscal year 2003 decreasecompared to fiscal year 2002 was primarily due to increased other expensesresulting from the winding-up of the Joint Venture and the resultinglitigation.

 

16

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|                        |   |        |   |        |   |        |   | **Fiscal  Years**            |   |
|-----------------------------|--------|-------------|--------|-------------|--------|-------------|--------|------------------------------|--------|
| **Sales**                   |   | **FY 2004** |   | **FY 2003** |   | **FY 2002** |   | **04 v 03**                  |   | **03 v 02** |   |
|                        |   |        |   |        |   |        |   | **(%  increase (decrease))** |   |
| Consolidated                |   | $14,092,189 |   | $12,786,343 |   | $12,167,530 |   | 10                           | %      | 5 | % |
| Dextran Products            |   | 4,742,519   |   | 4,575,359   |   | 4,246,635   |   | 4                            | %      | 8 | % |
| Percentage of Company sales |   | 34          | %      | 36          | %      | 35          | %      |                         |   |   |   |
| Chemdex                     |   | $9,349,670  |   | $8,210,984  |   | $7,920,895  |   | 14                           | %      | 4 | % |
| Percentage of Company sales |   | 66          | %      | 64          | %      | 65          | %      |                         |   |   |   |

 

The majority of thefiscal year 2004 sales increase was attributable to the Chemdex operatingsegment.  Both operating segmentsexperienced sales increases in fiscal year 2003 compared to fiscal year 2002.

 

*DextranProducts*.  Demand forDextran and related products increased in fiscal year 2004 due primarily tofavorable pricing.  Since DextranProducts pricing of product is primarily denominated in United States dollars,the decline in value of the United States dollar relative to the Euro resultedin lower pricing for European agents, increasing demand for the products ofDextran Products.  Increased demandacross all markets drove the sales increase from fiscal year 2002 to fiscalyear 2003.  Management expects saleslevels to increase slightly in fiscal year 2005 due to increased sales inEurope, absent a significant rise in the value of the United States dollar.

 

*Chemdex*.  The introduction of three new productsaccounted for $938,307 of the fiscal year 2004 sales increase.  The fiscal year 2003 sales increase comparedto fiscal year 2002 was due primarily to the introduction of a newcontract-manufactured product.

 

17

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|                 |   |        |      |        |   |        |   | **Fiscal Years**             |      |
|----------------------|--------|-------------|-----------|-------------|--------|-------------|--------|------------------------------|-----------|
| **Gross profit**     |   | **FY 2004** |      | **FY 2003** |   | **FY 2002** |   | **04 v 03**                  |      | **03 v 02** |   |
|                 |   |        |      |        |   |        |   | **(%  increase (decrease))** |      |
| Consolidated         |   | $           | 3,349,496 |        | $      | 3,257,384   |   | $                            | 2,736,421 |   | 3 | % | 19 | % |
| Percentage of  sales |   | 24          | %         | 25          | %      | 22          | %      |                         |      |   |   |
| Dextran Products     |   | $           | 1,539,164 |        | $      | 1,889,001   |   | $                            | 1,593,497 |   | (19 | )% | 19 | % |
| Percentage of sales  |   | 32          | %         | 41          | %      | 38          | %      |                         |      |   |   |
| Chemdex              |   | $           | 1,739,558 |        | $      | 1,281,409   |   | $                            | 1,051,312 |   | 36 | % | 22 | % |
| Percentage of sales  |   | 19          | %         | 16          | %      | 13          | %      |                         |      |   |   |

 

The fiscal year2004 increase in gross profit resulted from increased sales at the Chemdexoperating segment.  The concurrentdecline in gross profit percentage is primarily due to declines at the DextranProducts operating segment due to exchange rate fluctuations, which caused adecrease in margins.  The fiscal year2003 increase in gross profit compared to fiscal year 2002 gross profit was theresult of increased sales levels, particularly of higher margin products.

 

*DextranProducts*.  DextranProducts’ fiscal year 2004 gross profit decrease was due to the significantrise in the Canadian dollar relative to the United States dollar.  The majority of Dextran Products’ costs areincurred in Canadian dollars, while the majority of its sales are in UnitedStates dollars.  Therefore, as the valueof the Canadian dollar rises in relation to the United States dollar, DextranProducts’ margins decrease.  Exchangerate fluctuations resulted in an 8% decrease in margins at Dextran Products infiscal year 2004.  The fiscal year 2003increase in gross profit at Dextran Products compared to fiscal year 2002 wasthe result of increased sales of a high-margin product.

 

*Chemdex*.  The fiscal year 2004 increase in grossprofit and margin at Chemdex was primarily attributable to the increased saleslevels, particularly in the high-margin injectables product line, whichresulted in lower average fixed costs. The fiscal year 2003 increase in gross profit at Chemdex compared tofiscal year 2002 was the result of increased sales due to the introduction of anew product.

 

18

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|                                                         |   |        |      |        |   |        |   | **Fiscal Years**             |      |
|--------------------------------------------------------------|--------|-------------|-----------|-------------|--------|-------------|--------|------------------------------|-----------|
|                                                         |   | **FY 2004** |      | **FY 2003** |   | **FY 2002** |   | **04 v 03**                  |      | **03 v 02** |   |
|                                                         |   |        |      |        |   |        |   | **(%  increase (decrease))** |      |
| **Selling, promotion, general and administrative  expenses** |   | $           | 2,096,108 |        | $      | 1,799,292   |   | $                            | 1,670,338 |   | 16 | % | 8 | % |
|                                                              |        |             |           |             |        |             |        |                              |           |  |  |  |  |  |

 

The fiscal year 2004increase in selling, promotion, general and administrative expenses is a resultof three main factors.  The cost of theCompany’s director and officer liability insurance increased by 144% ascompared to fiscal year 2003, due to general market conditions.  The Company has not made a claim under anydirector and officer liability policy. Management salaries at Chemdex also included a full year of salary forthe general manager who was hired in the fourth quarter of fiscal year2003.  Finally, the selling, promotion,general and administrative expenses incurred at Dextran Products were incurredin Canadian dollars, resulting in increased expenses upon translation to UnitedStates dollars due to the significant rise in the Canadian dollar as discussedabove.

 

The fiscal year 2003increase in selling, promotion, general and administrative expenses compared tofiscal year 2002 was a result of senior management bonus accruals of $75,000 infiscal year 2003.  No senior managementbonuses were paid in fiscal year 2002. In addition, Chemdex incurred increased management salaries andrecruiting costs in connection with the hiring of a new general manager in thefourth quarter of fiscal year 2003 to oversee the Joint Venture operations andits management on behalf of the Company.

 

| **Research and**                       |   |                  |   |                  |   |                  |   | **Fiscal  Years**            |    |
|----------------------------------------|--------|-----------------------|--------|-----------------------|--------|-----------------------|--------|------------------------------|---------|
| **development**                        |   | **FY 2004**** ** |   | **FY 2003**** ** |   | **FY 2002**** ** |   | **04 v 03**                  |    | **03 v 02** |   |
|                                   |   |                  |   |                  |   |                  |   | **(%  increase (decrease))** |    |
| Research and  development expenditures |   | $                     | 73,635 |                  | $      | 193,284               |   | $                            | 506,980 |   | (62 | )% | (62 | )% |
| Investment tax credits                 |   | (12,684               | )      | (21,186               | )      | (42,375               | )      | (40                          | )%      | (50 | )% |
| Net research and  development expense  |   | 60,951                |   | 172,098               |   | 464,605               |   | (65                          | )%      | (63 | )% |
|                                        |        |                       |        |                       |        |                       |        |                              |         |  |  |  |  |  |

 

Due to continued direct funding of research and development expenses bythird party public and/or private sector groups, as well as investment taxcredits claimed by Dextran

 

19

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Products, the Company’s research anddevelopment expense continued to decrease in fiscal year 2004.

 

Funding forthe Company’s primary development products is provided directly by third partypublic and/or private sector groups to the entities carrying out suchresearch.  The Company does not takepossession or control over these funds. The Company benefits from the results of research projects through theownership of patents and/or licenses with respect to the productsinvolved.  The Company has nocommitments to repay the funding or to purchase the results of the research.

 

The currentstage of the cellulose sulphate project is such that a lesser portion ofdevelopment is being performed in-house, and significant funding from researchand development partners for the current phase of the project is expected tocontinue at necessary levels for the foreseeable future.  The Company’s research and developmentexpenditures are expected to increase in fiscal year 2005 due to additionalproduct development activities the Company expects to perform and fund outsideof its partnership relationships. Additionally, Chemdex experienced a reduction in research anddevelopment costs in fiscal year 2004 while awaiting FDA approval on severalnew products.

 

|                                      |   |        |    |        |   |        |   | **Fiscal Years**             |    |
|-------------------------------------------|--------|-------------|---------|-------------|--------|-------------|--------|------------------------------|---------|
|                                      |   | **FY 2004** |    | **FY 2003** |   | **FY 2002** |   | **04 v 03**                  |    | **03 v 02** |   |
|                                      |   |        |    |        |   |        |   | **(%  increase (decrease))** |    |
| **Depreciation and amortization expense** |   | $           | 617,685 |        | $      | 572,129     |   | $                            | 548,931 |   | 8 | % | 4 | % |
|                                           |        |             |         |             |        |             |        |                              |         |  |  |  |  |  |

 

The fiscal year 2004increase in depreciation and amortization expense is primarily attributable tonew production equipment purchased during fiscal year 2003 at Dextran Productsand the increase in the value of the Canadian dollar relative to the UnitedStates dollar.  The fiscal year 2003increase compared to fiscal year 2002 is primarily due to the purchase of newproduction equipment at Dextran Products in the fourth quarter of fiscal year2002.

 

|                 |   |        |    |        |   |        |   | **Fiscal Years**             |    |
|----------------------|--------|-------------|---------|-------------|--------|-------------|--------|------------------------------|---------|
|                 |   | **FY 2004** |    | **FY 2003** |   | **FY 2002** |   | **04 v 03**                  |    | **03 v 02** |   |
|                 |   |        |    |        |   |        |   | **(%  increase (decrease))** |    |
| **Interest expense** |   | $           | 133,382 |        | $      | 150,527     |   | $                            | 206,051 |   | (11 | )% | (27 | )% |
|                      |        |             |         |             |        |             |        |                              |         |  |  |  |  |  |

 

The fiscal year 2004decrease in interest expense is primarily attributable to a decrease inlong-term debt, as well as the associated decrease in imputed interest due tothe continuing

 

20

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repayment of non-interestbearing long-term debt.  The fiscal year2003 decrease compared to fiscal year 2002 is primarily attributable to adecrease in imputed interest on long-term payables due to the repayment ofnon-interest bearing long-term debt.

 

|                             |   |        |   |        |   |        |   | **Fiscal Years**             |   |
|----------------------------------|--------|-------------|--------|-------------|--------|-------------|--------|------------------------------|--------|
|                             |   | **FY 2004** |   | **FY 2003** |   | **FY 2002** |   | **04 v 03**                  |   | **03 v 02** |   |
|                             |   |        |   |        |   |        |   | **(%  increase (decrease))** |   |
| **Foreign exchange gain (loss)** |   | $(447,602   | )      | $(113,602   | )      | $77,809     |   | (294                         | )%     | (246 | )% |

 

The fiscal year 2004increase in foreign exchange loss at Dextran Products was due to the Canadiandollar increasing 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,including inter-company receivables, is denominated in United Statesdollars.  The fiscal year 2003 increasein foreign exchange loss at Dextran Products was due to a similar increase inthe value of the Canadian dollar.  Thefiscal year 2002 foreign exchange gain at Dextran Products was due to theCanadian dollar decline in value relative to the United States dollar duringthat period.  Management does not expectthat the Company will incur significant foreign exchange losses in fiscal year2005, due to the expected repayment of intercompany debts owed by Chemdex toDextran Products in fiscal year 2005.

 

|                       |   |                  |     |                  |   |                  |   | **Fiscal Years**            |   |
|----------------------------|--------|-----------------------|----------|-----------------------|--------|-----------------------|--------|-----------------------------|--------|
|                       |   | **FY 2004**** ** |     | **FY 2003**** ** |   | **FY 2002**** ** |   | **04 v 03**                 |   | **03 v 02** |   |
|                       |   |                  |     |                  |   |                  |   | **(% increase (decrease))** |   |
| **Other income (expense)** |   | $                     | (389,735 | )                     | $      | (372,111              | )      | $                           | 37,797 |   | (5 | )% | (1,084 | )% |
|                            |        |                       |          |                       |        |                       |        |                             |        |  |  |  |  |  |

 

In both fiscal years 2004and 2003, the other expenses relate almost entirely to legal and receiver costsassociated with the winding-up of the Joint Venture, and the resultinglitigation.  In fiscal year 2004, legaland receiver fees relating to this process totaled $397,380, as compared to$238,197 in fiscal year 2003. Additionally, due to the uncertainty related to this situation, infiscal year 2003, the Company provided an allowance for the entire receivablebalances of $132,614 due from Sparhawk. In fiscal year 2002 other income was primarily due to the receipt byChemdex of a final settlement payment of $48,643 resulting from a class actionlawsuit against various vitamin suppliers. Also in fiscal year 2002, Dextran Products incurred a loss of $27,269 ondisposal of production equipment that was netted against other income.

 

21

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|                         |   |                  |     |                  |   |                  |   | **Fiscal Years**            |    |
|------------------------------|--------|-----------------------|----------|-----------------------|--------|-----------------------|--------|-----------------------------|---------|
| **Tax provision (recovery)** |   | **FY 2004**** ** |     | **FY 2003**** ** |   | **FY 2002**** ** |   | **04 v 03**                 |    | **03 v 02** |   |
|                         |   |                  |     |                  |   |                  |   | **(% increase (decrease))** |    |
| Consolidated                 |   | $                     | (389,968 | )                     | $      | 751,366               |   | $                           | 168,982 |   | (152 | )% | 345 | % |
| Dextran Products             |   | 110,032               |     | 430,886               |   | 202,650               |   | (74                         | )%      | 113 | % |
| Chemdex                      |   | (500,000              | )        | 320,480               |   | (34,480               | )      | (256                        | )%      | 1,029 | % |
|                              |        |                       |          |                       |        |                       |        |                             |         |  |  |  |  |  |

 

The fiscal year2004 decrease in tax provision at Dextran Products is a result of the decreasein profitability as described above. The tax provision at Dextran Products exceeds its income before taxesbecause a significant portion of the foreign exchange loss relates tointercompany financing and consequently is deductible only against capitalgains.  The Canadian operations continueto have significant research and development tax pools to offset current taxespayable.

 

The fiscal year 2004Chemdex tax benefit was recorded because there is no longer uncertainty as tothe ability of Chemdex to use non-operating losses following the sale of theVet Labs assets for a gain subsequent to the end of fiscal year 2004.  On March 4, 2004, the Company sold itsfinished product veterinary pharmaceutical business to Sparhawk.  The sale included substantially all of theassets of Vet Labs and its ownership interest in the Joint Venture.

 

**Liquidity and Capital Resources**

 

As of January 31, 2004,the Company had cash of $59,455, compared to cash of $199,718 at January 31,2003.  In fiscal year 2004 the Companygenerated cash of $221,425 from its operating activities, compared to $941,559for fiscal year 2003.  Although there wasa decrease in the net loss in fiscal year 2004, this decrease resulted from thedeferred tax recovery, which is a non-cash item. In fiscal year 2003, therewere significant non-cash expenses relating to deferred income taxes and thewritedown of loan to Sparhawk, which were not incurred in fiscal year 2004.  Depreciation and amortization continues tobe a large non-cash expense of the Company. In fiscal year 2002, the Company generated cash of $443,765 from itsoperating activities.

 

The Company maintained$2,058,161 of working capital and a current ratio of 1.8 to 1 as of January 31,2004, compared to $1,528,856 and 1.6 to 1 as of January 31, 2003, and$1,481,138 and 1.8 to 1 as of January 31, 2002.

 

Management expects theprimary source of its future capital needs to be a combination of companyearnings, borrowings and the proceeds from the sale of the Vet Labsassets.  The

 

22

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Company, at present, doesnot have any material commitments for capital expenditures, although Managementintends to continue the plant refurbishment process at Dextran Products inToronto.

 

The Company believes thatbased upon the current levels of revenues and spending, and taking into accountthe effect of the sale of the Vet Labs assets on the operating results ofChemdex, its existing working capital resources will be sufficient to supportcontinuing operations for the foreseeable future.

 

At January 31, 2004, theCompany had accounts receivable, including amounts classified as assets subjectto sale agreement, of $1,040,732 and inventory of $2,693,312, compared to$1,351,515 and $2,265,963, respectively, at January 31, 2003.  The decrease in accounts receivable was dueto timing of collections at year-end. The increase in inventory levels was due to stocking of the new productsat Chemdex.  At January 31, 2002, theCompany had accounts receivable of $1,067,709 and inventory of $2,112,854.  The increase in accounts receivable fromfiscal year 2002 to fiscal year 2003 was due to the timing of collections atyear-end discussed above, while the increase in inventory levels was due to thestocking of additional finished goods for shipment to a particular customer andthe stocking of a new product at Chemdex.

 

At January 31, 2004, theCompany had accounts payable, including amounts included in liabilities subjectto sale agreement, of $1,099,736, compared to $1,205,383 at January 31,2003.  The decrease in accounts payablewas due to timing of supplier payments. At January 31, 2002, the Company had accounts payable of $935,419, withthe increase between fiscal year 2003 and fiscal year 2002 due primarily to theincrease in accounts receivable and inventory discussed above.

 

During fiscal year 2004,capital expenditures totaled $396,704, as compared to $367,868 in fiscal year2003 and $434,157 in fiscal year 2002.  Themajority of the capital expenditures were for production equipment at theDextran Products plant in Toronto in these fiscal years.  Management intends to continue its plantrefurbishment and expansion plan in fiscal year 2005, and expects capital expendituresto increase in that period.

 

The change in accumulatedother comprehensive loss of the Company is entirely attributable to thecurrency translation adjustment of Dextran Products.  Dextran Products’ functional currency is the Canadian dollar.  This currency translation adjustment arisesfrom the translation of Dextran Products’ financial statements to U.S. dollars.

 

Dextran Products has aCdn. $1,250,000 (U.S. $942,000) line of credit, of which Cdn. $150,000 (U.S.$113,000) was utilized at January 31, 2004. This line of credit was not utilized at January 31, 2003.  This line of credit bears interest at theCanadian banks’ prime lending rate plus 0.75% (2004 – 5%; 2003 – 5.75%).  This indebtedness is collateralized by ageneral security agreement over the Company’s assets and a collateral mortgageof Cdn. $500,000 on the Dextran Products building in Toronto.

 

The Joint Venture had a$175,000 line of credit to fund operations, none of which was utilized atJanuary 31, 2004 or 2003.  As a resultof the March 4, 2004 disposition of the Vet Labs assets, the Joint Venture lineof credit is no longer be available to the Company.

 

23

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Chemdex entered into onenew long-term debt obligation on September 19, 2003, which related to theredemption of the 10% minority interest in Chemdex.  The redemption amount was $146,500, which is to be paid in 25equal monthly installments of $5,860, commencing on the redemption date.  Since this installment contract isnon-interest bearing, it has been discounted using a discount rate of 9%.  The present value of this installmentcontract is $134,602, which has been recorded as long-term debt.

 

The significant decreasein long-term debt from fiscal year 2003 to fiscal year 2004 is due tocontinuing payments by the Company, and the full repayment of the term loan bythe Joint Venture.  All long-term debtis due in the next two years.

 

The Company entered intoone new capital lease obligation at Dextran Products during fiscal year 2004,for a piece of production equipment. Capital lease obligations are due over the next three years.

 

No changes in accountingprinciples or their application have been implemented in the reporting periodthat would have a material effect on reported income.

 

Changes in the relativevalues of the Canadian dollar and the United States dollar occur from time totime and may, in certain instances, materially affect the Company’s results ofoperations.

 

The Company does notbelieve that the impact of inflation and changing prices has had a materialeffect on its operations or financial results at any time in the last threeyears.

 

**Related Party Transactions**

 

In August 1997, theCompany loaned Thomas C. Usher, its Vice-Chairman, Director of Research andDevelopment, a member of its Board of Directors and the beneficial owner ofgreater than 5% of the outstanding common shares of the Company, $691,500 at aninterest rate equal to the prime rate of Toronto Dominion Bank plus 1.50% (the“Loan”).  The Loan was used to partiallyfund a $1,000,000 payment to the State of Florida in order to allow Thomas C.Usher to regain possession of 430,000 Common Shares of the Company then held bythe State as collateral security relating to the liquidation of insurancecompanies formerly owned by Thomas C. Usher. Repayment of the Loan is accomplished by monthly payments and throughoffsets by the Company against royalty payments due Thomas C. Usher pursuant tointellectual property license agreements and bonus payments, if any, grantedThomas C. Usher as an employee of the Company. The amount outstanding under the Loan as of January 31, 2004 was$417,467, as compared to $517,190 at January 31, 2003, including accruedinterest.  The Company has taken acumulative provision of $242,677 against accrued interest on this loan atJanuary 31, 2004, compared to a cumulative provision of $212,491 at January 31,2003.

 

In August 1999, Thomas C.Usher personally assumed all of the assets and liabilities of Novadex Corp.,including the balance of receivables (the “Receivables”) due to the Companyfrom Novadex Corp.  The Receivables haveno specific repayment terms.  The totaloutstanding

 

24

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amount of the Receivablesas of January 31, 2004 was $366,216, as compared to $426,454 at January 31,2003.  Thomas C. Usher also owes$250,000 to a subsidiary of the Company, Novadex International Limited, as ofJanuary 31, 2004, pursuant to a non-interest bearing loan with no specificrepayment terms.  The outstanding amountof this loan has not changed from January 31, 2003.

 

Thomas C. Usher haspledged 328,051 common shares of the Company as security for these amountsowing to the Company.  These commonshares have a market value of $2,266,800 at January 31, 2004, based on theclosing price of the Company’s common shares on the Nasdaq SmallCap market onFriday, January 30, 2004.

 

The Company also has anoutstanding loan payable to Ruth Usher, a member of the Board of Directorsthrough her retirement on October 31, 2003, the beneficial owner of greaterthan 5% of the outstanding common shares of the Company, and the spouse ofThomas C. Usher.  The amount due fromthe Company pursuant to this loan increased to $683,234 at January 31, 2004from $682,225 at January 31, 2003 due to interest charges less monthly paymentsby the Company.

 

**Off-Balance Sheet Arrangements**

 

The Company has no off-balance sheet arrangements.

 

**Tabular Disclosure of ContractualObligations**

 

As of January 31, 2004,future minimum cash payments due under contractual obligations, including,among others, the Dextran Products line of credit, the loan payable to RuthUsher, the long-term debt obligation in connection with the Chemdex redemption,and capital lease agreements, are as follows:

 

 
|                            |   | **Payment  due by period** |      |                  |   |
|---------------------------------|--------|----------------------------|-----------|-----------------------|--------|
| **Contractual Obligations**     |   | **Total**                  |      | **Less than  1 year** |   | **1-3  years** |   | **3-5 years** |   | **More than  5 years** |   |
|                            |   |                       |      |                  |   |   |   |   |   |   |   |
| Long-term debt obligations (1)  |   | $                          | 800,434   |                  | $      | 82,320 |   | $ | 70,880 |   | $ | 24,000 |   | $ | 623,234 |   |
| Capital lease obligations (2)   |   | 503,871                    |      | 193,463               |   | 310,408 |   | — |   | — |   |
| Operating lease obligations (3) |   | 22,355                     |      | 11,814                |   | 10,541 |   | — |   | — |   |
| Purchase obligations            |   | —                     |      | —                |   | — |   | — |   | — |   |
| Revolving loans (4)             |   | 150,000                    |      | 150,000               |   | — |   | — |   | — |   |
| Total                           |   | $                          | 1,476,660 |                  | $      | 437,597 |   | $ | 391,829 |   | $ | 24,000 |   | $ | 623,234 |   |

 

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1.                                       Consistsof:

 

(a)                                  Notepayable in monthly payments of $5,860 maturing September 19, 2005; and

 

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(b)                                 Amountsdue to shareholder which bear interest at the Canadian banks’ prime lendingrate plus 1.5%, with required minimum monthly payments, including interest, of$1,000.

 

Does not include a sharevalue guarantee outstanding at January 31, 2004 payable in quarterly repaymentsof $50,000 on February 1, May 1 and August 1, 2004, and a lump-sum payment forthe balance of $75,353 on November 1, 2004, which was paid in full on March 4,2004.

 

2.                                       Consistsof capital lease obligations for:

 

(a)                                  Productionequipment of Cdn. $38,734 (US $29,203) repayable in monthly installments,bearing interest at 6.65% and maturing December 2004;

 

(b)                                 Productionequipment of Cdn. $103,170 (US $77,783) repayable in monthly installments,bearing interest at 7.59% and maturing November 2006; and

 

(c)                                  Productionequipment of Cdn. $449,937 (US $339,217) repayable in monthly installments,bearing interest at 9% and maturing November 2006.

 

3.                                       Consistsof operating lease obligations for:

 

(a)                                  Productionequipment requiring monthly payments of Cdn. $732 (US $552) terminating June2004;

 

(b)                                 Officeequipment requiring semi-annual payments of Cdn. $2,180 (US $1,644) terminatingNovember 2005; and

 

(c)                                  Officeequipment requiring quarterly payments of Cdn. $161 (US $121) terminating June2006.

 

(d)                                 Officeequipment requiring quarterly payments of $843 termination July 2006.

 

(e)                                  Officeequipment requiring monthly payments of $477 terminating May 2004.

 

4.                                       Consistsof Canadian operating line of credit bearing interest at the Canadian banks’prime lending rate plus 0.75%, repayable upon demand.

 

**RiskFactors**

 

The risks,uncertainties and other factors described below could materially and adverselyaffect the Company’s business, financial condition, operating results andprospects.

 

***TheCompany’s product development efforts may be reduced or discontinued due todifficulties or delays in clinical trials.***

 

To achievesustained profitability, the Company must, alone or with corporate partners andcollaborators, successfully research, develop and commercialize identifiedtechnologies or product candidates. Current developmental product candidates are in various stages ofclinical and pre-clinical development and will require significant furtherfunding, research, development,

 

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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.  These products are also rigorously regulatedby the U.S. federal government, particularly the FDA, and by comparableagencies in state and local jurisdictions and in foreign countries.  Specifically, each of the following resultsis possible 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 theproduct 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 therisks set forth above occurs, the Company may not be able to successfullydevelop its identified developmental product candidates.

 

***TheCompany’s developmental product commercialization efforts may not besuccessful.***

 

It is possiblethat, for reasons including, but not limited to those set forth below, theCompany may be unable to commercialize or receive royalties from the sale ofany given developmental product, even if it is shown to be effective, if:

 

•                  the product isuneconomical or if the market for the product does not develop or diminishes;

 

•                  the Company isnot able to enter into arrangements or collaborations to commercialize and/ormarket the product;

 

•                  the product isnot eligible for third-party reimbursement from government or private insurers;

 

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•                  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;

 

•                  governmentregulation imposes limitations on the indicated uses of the product, or laterdiscovery of previously unknown problems with the product results in addedrestrictions on the product or results in the product being withdrawn from themarket; and/or

 

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

 

***TheCompany depends on partnerships with third parties for the development andcommercialization of its products.***

 

The Company’sstrategy for development and commercialization of its products is to rely on licensingagreements with third party partners. As a result, the ability of the Company to commercialize future productsis dependent upon the success of third parties in performing clinical trials,obtaining regulatory approvals, manufacturing and successfully marketing itsproducts.  There can be no assurancethat such third party collaborations will be successful.  If any of the Company’s current research anddevelopment partnerships are discontinued, it may not be able to find others todevelop and commercialize its current product candidates.

 

***TheCompany does not currently have agreements with third parties to market itsdevelopmental products.***

 

Thecommercialization of any of the Company’s developmental products that receiveFDA approval will depend upon the Company’s ability to enter into agreementswith companies that have sales and marketing capabilities.  The Company currently intends to sell itsproducts in the United States and internationally in collaboration with one ormore marketing partners.  The Companymay not be able to enter into any such collaboration to market itsdevelopmental products in a timely manner or on commercially reasonable terms,if at all.

 

***TheCompany may be unable to commercialize its products if it is unable to protect itsproprietary rights, and may be liable for significant costs and damages if itfaces a claim of intellectual property infringement by a third party.***

 

The Company’ssuccess depends in part on its ability to obtain and maintain patents, protecttrade secrets and operate without infringing upon the proprietary rights ofothers.  In the absence of patent andtrade secret protection, competitors may adversely affect the Company’sbusiness by independently developing and marketing substantially equivalent orsuperior products, possibly at lower prices. The Company could also incur substantial costs in litigation

 

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and suffer diversion of attention of technical and management personnelif it is required to defend intellectual property infringement suits brought bythird parties, with or without merit, or if required to initiate litigationagainst others to protect or assert intellectual property rights.  Moreover, any such litigation may not beresolved in favor of the Company.

 

The Companyhas received various patents covering the uses of its developmentalproducts.  However, the patent positionof companies in the pharmaceutical industry generally involves complex legaland factual questions, and recently has been the subject of muchlitigation.  Any patents the Company hasobtained, or may obtain in the future, may be challenged, invalidated orcircumvented.  To date, no consistentpolicy has been developed by the United States Patent and Trademark Office regardingthe breadth of claims allowed in biotechnology patents.

 

In addition,because patent applications in the United States are maintained in secrecyuntil patents issue, and because publication of discoveries in scientific orpatent literature often lags behind actual discoveries, the Company cannot becertain that it and its licensors are the first creators of inventions coveredby any licensed patent applications or patents or that the Company or suchlicensors are the first to file.  TheUnited States Patent and Trademark Office may commence interference proceedingsinvolving patents or patent applications, in which the question of firstinventorship is contested.  Accordingly,the patents owned by or licensed to the Company may not be valid or may not affordthe Company protection against competitors with similar intellectual property.

 

It is alsopossible that the Company’s patents may infringe on patents or other rightsowned by others, licenses to which may not be available to the Company.  The Company may have to alter its productsor processes, pay licensing fees or cease certain activities altogether becauseof patent rights of third parties.

 

In addition tothe products for which the Company has patents or have filed patentapplications, the Company relies upon unpatented proprietary technology and maynot be able to meaningfully protect its rights with regard to that unpatentedproprietary technology.

 

**Critical Accounting Policies**

 

The Company’sconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States, applied on a consistentbasis.  The critical accounting policiesinclude the use of estimates of allowance for doubtful accounts, the usefullives of assets and the realizability of deferred tax assets.  The Company’s accounting policies withrespect to the Joint Venture and its disposition are also discussed below.

 

Management isrequired to make estimates and assumptions, in preparing the consolidatedfinancial statements, that affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenue andexpenses during the periods.  The actualresults could differ from these estimates. Significant estimates made by management include the calculation

 

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of reserves for uncollectible accounts, inventory allowances, usefullives of long-lived assets and the realizability of deferred tax assets.

 

***Revenue Recognition***

 

All revenue is from sales ofbulk and finished dosage manufactured products and is recognized when title andrisk of ownership of products pass to the customer.  Title and risk of ownership pass to the customer pursuant to theapplicable sales contract, either upon shipment of product or upon receipt bythe customer.  Since returns are rareand generally not accepted, 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.

 

***Allowance forDoubtful Accounts***

 

Accountsreceivable is stated net of allowances for doubtful accounts.  Allowances for doubtful accounts aredetermined by each reporting unit on a specific item basis.  Management reviews the credit worthiness ofindividual customers and past payment history to determine the allowance fordoubtful accounts.  Since the majorityof sales at Dextran Products are export, Dextran Products maintains creditinsurance through a crown corporation for the majority of its customersreceivables.

 

***Long-Lived Assets***

 

Long-livedassets are stated at cost, less accumulated depreciation or amortizationcomputed using the straight-line method based on their estimated useful livesranging from three to fifteen years. Useful life is the period over which the asset is expected to contributeto the Company’s cash flows.  Asignificant change in estimated useful lives could have a material impact onthe results of operations.  The Companyreviews the recoverability of its long-lived assets, including buildings,equipment and other intangible assets, when events or changes in circumstancesoccur that indicate that the carrying value of the asset may not berecoverable.  **Theassessment of possible impairment is based on the Company’s ability to recover********thecarrying value of the asset from the expected future pre-tax cash flows(undiscounted and********without interest charges) of the related operations.  If these cash flows are less than the********carryingvalue of such asset, an impairment loss is recognized for the differencebetween********estimated fair value and carrying value.  The measurement of impairment requiresmanagement to********make estimates of these cash flows related to long-livedassets as well as other fair value********determinations.**

 

**Deferred Tax Assets**

 

The Companyhas recorded a valuation allowance on deferred tax assets where there isuncertainty as to the ultimate realization of the future tax deduction.  There has not been a consistent history ofprofitability at Chemdex, therefore there is uncertainty regarding whetherthere will be adequate future profits realized to use the U.S. tax lossdeductions.  Dextran

 

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Products has incurred capital losses, which are only deductible againstcapital gains.  It is not certain thatDextran Products will realize capital gains in the future to use these Canadiancapital loss deductions.

 

***The Joint Venture***

 

**In 1992,Vet Labs and Sparhawk entered into the Joint Venture for the manufacture andsale of veterinary pharmaceutical products. Vet Labs and Sparhawk each owned 50% of the Joint Venture during itsoperation. The Joint Venture was governed by the Agreement for the Operation ofVeterinary Laboratories, Inc.’s Lenexa Facility and Sparhawk Lab of KC as aJoint Venture, dated December 1, 1992, by and among Sparhawk, Chemdex and VetLabs (the “Joint Venture Agreement”).**

** **

**Pursuantto the Joint Venture Agreement, the Joint Venture Policy Committee wasresponsible for the overall management of the Joint Venture, including thedirection and control of the persons designated with the daily managementresponsibilities of the Joint Venture, and the general supervision of themanagement and conduct of the affairs of the Joint Venture.  The Policy Committee consisted of fivemembers, three of which are selected by Vet Labs and two of which are selectedby Sparhawk.  Decisions of the PolicyCommittee required a simple majority vote.**

** **

**Becausethe Company controlled the operating, financing and investing decisions of theJoint Venture through Vet Labs’ control of the Policy Committee, itconsolidated the Joint Venture’s assets, liabilities, revenue and expenses inthe Company’s financial statements.  TheCompany has funded the Joint Venture’s cumulative losses since 1992 and, accordingly,has recorded 100% of these losses in the consolidated financial statements.**

** **

**OnJanuary 13, 2004, the Company, Chemdex and Vet Labs entered into an AssetPurchase Agreement with Sparhawk. Pursuant to the Asset Purchase Agreement, the Company agreed to sellsubstantially all of the assets of Vet Labs, including its interest in theJoint Venture, to Sparhawk for $5,500,000 in cash.  This sale was completed on March 4, 2004.  Simultaneously with the closing, Chemdexadvanced $350,000 to Sparhawk in exchange for an unsecured subordinated promissorynote bearing interest at 13% per annum and a warrant to purchase 4% of theequity of Sparhawk.  The promissory noteis payable in full on March 4, 2009. Interest is payable annually, but can be deferred and added to theprincipal balance of the**

** **

**31**

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** **

**promissorynote each year at Sparhawk’s discretion. The warrant becomes exercisable on March 5, 2009 and expires at theearlier of payment in full of the promissory note or March 4, 2014.  Chemdex also entered into a supply agreementwith Sparhawk to supply ferric hydroxide and hydrogenated dextran solution toSparhawk on an exclusive basis in the United States for 10 years.  In connection with the sale, the litigationinvolving the Joint Venture, *SparhawkLaboratories, Inc. v. Veterinary Laboratories, Inc., et al*, Case No.02CV07426, County of Johnson, State of Kansas, was settled, and a Motion ofApproval of Settlement and Stipulation of Dismissal with Prejudice was filedwith the Court on March 4, 2004.**

** **

**Theassets and liabilities of Vet Labs and the Joint Venture at January 31, 2004and 2003 that are subject to the Asset Purchase Agreement have beenreclassified to assets and liabilities subject to sale agreement.  All liabilities subject to sale agreementwere current liabilities at both January 31, 2004 and 2003.  All assets subject to sale agreement atJanuary 31, 2004 were considered current assets because the sale closed lessthan two months after fiscal year-end. At January 31, 2003, long-lived assets are presented as non-currentbecause the disposal date was more than one year from the date of sale of theassets.  Effective January 13, 2004,depreciation and amortization of the long-lived assets ceased.**

** **

**Asignificant gain will be recorded by the Company upon the disposal of the VetLabs assets.  There will also besignificant changes in the Company’s results of operations following the saleof the Vet Labs assets and its ownership interest in the Joint Venture.  Sales of the Joint Venture accounted for 66%and 64% of the Company’s total sales in fiscal year 2004 and fiscal year 2003,respectively.  Income before incometaxes from Vet Labs and the Joint Venture amounted to $408,667 in fiscal year2004, with a loss before income taxes of $129,222 in fiscal year 2003.  Management expects that gross profit as apercentage of sales for the Company will increase because the Joint Venture’smargins were generally lower than those of Dextran Products.**

** **

**Changesin Accounting Policies**

 

Effective February 1,2003, the Company adopted the fair value accounting method provided for underStatement of Financial Accounting Standards No. 123, “Accounting forStock-Based Compensation” in accounting for its employee stock options.  The adoption of this accounting policyreduced net income by $12,370 as compared to the Company’s previous accountingpolicy of using the intrinsic value method as provided for in AccountingPrinciples Board Opinion (“APB”) No. 25.

 

**Recent Accounting Pronouncements**

 

In May 2003,the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”.  SFAS No. 150establishes standards for the measurement and classification of certain financialinstruments with characteristics of both liabilities and equity.  SFAS No. 150 is effective for financialinstruments entered into or modified after May 31, 2003.  Effective June 1,

 

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2003, theCompany accounts for financial instruments in accordance with SFAS No.150.  The adoption of this standard hadno impact on the consolidated financial statements.

 

In April 2003,the FASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” SFAS 149 is intended to result in more consistent reporting of contractsas either freestanding derivative instruments subject to Statement 133 in theirentirety, or as hybrid instruments with debt host contracts and embedded derivativefeatures.  The Statement is effectivefor contracts entered into or modified after June 30, 2003, and hedgingrelationships designated after June 30, 2003. Effective July 1, 2003, the Company accounts for any derivativeinstruments and hedging activities in accordance with SFAS 149.  The adoption of this amendment had no impacton the consolidated financial statements.

 

In January 2003, the FASB issued FASB Interpretation(“FIN”) No. 46, “Consolidation of Variable Interest Entities an interpretationof ARB No. 51” (the “Interpretation”). The Interpretation introduces a new consolidation model - the variableinterests model - which determines control (and consolidation) based onpotential variability in gains and losses of the entity being evaluated forconsolidation.  The Interpretationrequires disclosure of certain information in financial statements initiallyissued after January 31, 2003, if it is reasonably possible that an enterprisewill consolidate or disclose information about a variable interest entity whenInterpretation 46 becomes effective. The Company will account for any variableinterest entities in accordance with FIN 46. The adoption of this Interpretation had no impact on the Company’s consolidatedfinancial statements.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation - Transition and Disclosure.”  SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-Based Compensation,” to provide alternative methods oftransition to SFAS No. 123’s fair value method of accounting for stock-basedemployee compensation.  SFAS No. 148also amends the disclosure provisions of SFAS No. 123 and APB No. 28,“Interim Financial Reporting,” to require disclosure in the summary ofsignificant accounting policies of the effects of an entity’s accounting policywith respect to stock-based employee compensation on reported net income andearnings per share in annual and interim financial statements.  SFAS No. 148 is effective for fiscal yearsending after December 15, 2002.  TheCompany has adopted the required disclosures of SFAS No. 148 effective January31, 2003.

 

**Forward-looking Statements**

 

This Annual Report onForm 10-K, including the Management’s Discussion and Analysis, contains various“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended, which represent the Company’s expectations or beliefsconcerning future events, including, but not limited to statements regardingmanagement’s expectations of regulatory approval and the commencement ofsales.  In addition, statementscontaining expressions such as “believes”, “anticipates” or “expects” used inthis Annual Report on Form 10-K and the Company’s periodic reports on Forms10-K and 10-Q filed with the Securities and Exchange

 

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Commission are intendedto identify forward-looking statements. The Company cautions that these and similar statements in this AnnualReport on Form 10-K and in previously filed periodic reports including reportsfiled on Forms 10-K and 10-Q are further qualified by important factors thatcould cause actual results to differ materially from those in theforward-looking statements. These factors include, without limitation, changingmarket conditions, the progress of clinical trials and the results obtained,the establishment of new corporate alliances, the impact of competitiveproducts and pricing, and the timely development, FDA approval and marketacceptance of the Company’s products, as well as the other risks discussedabove, none of which can be assured.

 

The forward-looking statements contained in this quarterly report speakonly as to the date of this report. Except as otherwise required by federal securities laws, the Companyundertakes no obligation to publicly update or revise any forward-lookingstatements or the risk factors described in this Annual Report on Form 10-K,whether as a result of new information, future events, changed circumstances orany other reason after the date of this report.

 

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ITEM 7A.                                           QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

**Exchange Rate Sensitivity**

 

The Company’s operations consist of manufacturingactivities in the United States and Canada. The Company’s products are sold in North America, Europe and the PacificRim.

 

While the majority of the sales of Dextran Products, the Company’sCanadian operation, are denominated in United States dollars, the majority ofits expenses are incurred in Canadian dollars. The majority of the assets and liabilities of Dextran Products aredenominated in Canadian dollars prior to the currency translation adjustmentnecessary for preparation of the financial statements of the Company containedin this report.  Therefore, DextranProducts has a net asset exposure to the United States dollar.  When the Canadian dollar rises in valuerelative to the United States dollar, the carrying value of the assets andliabilities of Dextran Products as stated in United States dollarsincreases.  A rise in the Canadiandollar relative to the United States dollar also results in a decrease in grossmargins and net income of Dextran Products. Dextran Products also experiences a foreign exchange loss when theCanadian dollar rises in relation to the United States dollar due to this netasset exposure.  Similarly, a decline inthe Canadian dollar relative to the United States dollar results in a foreignexchange gain and increased gross margins and net income at Dextran Products.

 

Management monitors currency fluctuations to ensurethat an acceptable margin level at Dextran Products is maintained.  Management has the ability, to some extent,to adjust sales prices to maintain an acceptable margin level.

 

The following table presents information about theCompany’s financial instruments other than accounts receivable that aresensitive to changes in foreign currency exchange rates.  All financial instruments are held for otherthan trading purposes.  The tablepresents principal cash flows and related weighted average interest rates byexpected maturity dates.

 
|                 |   | **Expected  Maturity Date** |       |
|----------------------|--------|-----------------------------|------------|
|                 |   | **1/31/05**                 |       | **1/31/06** |   | **1/31/07** |   | **1/31/08** |   | **1/31/09** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
|                 |   | **(US$Equivalent)**         | ** ** |
| **Liabilities:**     |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt:      |   |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate ($Cdn.)   |   | 162,035                     |       | 144,746 |   | 141,583 |   | — |   | — |   | — |   | 448,364 |   | 439,484 |   |
| Average interestrate |   | 8.35                        | %          | 8.73 | % | 8.75 | % | — |   | — |   | — |   | 8.61 | % |   |   |

 

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**Interest Rate Sensitivity**

 

The Company has no significant interest earning assetsand the majority of its debt is at fixed rates.  The variable rate debt represents the shareholder loan payable,which is approximately offset with the shareholder loan receivable.  Both of these financial instruments carrythe same interest rate.  As such, theCompany has no significant risk exposure to changes in interest rates.

 

The following table presents information about theCompany’s financial instruments that are sensitive to changes in interestrates.  All financial instruments areheld for other than trading purposes. The table presents principal cash flows and related weighted averageinterest rates by expected maturity dates.

 
|                         |   | **Expected  Maturity Date** |   |        |   |        |   |
|------------------------------|--------|-----------------------------|--------|-------------|--------|-------------|--------|
|                         |   | **1/31/05**                 |   | **1/31/06** |   | **1/31/07** |   | **1/31/08** |   | **1/31/09** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
|                         |   | **(US$Equivalent)**         |   |
| **Assets:**                  |   |                        |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Notes receivable:            |   |                        |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| (Variable rate ($US)         |   | 54,861                      |   | 58,153      |   | 61,642      |   | 65,340 |   | 69,261 |   | 108,209 |   | 417,466 |   | 417,466 |   |
| Average interest rate        |   | 6.00                        | %      | 6.00        | %      | 6.00        | %      | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % |   |   |
|                         |   |                        |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities:**             |   |                        |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt:              |   |                        |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate ($Cdn.)           |   | 162,035                     |   | 144,583     |   | 141,583     |   | — |   | — |   | — |   | 448,364 |   | 439,484 |   |
| Average   interest rate |   | 8.35                        | %      | 8.73        | %      | 8.75        | %      | — |   | — |   | — |   | 8.61 | % |   |   |
| Variable rate ($US)          |   | 1,007                       |   | 1,068       |   | 1,132       |   | 1,200 |   | 1,272 |   | 677,534 |   | 683,213 |   | 683,213 |   |
| Average interest rate        |   | 6.00                        | %      | 6.00        | %      | 6.00        | %      | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % |   |   |

 

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ITEM 8.     FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA

 

**Polydex Pharmaceuticals LimitedQuarterly Financial HighlightsJanuary 31, 2004**

 
|                                         |   | **Fourth  Quarter  Fiscal Year** |   | **Third  Quarter  Fiscal Year** |   | **Second  Quarter  Fiscal Year** |   | **First  Quarter  Fiscal Year ** |   |
|----------------------------------------------|--------|----------------------------------|--------|---------------------------------|--------|----------------------------------|--------|---------------------------------------|--------|
|                                         |   | **2004**                         |   | **2003**                        |   | **2004**                         |   | **2003**                              |   | **2004** |   | **2003** |   | **2004** |   | **2003** |   |
| Sales from continuing operations             |   | 4,055,997                        |   | 3,358,668                       |   | 3,681,305                        |   | 3,455,665                             |   | 3,058,369 |   | 2,647,400 |   | 3,296,518 |   | 3,324,610 |   |
| Gross Profit                                 |   | 1,022,550                        |   | 828,075                         |   | 863,653                          |   | 758,867                               |   | 685,005 |   | 701,247 |   | 778,288 |   | 969,195 |   |
| Net income (loss) from continuing operations |   | 721,802                          |   | (771,391                        | )      | (201,426                         | )      | (11,512                               | )      | (236,805 | ) | (35,840 | ) | (289,570 | ) | 145,002 |   |
| Net income (loss) per common share           |   | 0.24                             |   | (0.26                           | )      | (0.07                            | )      | —                                |   | (0.08 | ) | (0.01 | ) | (0.10 | ) | 0.05 |   |

 

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**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 accounting policiesand uses its judgement and best estimates to report events and transactions asthey occur.  Management has determinedsuch amounts on a reasonable basis in order to ensure that the consolidatedfinancial 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 opinion regarding the fair presentation of reportedoperating results and financial position in accordance with generally acceptedaccounting principles.

 

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.

 

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

 

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**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, 2004 and 2003 and the related consolidated statements ofshareholders’ equity, operations and cash flows for each of the years in thethree-year period ended January 31, 2004. 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 an 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, 2004 and 2003, and the consolidated results of its operationsand its cash flows for each of the years in the three-year period endedJanuary 31, 2004 in conformity with United States generally acceptedaccounting principles.

 

As described in note 2 to theconsolidated financial statements, the Company changed its accounting policyfor stock-based compensation effective February 1, 2003.

 

 
|              |   | /s/ Ernst  & Young LLP |
|-------------------|--------|----------------------------|
| Toronto,  Canada, |   |                       |
| March 19,  2004.  |   | Chartered  Accountants     |

 

39

----

 

**Polydex Pharmaceuticals Limited**

 

**CONSOLIDATED BALANCESHEETS**

[Expressed in United States dollars]

 

As at January 31

 
|                                                        |   | **2004**        |       | **2003**    |   |
|-------------------------------------------------------------|--------|-----------------|------------|-------------|--------|
|                                                        |   | **$**           |       | **$**       |   |
|                                                        |   |            | ** ** |        |   |
| **ASSETS***[notes 7 and 8]*                                 |   |            | ** ** |        |   |
| **Current**                                                 |   |            | ** ** |        |   |
| Cash                                                        |   | **59,455**      | ** ** | 199,718     |   |
| Trade accounts receivable *[note 17]*                       |   | **503,864**     | ** ** | 625,486     |   |
| Inventories *[note 3]*                                      |   | **1,226,439**   | ** ** | 1,067,532   |   |
| Prepaid expenses and other current assets                   |   | **42,730**      | ** ** | 29,381      |   |
| Deferred tax assets *[note 13]*                             |   | **267,500**     | ** ** | —      |   |
| Assets subject to sale agreement *[note  11[a]]*            |   | **4,285,666**   | ** ** | 2,056,434   |   |
| **Total current assets**                                    |   | **6,385,654**   | ** ** | 3,978,551   |   |
| Property, plant and equipment, net *[note 4]*               |   | **3,248,342**   | ** ** | 3,034,958   |   |
| Patents and  intangible assets, net *[note 5]*              |   | **85,511**      | ** ** | 24,305      |   |
| Due from shareholder *[note 6]*                             |   | **791,006**     | ** ** | 981,153     |   |
| Assets subject to sale agreement *[note  11[a]]*            |   | **—**      | ** ** | 1,693,607   |   |
|                                                        |   | **10,510,513**  |       | 9,712,574   |   |
|                                                        |   |            |       |        |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**               |   |            | ** ** |        |   |
| **Current**                                                 |   |            | ** ** |        |   |
| Bank indebtedness *[note 7]*                                |   | **165,609**     | ** ** | —      |   |
| Accounts payable                                            |   | **515,092**     | ** ** | 431,028     |   |
| Accrued liabilities                                         |   | **337,046**     | ** ** | 262,342     |   |
| Customer deposits                                           |   | **100,925**     | ** ** | 25,380      |   |
| Income taxes payable                                        |   | **923**         | ** ** | 33,010      |   |
| Liabilities subject to sale agreement *[note  11[a]]*       |   | **880,564**     | ** ** | 1,428,853   |   |
| Current portion of long-term debt *[note 8[a]]*             |   | **281,015**     | ** ** | 158,694     |   |
| Current portion of capital lease  obligations *[note 8[b]]* |   | **161,253**     | ** ** | 110,387     |   |
| **Total current liabilities**                               |   | **2,442,427**   | ** ** | 2,449,694   |   |
| Long-term debt*[note 8[a]]*                                 |   | **45,517**      | ** ** | 186,776     |   |
| Capital lease obligations *[note  8[b]]*                    |   | **284,950**     | ** ** | 319,602     |   |
| Due to shareholder*[note 6]*                                |   | **683,234**     | ** ** | 682,225     |   |
| Deferred tax liabilities *[note 13]*                        |   | **147,054**     | ** ** | 49,750      |   |
| **Total long-term liabilities**                             |   | **1,160,755**   | ** ** | 1,238,353   |   |
| **Total liabilities**                                       |   | **3,603,182**   | ** ** | 3,688,047   |   |
|                                                        |   |            |       |        |   |
| **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      |   |
| 3,027,796 common shares [2003 - 3,027,777]                  |   | **50,434**      | ** ** | 50,434      |   |
| Contributed surplus                                         |   | **23,236,498**  | ** ** | 23,224,128  |   |
| Deficit                                                     |   | **(16,284,268** | **)**      | (16,278,269 | )      |
| Accumulated other comprehensive loss                        |   | **(110,343**    | **)**      | (986,776    | )      |
| **Total shareholders’ equity**                         |   | **6,907,331**   | ** ** | 6,024,527   |   |
|                                                        |   | **10,510,513**  |       | 9,712,574   |   |

 

*See accompanying notes*

 

40

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**Polydex Pharmaceuticals Limited**

 

**CONSOLIDATEDSTATEMENTS OFSHAREHOLDERS’ EQUITY**

[Expressed in United States dollars]

 

Years ended January 31, 2004,2003 and 2002

 
|                                                                                              |   | **Preferred  shares** |       | **Common  shares** |       | **Contributed  surplus** |       | **Deficit**     |   | **Accumulated  other  comprehensive  income (loss)** |   | **Total  shareholders’  equity** |       |
|---------------------------------------------------------------------------------------------------|--------|-----------------------|------------|--------------------|------------|--------------------------|------------|-----------------|--------|------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                                              |   | **$**                 |       | **$**              |       | **$**                    |       | **$**           |   | **$**                                                |   | **$**                                 |       |
|                                                                                              |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |
| **Balance, January 31, 2001**                                                                     |   | 15,010                |       | 50,434             |       | 23,221,104               |       | (15,397,648     | )      | (895,265                                             | )      | 6,993,635                             |       |
|                                                                                              |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |
| 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                              | )          |
| Currency translation adjustment                                                                   |   | —                |       | —             |       | —                   |       | —          |   | (304,362                                             | )      | (304,362                              | )          |
| **Balance, January 31, 2002**                                                                     |   | 15,010                |       | 50,434             |       | 23,224,128               |       | (15,604,528     | )      | (1,199,627                                           | )      | 6,485,417                             |       |
|                                                                                              |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |
| Comprehensive income (loss)                                                                       |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |
| Net loss for the year                                                                             |   | —                |       | —             |       | —                   |       | (673,741        | )      | —                                               |   | (673,741                              | )          |
| Currency translation adjustment                                                                   |   | —                |       | —             |       | —                   |       | —          |   | 212,851                                              |   | 212,851                               |       |
| **Balance, January 31, 2003**                                                                     |   | 15,010                |       | 50,434             |       | 23,224,128               |       | (16,278,269     | )      | (986,776                                             | )      | 6,024,527                             |       |
|                                                                                              |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |
| Common share options issued                                                                       |   | —                |       | —             |       | 12,370                   |       | —          |   | —                                               |   | 12,370                                |       |
| Comprehensive income (loss)                                                                       |   |                  |       |               |       |                     |       |            |   |                                                 |   |                                  |       |
| Net loss for the year                                                                             |   | —                |       | —             |       | —                   |       | (5,999          | )      | —                                               |   | (5,999                                | )          |
| Currency translation adjustment                                                                   |   | —                |       | —             |       | —                   |       | —          |   | 876,433                                              |   | 876,433                               |       |
| **Balance, January 31, 2004**                                                                     |   | **15,010**            | ** ** | **50,434**         | ** ** | **23,236,498**           | ** ** | **(16,284,268** | **)**  | **(110,343**                                         | **)**  | **6,907,331**                         | ** ** |

 

*See accompanying notes*

 

41

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**Polydex Pharmaceuticals Limited**

 

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

[Expressed in United States dollars]

 

Years ended January 31

 
|                                                 |   | **2004**       |       | **2003**   |   | **2002**   |   |
|------------------------------------------------------|--------|----------------|------------|------------|--------|------------|--------|
|                                                 |   | **$**          |       | **$**      |   | **$**      |   |
|                                                 |   |           |       |       |   |       |   |
| **Sales**                                            |   | **14,092,189** | ** ** | 12,786,343 |   | 12,167,530 |   |
| Cost of goods sold                                   |   | **10,742,693** | ** ** | 9,528,959  |   | 9,431,109  |   |
| **Gross profit**                                     |   | **3,349,496**  | ** ** | 3,257,384  |   | 2,736,421  |   |
|                                                 |   |           |       |       |   |       |   |
| **Expenses**                                         |   |           | ** ** |       |   |       |   |
| General and administrative *[note  10[b][i]]*        |   | **1,937,262**  | ** ** | 1,659,011  |   | 1,527,316  |   |
| Depreciation                                         |   | **592,421**    | ** ** | 549,946    |   | 526,748    |   |
| Foreign exchange loss (gain)                         |   | **447,602**    | ** ** | 113,602    |   | (77,809    | )      |
| Selling and promotion                                |   | **158,846**    | ** ** | 140,281    |   | 143,022    |   |
| Interest, net *[note 6]*                             |   | **133,382**    | ** ** | 150,527    |   | 206,051    |   |
| Research and development, net *[note 12]*            |   | **60,951**     | ** ** | 172,098    |   | 464,605    |   |
| Amortization                                         |   | **25,264**     | ** ** | 22,183     |   | 22,183     |   |
|                                                 |   | **3,355,728**  |       | 2,807,648  |   | 2,812,116  |   |
| Income (loss) before the following                   |   | **(6,232**     | **)**      | 449,736    |   | (75,695    | )      |
| Other income (expense) *[notes 9 and 11[a]]*         |   | **(389,735**   | **)**      | (372,111   | )      | 37,797     |   |
| Income (loss) before income taxes                    |   | **(395,967**   | **)**      | 77,625     |   | (37,898    | )      |
| Provision for (recovery of) income taxes *[note 13]* |   | **(389,968**   | **)**      | 751,366    |   | 168,982    |   |
| **Net loss for the year**                            |   | **(5,999**     | **)**      | (673,741   | )      | (206,880   | )      |
| Currency translation adjustment                      |   | **876,433**    | ** ** | 212,851    |   | (304,362   | )      |
| **Comprehensive income (loss) for the year**         |   | **870,434**    | ** ** | (460,890   | )      | (511,242   | )      |
|                                                 |   |           |       |       |   |       |   |
| **Per share information**                            |   |           | ** ** |       |   |       |   |
| Loss per common share                                |   |           | ** ** |       |   |       |   |
| Basic                                                |   | **$**          | —     | ** ** | $      | (0.22      | )      | $ | (0.07 | ) |
| Diluted                                              |   | **$**          | —     | ** ** | $      | (0.22      | )      | $ | (0.07 | ) |

 

*See accompanying notes*

 

42

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**Polydex Pharmaceuticals Limited**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

[Expressed in United States dollars]

 

Years ended January 31

 
|                                                                               |   | **2004**     |       | **2003** |   | **2002** |   |
|------------------------------------------------------------------------------------|--------|--------------|------------|----------|--------|----------|--------|
|                                                                               |   | **$**        |       | **$**    |   | **$**    |   |
| **OPERATING ACTIVITIES**                                                           |   |         | ** ** |     |   |     |   |
| Net loss for the year                                                              |   | **(5,999**   | **)**      | (673,741 | )      | (206,880 | )      |
| Add (deduct) items not affecting cash                                              |   |         | ** ** |     |   |     |   |
| Depreciation and amortization                                                      |   | **617,685**  | ** ** | 572,129  |   | 548,931  |   |
| Imputed interest on long-term debt                                                 |   | **25,760**   | ** ** | 33,177   |   | 55,762   |   |
| Deferred income taxes                                                              |   | **(414,594** | **)**      | 684,474  |   | 125,947  |   |
| Loss on disposal of equipment                                                      |   | **—**   | ** ** | —   |   | 27,269   |   |
| License fee and interest income charged to  due from shareholder                   |   | **60,239**   | ** ** | 68,276   |   | 46,389   |   |
| Provision for due from Sparhawk  Laboratories, Inc. *[note 9]*                     |   | **—**   | ** ** | 132,614  |   | —   |   |
| Options issued in exchange for services*****[note  10[b][i]]*                      |   | **12,370**   | ** ** | —   |   | 3,024    |   |
| Net change in non-cash working capital  balances related to operations*[note  14]* |   | **(74,036**  | **)**      | 124,630  |   | (156,677 | )      |
| **Cash provided by operating activities**                                          |   | **221,425**  | ** ** | 941,559  |   | 443,765  |   |
|                                                                               |   |         |       |     |   |     |   |
| **INVESTING ACTIVITIES**                                                           |   |         | ** ** |     |   |     |   |
| Additions to property, plant and equipment  and patents                            |   | **(183,124** | **)**      | (367,868 | )      | (434,157 | )      |
| Repayment from Sparhawk Laboratories, Inc.                                         |   | **—**   | ** ** | —   |   | 5,633    |   |
| Decrease in due from shareholder                                                   |   | **129,908**  | ** ** | 48,713   |   | 106,669  |   |
| Acquisition of minority interest *[note  11[b]]*                                   |   | **(5,860**   | **)**      | —   |   | —   |   |
| Proceeds from sale of equipment                                                    |   | **—**   | ** ** | —   |   | 110,000  |   |
| **Cash used in investing activities**                                              |   | **(59,076**  | **)**      | (319,155 | )      | (211,855 | )      |
|                                                                               |   |         |       |     |   |     |   |
| **FINANCING ACTIVITIES**                                                           |   |         | ** ** |     |   |     |   |
| Repayment of long-term debt                                                        |   | **(453,805** | **)**      | (252,256 | )      | (442,077 | )      |
| Repayment of capital lease obligations                                             |   | **(126,703** | **)**      | (73,599  | )      | (128,361 | )      |
| Increase (decrease) in due to shareholder                                          |   | **1,009**    | ** ** | 262      |   | (40,259  | )      |
| Increase (decrease) in bank indebtedness                                           |   | **165,609**  | ** ** | (179,286 | )      | 179,286  |   |
| **Cash used in financing activities**                                              |   | **(413,890** | **)**      | (504,879 | )      | (431,411 | )      |
| Effect of exchange rate changes on cash                                            |   | **342,321**  | ** ** | 39,805   |   | (80,284  | )      |
|                                                                               |   |         |       |     |   |     |   |
| **Net increase (decrease) in cash during the year**                                |   | **90,780**   | ** ** | 157,330  |   | (279,785 | )      |
| Cash, beginning of year                                                            |   | **280,748**  | ** ** | 123,418  |   | 403,203  |   |
| **Cash, end of year**                                                              |   | **371,528**  | ** ** | 280,748  |   | 123,418  |   |
|                                                                               |   |         |       |     |   |     |   |
| Cash is comprised of the following                                                 |   |         | ** ** |     |   |     |   |
| Cash                                                                               |   | **59,455**   | ** ** | 199,718  |   | 123,410  |   |
| Cash included in assets subject to sale  agreement *[note  11[a]]*                 |   | **312,073**  | ** ** | 81,030   |   | 8        |   |
|                                                                               |   | **371,528**  |       | 280,748  |   | 123,418  |   |

 

*See accompanying notes*

 

43

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**Polydex Pharmaceuticals Limited**

 

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

[Expressed in United States dollars except where otherwise noted]

 

January 31, 2004

 

 

**1. GENERAL**

 

Polydex Pharmaceuticals Limited[the “Company”] is incorporated in the Commonwealth of the Bahamas and itsprincipal business activities, carried on through subsidiaries, include themanufacture and sale of veterinary pharmaceutical products and specialtychemicals.  These consolidated financialstatements have been prepared in accordance with United States generallyaccepted accounting principles.

 

**2. SIGNIFICANT ACCOUNTING POLICIES**

 

**Basisof consolidation**

 

The consolidated financialstatements include the accounts of the Company and its subsidiaries.  All inter-company accounts and transactionshave been eliminated on consolidation.

 

**Useof estimates**

 

The preparation of financialstatements in conformity with United States generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the consolidated financial statements andthe reported amounts of revenue and expenses during the reporting period.  Actual results could differ from theseestimates.

 

**Inventories**

 

Inventories of raw materialsare stated at the lower of cost and net realizable value, cost being determinedon 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 andfixed and variable overhead expenses.

 

**Property,plant and equipment and patents and intangible assets**

 

Property, plant and equipmentare recorded at cost less accumulated depreciation.  Depreciation is provided on a straight-line basis over theestimated useful lives of the assets as follows:

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

 

44

----

 

Patents and intangible assetsare recorded at cost and are amortized on a straight-line basis over theirestimated useful lives of ten years. Intangible assets consist of intellectual property, government licensesand government license applications.

 

Useful life is the period overwhich the asset is expected to contribute to the Company’s future cashflows.  The Company reviews therecoverability of its long-lived assets when events or changes in circumstancesoccur that indicate that the carrying value of the asset may not berecoverable.  The assessment of possibleimpairment is based on the Company’s ability to recover the carrying value ofthe asset from the expected future pre-tax cash flows of the relatedoperations.  If these cash flows areless than the carrying value of such asset, an impairment loss is recognizedfor the difference between estimated fair value and carrying value.

 

Costs related to plantrefurbishments and equipment upgrades that represent improvements to existingfacilities are capitalized.  Costsrelated to repair and maintenance of buildings and equipment are expensed.  The Company has no major planned maintenanceactivity.

 

**Revenuerecognition**

 

All revenue is from sales ofbulk and finished dosage manufactured products and is recognized when title andrisk of ownership of products pass to the customer.  Title and risk of ownership pass to the customer pursuant to theapplicable sales contract, either upon shipment of product or upon receipt bythe customer.

 

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.  Furtherpurchases by a customer of a bulk product with the same specifications do notrequire approvals.  Returns of bulk productare rare and generally are not accepted.

 

No testing and approval isrequired for finished dosage product because of its nature.  Returns of finished dosage product are rareand generally are not accepted.

 

**Shippingand handling costs**

 

Shipping and handling costsincurred by the Company for shipment of products to customers are classified ascost of goods sold.

 

45

----

 

**Researchand development**

 

Research and development costsare expensed as incurred and are stated net of investment tax credits earned.

 

**Foreigncurrency translation**

 

The functional currency of theCompany’s Canadian operations has been determined to be the Canadiandollar.  All asset and liabilityaccounts of these companies have been translated into United States dollarsusing the current exchange rates at the consolidated balance sheet dates.  Revenue and expense items are translatedusing the average exchange rates for the year. The resulting gains and losses have been reported separately as othercomprehensive income (loss) within shareholders’ equity.

 

**Stock options**

 

Effective February 1, 2003, theCompany has, in accordance with Statement of Financial Accounting Standards No.148 [“SFAS 148”], prospectively adopted the fair value accounting methodprovided for under Statement of Financial Accounting Standards No. 123,“Accounting for Stock-Based Compensation” [“SFAS 123”] to apply recognitionprovisions to its employee stock options granted, modified or settled afterFebruary 1, 2003.  Previously, theCompany followed Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” [“APB 25”] and relatedinterpretations.  Under SFAS 123,compensation expense is recorded at the date stock options are granted.  The amount of compensation expense isdetermined by estimating the fair value of the options granted using aBlack-Scholes option pricing model. Previously, under APB 25, the Company recognized no compensation expensewhen stock options were granted if the exercise price of the stock optionsequaled or exceeded the market price of the underlying stock on the date ofgrant.  This change in accounting policyreduced net income and increased contributed surplus by $12,370 and reducedearnings per common share by $0.01.

 

**Lossper common share**

 

Basic loss per common share iscomputed using the weighted average number of shares outstanding of 3,027,796for the year ended January 31, 2004 [2003 - 3,027,777; 2002 - 3,027,477].  Diluted loss per common share is computedusing the weighted average number of shares outstanding adjusted for theincremental shares, using the treasury stock method, attributed to outstandingoptions to purchase common stock. Incremental shares of nil in 2004 [2003 - nil; 2002 - nil], were used inthe calculation of diluted loss per common share.  Options to purchase 427,935, 431,550 and 419,550 common shares in2004, 2003 and 2002, respectively, were not

 

46

----

 

included in the computation ofdiluted loss per common share because their effect was anti-dilutive.

 

**3. INVENTORIES**

 

Inventories consist of thefollowing:

 
|            |   | **2004**      |       | **2003**  |   |
|-----------------|--------|---------------|------------|-----------|--------|
|            |   | **$**         |       | **$**     |   |
|            |   |          |       |      |   |
| Finished goods  |   | **943,373**   | ** ** | 889,513   |   |
| Work-in-process |   | **107,008**   | ** ** | 50,987    |   |
| Raw materials   |   | **176,058**   | ** ** | 127,032   |   |
|            |   | **1,226,439** |       | 1,067,532 |   |

 

**4. PROPERTY, PLANT AND EQUIPMENT**

 

Property, plant and equipmentconsist of the following:

 
|                    |   | **2004**      |       | **2003**                      |       |
|-------------------------|--------|---------------|------------|-------------------------------|------------|
|                    |   | **Cost**      |       | **depreciation  Accumulated** |       | **Net  book  value** |   | **Cost** |   | **Accumulated  depreciation** |   | **Net  book  value** |   |
|                    |   | **$**         |       | **$**                         | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** | **$** | ** ** |
|                    |   |          |       |                          |       |   |   |   |   |   |   |   |   |
| Land and buildings      |   | **1,391,141** | ** ** | **496,720**                   | ** ** | **894,421** |   | 1,193,955 |   | 362,985 |   | 830,970 |   |
| Machinery and equipment |   | **6,982,088** | ** ** | **4,628,167**                 | ** ** | **2,353,921** |   | 5,944,451 |   | 3,740,463 |   | 2,203,988 |   |
|                    |   | **8,373,229** |       | **5,124,887**                 | ** ** | **3,248,342** |   | 7,138,406 |   | 4,103,448 |   | 3,034,958 |   |

 

Included in machinery andequipment are assets under capital lease with a total cost of $981,925 [2003 -$775,703] and accumulated depreciation of $344,348 [2003 - $220,406].  Depreciation of assets under capital leaseis included in depreciation expense.

 

47

----

 

**5. PATENTS AND INTANGIBLE ASSETS**

 

Patents and intangible assetsconsist of the following:

 
|                          |   | **2004**    |   | **2003** |   |
|-------------------------------|--------|-------------|--------|----------|--------|
|                          |   | **$**       |   | **$**    |   |
|                          |   |        |   |     |   |
| Cost                          |   | **283,199** |   | 202,858  |   |
| Less accumulated amortization |   | **197,688** |   | 178,553  |   |
|                          |   | **85,511**  |   | 24,305   |   |

 

**6. RELATED PARTY TRANSACTIONS**

 

Amounts due from (to) shareholder consist of the following:

 
|                               |   | **2004**     |       | **2003** |   |
|------------------------------------|--------|--------------|------------|----------|--------|
|                               |   | **$**        |       | **$**    |   |
|                               |   |         |       |     |   |
| Amounts due from shareholder *[i]* |   | **791,006**  | ** ** | 981,153  |   |
|                               |   |         |       |     |   |
| Amounts due to shareholder *[ii]*  |   | **(683,234** | **)**      | (682,225 | )      |

 

----

[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% [2004 - 5.75%; 2003 - 6%], exceptfor an amount of $616,216 [2003 - $676,454] which is non-interest bearing.  Interest income on this loan is recognizedwhen realized.  These amounts have nofixed terms of repayment.  The MajorShareholder has pledged 328,051 shares of the Company and has pledged futurelicense fee payments from the Iron Dextran process license agreement *[note 12]*ascollateral for this loan.  During 2004,$60,239 [2003 - $66,727; 2002 - $47,346] of license fee payments were made.

 

[ii]                Amountsdue to shareholder bear interest at the Canadian banks’ prime lending rate plus1.5% [2004 - 5.75%; 2003 - 6%].  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.

 

48

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Interest recorded with respectto amounts due to shareholder are as follows:

 
|             |   | **2004**   |   | **2003** |       | **2002** |       |
|------------------|--------|------------|--------|----------|------------|----------|------------|
|             |   | **$**      |   | **$**    | ** ** | **$**    | ** ** |
|             |   |       |   |     |       |     |       |
| Interest expense |   | **42,006** |   | 39,263   |       | 48,578   |       |

 

**7. BANK INDEBTEDNESS**

 

The Company has a Canadianoperating line of credit of Cdn. $1,250,000 [U.S. $942,000] [2003 -Cdn. $750,000, U.S. $491,000], of which Cdn. $150,000 [U.S. $113,000] wasutilized at January 31, 2004.  TheCanadian operating line was not utilized at January 31, 2003.  The Company also has a U.S. operating lineof credit of $175,000 [2003 - $175,000]. At January 31, 2004 and 2003, this line was not utilized.  The Canadian line of credit bears interestat the Canadian banks’ prime lending rate plus 0.75% [2004 - 5%; 2003 -5.75%].  The U.S. line of credit bearsinterest at the U.S. bank’s prime lending rate plus 0.5% [2004 - 4.5%; 2003 -4.75%].  Bank indebtedness iscollateralized by a general security agreement over the Company’s assets and acollateral mortgage of $500,000 on the Dextran Products Limited [“DextranProducts”] building.

 

49

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**8. LONG-TERM DEBT AND CAPITAL LEASEOBLIGATIONS**

 

[a]          Long-termdebt consists of the following:

 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **2004**    |   | **2003** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|----------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **$**       |   | **$**    |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |        |   |     |   |
| Share value guarantee payable in quarterly  repayments of $50,000 on February 1, May 1 and August 1, 2004 and a lump-sum  payment for the balance of $75,353 on November 1, 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 $3,380,000 as at January 31, 2004 *[note  11[a]]* |   | **217,670** |   | 345,470  |   |
| Note payable to bank, repaid on January 22,  2004, bearing interest at the U.S. bank prime rate plus 1.5% [2004 - 5.5%;  2003 - fixed rate of 9%], collateralized by assignments of land, building and  equipment.  The balance outstanding at  January 31, 2003 is included in liabilities subject to sale agreement *[note  11[a]]*                                                                                                                                                                   |   | **—**  |   | 280,365  |   |
| Note payable in monthly payments of $5,860  maturing September 19, 2005.  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 unsecured *[note  11[b]]*                                                                                                                                                                                                                                         |   | **108,862** |   | —   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **326,532** |   | 625,835  |   |
| Less current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **281,015** |   | 158,694  |   |
| Less amounts included in liabilities  subject to sale agreement                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **—**  |   | 280,365  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **45,517**  |   | 186,776  |   |

 

50

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Repayments onthe long-term debt are as follows:

 
|                                      |   | **$**   |   |
|-------------------------------------------|--------|---------|--------|
|                                      |   |    |   |
| 2005                                      |   | 295,673 |   |
| 2006                                      |   | 46,880  |   |
| Total long-term debt repayments           |   | 342,553 |   |
| Less amount representing imputed interest |   | 16,021  |   |
|                                      |   | 326,532 |   |

 

[b]         Capitallease obligations consist of the following:

 
|                                                                                                                                                                                                                                                                                           |   | **2004**    |   | **2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|----------|--------|
|                                                                                                                                                                                                                                                                                           |   | **$**       |   | **$**    |   |
|                                                                                                                                                                                                                                                                                           |   |        |   |     |   |
| Obligation [Cdn.$38,734] 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                                                          |   | **29,203**  |   | 51,272   |   |
| Obligation [Cdn.$103,170] under a capital  lease, repayable in monthly instalments, bearing interest at 7.59% and  maturing November 2006.  The Company  has an option to purchase the asset for $1 at the end of the lease term                                                          |   | **77,783**  |   | —   |   |
| Obligation [Cdn.$449,937] 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 $84,000 [Cdn.$111,500] in  April 2006, or at fair market value at the end of the lease term |   | **339,217** |   | 378,717  |   |
|                                                                                                                                                                                                                                                                                           |   | **446,203** |   | 429,989  |   |
| Less current portion                                                                                                                                                                                                                                                                           |   | **161,253** |   | 110,387  |   |
|                                                                                                                                                                                                                                                                                           |   | **284,950** |   | 319,602  |   |

 

51

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Future minimumannual lease payments on the capital lease obligations are as follows:

 
|                                      |   | **$**   |   |
|-------------------------------------------|--------|---------|--------|
|                                      |   |    |   |
| 2005                                      |   | 193,463 |   |
| 2006                                      |   | 163,282 |   |
| 2007                                      |   | 147,126 |   |
| Total minimum lease payments              |   | 503,871 |   |
| Less amount representing imputed interest |   | 57,668  |   |
|                                      |   | 446,203 |   |

 

**9. OTHER INCOME**

 

During the year ended January31, 2002, the Company received settlement as part of a class action lawsuitagainst a group of suppliers, recording a gain of $48,643.  In 2003, the amount due from SparhawkLaboratories, Inc. [“Sparhawk”] was fully provided for pending the outcome ofthe legal dispute with Sparhawk.  Thecharge of $132,614 was included in other income (expense).

 

**10. CAPITAL STOCK**

 

**[a]****          Sharecapital issued and outstanding**

 

**[i]****            ClassA preferred shares**

 

The Class Apreferred shares will carry dividends, will be convertible into common sharesof the Company and will be redeemable, all at rates as shall be determined byresolution of the Board of Directors. No Class A preferred shares have been issued to date.

 

**[ii]****        ClassB preferred shares**

 

The Class Bpreferred shares carry no dividends, are non-convertible and entitle the holderto two votes per share.

 

52

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**[b]Share option plan**

 

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

 

The Companymaintains an incentive share option plan for management personnel for 1,000,000options to purchase common shares.  TheCompany also issues options to certain consultants for services provided to theCompany.

 

All optionsgranted have a term of five years and vest immediately.  At January 31, 2004, the Company has427,935 options outstanding at exercise prices ranging from $2.50 to $7.72 anda weighted average exercise price of $3.92. The options, which are immediately exercisable and expire on datesbetween May 31, 2004 and January 31, 2009, entitle the holder of an option toacquire one common share of the Company.

 

During theyear ended January 31, 2002, 3,000 common share options were issued to acertain individual for services provided to the Company.  These options were valued at $3,024 usingthe Black-Scholes option pricing model and were charged to research anddevelopment expense.

 

During theyear ended January 31, 2004, 3,885 common share options were issued to theindependent directors of the Company. These options were valued at $12,370 and were charged to general andadministrative expense, in accordance with SFAS 123.  The fair value for these options was estimated at the date ofgrant using the Black-Scholes option pricing model with the following assumptions:  risk-free interest rate of 3.12%; dividendyield of nil; volatility factor of the expected market price of the Company’scommon stock of 0.701, and an expected life of the options of five years.  Common share options of 12,000 and 10,950granted to the independent directors of the Company during 2003 and 2002,respectively, were not expensed as the Company adopted SFAS 123 prospectivelyin fiscal 2004.  The impact of thesecommon share option grants on the earnings of the Company for 2003 and 2002 if SFAS123 had been adopted in these years are presented in note 10[b][ii].

 

53

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Details of theoutstanding options, which are all currently exercisable, are as follows:

 
|                                                                |   | **Share  options** |       | **Weighted  average  exercise price per share** |   |
|---------------------------------------------------------------------|--------|--------------------|------------|-------------------------------------------------|--------|
|                                                                |   | **2004**           |       | **2003**                                        |   | **2002** |   | **2004** |   | **2003** |   | **2002** |   |
|                                                                |   | **#**              |       | **#**                                           |   | **#** |   | **$** |   | **$** |   | **$** |   |
|                                                                |   |               |       |                                            |   |   |   |   |   |   |   |   |   |
| **Options outstanding, beginning of year**                          |   | **431,550**        | ** ** | 419,550                                         |   | 420,600 |   | **3.88** |   | 3.91 |   | 4.05 |   |
| Granted                                                             |   | **3,885**          | ** ** | 12,000                                          |   | 13,950 |   | **7.72** |   | 2.50 |   | 2.80 |   |
| Expired                                                             |   | **(7,500**         | **)**      | —                                          |   | (15,000 | ) | **3.50** |   | — |   | 6.80 |   |
| **Options outstanding, end of year**                                |   | **427,935**        | ** ** | 431,550                                         |   | 419,550 |   | **3.92** |   | 3.88 |   | 3.91 |   |
|                                                                |   |               | ** ** |                                            |   |   |   |   |   |   |   |   |   |
| **Weighted average fair value of options  granted during the year** |   |               |       |                                            |   |   |   | **$** | **3.98** |   | $ | 1.28 |   | $ | 1.49 |   |
|                                                                     |        |                    |            |                                                 |        |  |  |  |  |  |  |  |  |  |  |  |

 

The followingtable summarizes information relating to the options outstanding at January 31,2004:

 
| **Exercise  price** |   | **Number  outstanding** |       | **Weighted  average  remaining  contractual life** |       |
|---------------------|--------|-------------------------|------------|----------------------------------------------------|------------|
| **$**               |   |                    |       | **[months]**                                       |       |
|                |   |                    |       |                                               |       |
| **2.50**            |   | **12,000**              | ** ** | **48**                                             | ** ** |
| **2.75**            |   | **10,950**              | ** ** | **36**                                             | ** ** |
| **3.00**            |   | **3,000**               | ** ** | **28**                                             | ** ** |
| **3.50**            |   | **7,500**               | ** ** | **18**                                             | ** ** |
| **3.75**            |   | **340,000**             | ** ** | **4**                                              | ** ** |
| **4.59**            |   | **6,600**               | ** ** | **24**                                             | ** ** |
| **5.00**            |   | **4,000**               | ** ** | **28**                                             | ** ** |
| **5.25**            |   | **30,000**              | ** ** | **12**                                             | ** ** |
| **6.80**            |   | **10,000**              | ** ** | **16**                                             | ** ** |
| **7.72**            |   | **3,885**               | ** ** | **60**                                             | ** ** |
|                |   | **427,935**             |       | **8**                                              |       |

 

54

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

 

As required bySFAS 123 [and modified by SFAS 148], pro forma information regarding net lossand net loss per common share has been determined as if the Company hadaccounted for its employee stock options under the fair value method for theyears ended January 31, 2003 and 2002. The fair value for these options was estimated at the date of grantusing the Black-Scholes option pricing model with the following weightedaverage assumptions:  risk-free interestrates of 2.96% for 2003 and 4.47% for 2002; dividend yields of nil for both2003 and 2002; volatility factors of the expected market price of the Company’scommon stock of 0.660 for 2003 and 0.634 for 2002; and an expected life of theoptions of five years for both 2003 and 2002. For purposes of pro forma disclosures, the estimated fair value of theoptions is expensed immediately.

 

Since changesin subjective input assumptions can materially affect the fair value estimate,in management’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.

 

The Company’spro forma net loss and net loss per common share following SFAS 123 are asfollows:

 
|                                                                |   | **2003**     |       | **2002** |   |
|---------------------------------------------------------------------|--------|--------------|------------|----------|--------|
|                                                                |   | **$**        |       | **$**    |   |
|                                                                |   |         |       |     |   |
| Net loss as reported                                                |   | **(673,741** | **)**      | (206,880 | )      |
| Stock-based employee compensation cost  using the fair value method |   | **(9,216**   | **)**      | (9,461   | )      |
| **Pro forma net loss**                                              |   | **(682,957** | **)**      | (216,341 | )      |
|                                                                |   |         |       |     |   |
| Pro forma net loss per common share                                 |   |         | ** ** |     |   |
| Basic                                                               |   | **(0.23**    | **)**      | (0.07    | )      |
| Diluted                                                             |   | **(0.23**    | **)**      | (0.07    | )      |

 

55

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**11. VETERINARY LABORATORIES, INC.**

 

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

 

In 1992,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 cumulative losses in the consolidated financialstatements.  At a future point in time,if the cumulative deficit of the Joint Venture is eliminated, a minorityinterest will be recorded and income will be allocated 50% to Vet Labs and 50%to Sparhawk.

 

Under theJoint Venture agreement, Sparhawk had an option to purchase 40% of the assetsheld by Vet Labs.  The purchase pricewould be 40% of the fair market value of the land, building and equipment ownedby Vet Labs plus $1,000,000.  Sparhawknotified the Company on October 16, 2002 of its intention to exercise thisoption, but did not deliver the purchase price.  Under the terms of the Joint Venture agreement, the Joint Ventureagreement and the option terminated on December 1, 2002.  The Company believes that the option hadexpired because of Sparhawk’s failure to deliver the purchase price.  Sparhawk had been disputing this fact untilJanuary 13, 2004.

 

OnDecember 6, 2002, the Company and Sparhawk entered into a standstillagreement requiring both parties to continue to operate under the Joint Ventureagreement.  On December 16, 2003,the court appointed a receiver to supervise the wind-up of the Joint Venture.

 

On January 13,2004, the Company entered into an Asset Purchase Agreement with Sparhawk.  Pursuant to this Asset Purchase Agreement,the Company agreed to sell the finished product veterinary pharmaceuticalbusiness, including substantially all of the assets of Vet Labs, to Sparhawkfor $5,500,000 in cash. Effective March 4, 2004, this sale was completed.  Simultaneously, on March 4, 2004, Chemdex,Inc. [“Chemdex”], a wholly-owned subsidiary of the Company, advanced $350,000to Sparhawk in exchange for a promissory note bearing interest at 13% per annumand a warrant to purchase 4% of the equity of Sparhawk for no additionalconsideration.  The promissory note isdue in full on March 4, 2009.  Interestis payable annually, but can be deferred and added to the principal balance ofthe promissory note each year at Sparhawk’s discretion.  The warrant expires at the earlier ofpayment in full

 

56

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of thepromissory note or 10 years from date of issue.  The warrant becomes exercisable the day after the fifthanniversary from the date of issue. Pursuant to a definitive supply agreement [the “Supply Agreement”]entered into on March 4, 2004, Chemdex agreed to supply ferric hydroxide andhydrogenated dextran solution to Sparhawk on an exclusive basis in the UnitedStates for 10 years.  Chemdex alsogranted to Sparhawk an exclusive license to use the drug master file tomanufacture 10% bulk Iron Dextran for veterinary use, and the use of certainequipment during the 10-year period of the Supply Agreement.  Pursuant to definitive agreements, theCompany made customary representations, warranties and indemnities and agreedto a full release of all claims against Sparhawk arising from the Joint Venturelitigation.  Similarly, Sparhawk agreedto a full release of all claims against the Company arising from the Joint Venturelitigation.

 

Assets thatare included in the disposal have been reclassified to assets subject to saleagreement in the accompanying consolidated balance sheets and are as follows:

 
|                                      |   | **2004**      |   | **2003**  |   |
|-------------------------------------------|--------|---------------|--------|-----------|--------|
|                                      |   | **$**         |   | **$**     |   |
|                                      |   |          |   |      |   |
| **Assets subject to sale agreement**      |   |          |   |      |   |
| Cash                                      |   | **312,073**   |   | 81,030    |   |
| Trade accounts receivable                 |   | **536,868**   |   | 726,030   |   |
| Inventories                               |   | **1,466,873** |   | 1,198,431 |   |
| Prepaid expenses and other current assets |   | **84,786**    |   | 50,943    |   |
| Land and building                         |   | **1,459,681** |   | 1,460,771 |   |
| Machinery and equipment                   |   | **136,258**   |   | 170,080   |   |
| Patents and intangible assets             |   | **56,627**    |   | 62,756    |   |
| Deferred income taxes                     |   | **232,500**   |   | —    |   |
|                                      |   | **4,285,666** |   | 3,750,041 |   |
| Less  non-current portion                 |   | **—**    |   | 1,693,607 |   |
|                                      |   | **4,285,666** |   | 2,056,434 |   |

 

57

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Liabilities tobe assumed by the purchaser have been reclassified to liabilities subject tosale agreement in the accompanying consolidated balance sheets and are asfollows:

 
|                                      |   | **2004**    |   | **2003**  |   |
|-------------------------------------------|--------|-------------|--------|-----------|--------|
|                                      |   | **$**       |   | **$**     |   |
|                                      |   |        |   |      |   |
| **Liabilities subject to sale agreement** |   |        |   |      |   |
| Accounts payable                          |   | **584,644** |   | 774,355   |   |
| Accrued liabilities                       |   | **175,654** |   | 160,717   |   |
| Due to Sparhawk                           |   | **101,453** |   | 101,453   |   |
| Customer deposits                         |   | **18,813**  |   | 111,963   |   |
| Current portion of long-term debt         |   | **—**  |   | 280,365   |   |
|                                      |   | **880,564** |   | 1,428,853 |   |

 

As describedin note 8[a], long-term debt of the Company includes an amount due under ashare value guarantee which arose upon the acquisition of Vet Labs in 1992 *[note 11[c]*.  This share value guarantee is collateralizedby the assets of Vet Labs including the land and building.  To release the charge against the Vet Labsassets, this share value guarantee had to be paid in full.  This payment of $225,353 was made on March4, 2004 from the sale proceeds.

 

As atJanuary 31, 2004, the Company has continued to consolidate the JointVenture.  The Joint Venture operationscomprise substantially all of the operations of the Chemdex segment *[note 15]*.  Legal and receiver costs are included inother income (expense) on the consolidated statements of operations.  A gain on this transaction will be recordedin the first quarter of fiscal 2005.

 

58

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**[b]****          Acquisitionof minority interest**

 

On September19, 2003, Chemdex redeemed all of the common shares held by the 10% minorityinterest shareholder, which resulted in the Company controlling 100% of theissued and outstanding shares of Chemdex. The redemption amount was $146,500, which is to be paid in 25 equalmonthly installments of $5,860, which commenced on September 19, 2003.  Since this installment contract isnon-interest bearing, it has been discounted using a discount rate of 9%.  The present value of this installmentcontract is $134,602, which has been recorded in long-term debt.  The Company has recorded this acquisition asa step purchase and has allocated the purchase price based on fair values ofthe assets as follows:

 
|                                                                            |   | **$**   |   |
|---------------------------------------------------------------------------------|--------|---------|--------|
|                                                                            |   |    |   |
| Land and building, included in assets  subject to sale agreement *[note 11[a]]* |   | 43,549  |   |
| Equipment                                                                       |   | 555     |   |
| Equipment, included in assets subject to  sale agreement *[note 11[a]]*         |   | 10,157  |   |
| Patents and intangible assets                                                   |   | 80,341  |   |
|                                                                            |   | 134,602 |   |

 

**[c]****          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. On April 9, 2003, the terms of the purchase agreement were revised toamend the repayment terms for the outstanding repurchase obligation.  This revised agreement requires the Companyto make quarterly payments of $50,000 on each of May 1, August 1, November 1and February 1 until August 1, 2004 and a final payment of $75,343 on November1, 2004.  This amount is included inlong-term debt*[note 8[a]]* and was repaid on March 4, 2004 as described in*note 11[a]*.

 

59

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**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:

 
|                                  |   | **2004**    |   | **2003** |   | **2002** |   |
|---------------------------------------|--------|-------------|--------|----------|--------|----------|--------|
|                                  |   | **$**       |   | **$**    |   | **$**    |   |
|                                  |   |        |   |     |   |     |   |
| Research and development expenditures |   | **73,635**  |   | 193,284  |   | 506,980  |   |
| Investment tax credits                |   | **(12,684** | **)**  | (21,186  | )      | (42,375  | )      |
| **Research and development expense**  |   | **60,951**  |   | 172,098  |   | 464,605  |   |

 

**IronDextran process**

 

The Company has an agreement withthe Major Shareholder which grants the Company the exclusive worldwide licenseto use a certain process for producing Iron Dextran.  This license agreement expires in 2014.  The Company pays a license fee based on production volumes.  The total license fee incurred during theyear was $60,239 [2003 - $66,727; 2002 - $47,346].  These payments are applied to the balanceowing by the Major Shareholder *[note 6[i]]*.

 

**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:

 
|          |   | **2004**     |       | **2003** |       | **2002** |   |
|---------------|--------|--------------|------------|----------|------------|----------|--------|
|          |   | **$**        |       | **$**    |       | **$**    |   |
|          |   |         | ** ** |     |       |     |   |
| Bahamas       |   | **(391,641** | **)**      | (360,664 | )          | (634,637 | )      |
| Canada        |   | **61,980**   | ** ** | 940,088  |       | 725,475  |   |
| United States |   | **(66,306**  | **)**      | (501,799 | )          | (128,736 | )      |
|          |   | **(395,967** | **)**      | 77,625   | ** ** | (37,898  | )      |

 

60

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The provisionfor (recovery of) income taxes consists of the following:

 
|                                                                              |   | **2004**     |       | **2003** |       | **2002** |       |
|-----------------------------------------------------------------------------------|--------|--------------|------------|----------|------------|----------|------------|
|                                                                              |   | **$**        |       | **$**    |       | **$**    |       |
|                                                                              |   |         | ** ** |     |       |     |       |
| Foreign withholding taxes on Bahamian  income                                     |   | **—**   | ** ** | —   |       | 812      |       |
|                                                                              |   |         | ** ** |     |       |     |       |
| Provision for income taxes based on  Canadian statutory income tax rates          |   | **22,933**   | ** ** | 311,357  |       | 275,680  |       |
| Increase (decrease) in tax reserve                                                |   | **—**   | ** ** | 147,012  |       | (50,820  | )          |
| Increase (decrease) in valuation allowance                                        |   | **53,900**   | ** ** | 3,506    |       | (8,947   | )          |
| Tax rate changes on deferred tax items                                            |   | **(20,203**  | **)**      | (21,612  | )          | 5,913    |       |
| Items not deductible for tax                                                      |   | **53,402**   | ** ** | (9,377   | )          | (19,176  | )          |
|                                                                              |   | **110,032**  |       | 430,886  |       | 202,650  |       |
|                                                                              |   |         | ** ** |     |       |     |       |
| Provision for (recovery of) income taxes  based on United States income tax rates |   | **(24,533**  | **)**      | (185,666 | )          | (47,632  | )          |
| Tax expense (recovery) on Joint Venture  partner’s share of income           |   | **(132,282** | **)**      | (32,319  | )          | 547      |       |
| Tax on non-deductible items                                                       |   | **—**   | ** ** | —   |       | 12,605   |       |
| Increase (decrease) in valuation allowance                                        |   | **(343,185** | **)**      | 538,465  |       | —   |       |
|                                                                              |   | **(500,000** | **)**      | 320,480  |       | (34,480  | )          |
|                                                                              |   |         | ** ** |     | ** ** |     | ** ** |
| **Provision for (recovery of) income taxes**                                      |   | **(389,968** | **)**      | 751,366  |       | 168,982  |       |

 

Significantcomponents of the provision for (recovery of) income taxes attributable tocontinuing operations are as follows:

 
|                                     |   | **2004**     |       | **2003** |   | **2002** |   |
|------------------------------------------|--------|--------------|------------|----------|--------|----------|--------|
|                                     |   | **$**        |       | **$**    |   | **$**    |   |
|                                     |   |         | ** ** |     |   |     |   |
| Canadian deferred tax recovery           |   | **(38,083**  | **)**      | (21,307  | )      | (61,054  | )      |
| Canadian deferred tax expense            |   | **128,440**  | ** ** | 385,301  |   | 221,481  |   |
| Canadian current tax expense             |   | **19,675**   | ** ** | 66,892   |   | 42,223   |   |
| United States deferred tax recovery      |   | **(500,000** | **)**      | —   |   | (34,480  | )      |
| United States deferred tax expense       |   | **—**   | ** ** | 320,480  |   | —   |   |
| Bahamian foreign withholding tax expense |   | **—**   | ** ** | —   |   | 812      |   |
|                                     |   | **(389,968** | **)**      | 751,366  |   | 168,982  |   |

 

61

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

 
|                                                           |   | **2004**      |       | **2003**  |   | **2002** |   |
|----------------------------------------------------------------|--------|---------------|------------|-----------|--------|----------|--------|
|                                                           |   | **$**         |       | **$**     | **$**  |     |   |   |
|                                                           |   |          | ** ** |      |   |     |   |
| **Deferred tax assets**                                        |   |          | ** ** |      |   |     |   |
| Canadian                                                       |   |          | ** ** |      |   |     |   |
| Unclaimed research and development expenses                    |   | **307,180**   | ** ** | 342,000   |   | 526,000  |   |
| Net capital losses and other items *[note  13[c]]*             |   | **193,000**   | ** ** | 90,000    |   | 88,000   |   |
| United States                                                  |   |          | ** ** |      |   |     |   |
| Net operating loss carryforwards *[note  13[d]]*               |   | **580,000**   | ** ** | 600,000   |   | 368,000  |   |
| Unpaid intercompany interest                                   |   | **150,000**   | ** ** | —    |   | —   |   |
|                                                           |   | **1,230,180** |       | 1,032,000 |   | 982,000  |   |
| Less valuation allowance                                       |   | **627,000**   | ** ** | 899,207   |   | 147,000  |   |
|                                                           |   | **603,180**   |       | 132,793   |   | 835,000  |   |
| **Deferred tax liabilities**                                   |   |          | ** ** |      |   |     |   |
| Excess of carrying value over tax value of  depreciable assets |   | **(249,000**  | **)**      | (160,000  | )      | (118,000 | )      |
| Investment tax credits and other items                         |   | **(1,234**    | **)**      | (22,543   | )      | (86,594  | )      |
|                                                           |   | **352,946**   |       | (49,750   | )      | 630,406  |   |
|                                                                |        |               |            |           |        |          |        |  |

 

[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 approximately $1,123,000 and $581,000 for federaland provincial purposes, respectively. Certain Canadian subsidiaries also have net capital losses available forcarryforward of approximately $312,000 available to offset future taxablecapital gains.  These potentialdeductions and net capital losses have an indefinite carryforward period.

 

[d]         TheU.S. subsidiaries of the Company have net operating loss carryforwards forincome tax purposes of approximately $1,568,000 that expire from 2009 to 2019.

 

[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.

 

62

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**14. CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

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

 
|                                           |   | **2004**     |       | **2003** |   | **2002** |   |
|------------------------------------------------|--------|--------------|------------|----------|--------|----------|--------|
|                                           |   | **$**        |       | **$**    |   | **$**    |   |
|                                           |   |         |       |     |   |     |   |
| **Decrease (increase) in current assets**      |   |         |       |     |   |     |   |
| Trade accounts receivable                      |   | **402,848**  | ** ** | (262,397 | )      | 39,101   |   |
| Inventories                                    |   | **(270,190** | **)**      | (111,260 | )      | 38,394   |   |
| Prepaid expenses and other current assets      |   | **(45,350**  | **)**      | 594      |   | 19,368   |   |
|                                           |   | **87,308**   |       | (373,063 | )      | 96,863   |   |
| **Increase (decrease) in current liabilities** |   |         | ** ** |     |   |     |   |
| Accounts payable                               |   | **(171,739** | **)**      | 254,664  |   | 6,192    |   |
| Accrued liabilities                            |   | **66,878**   | ** ** | 102,453  |   | (201,844 | )      |
| Customer deposits                              |   | **(20,660**  | **)**      | 131,744  |   | (76,906  | )      |
| Income taxes payable                           |   | **(35,823**  | **)**      | 8,832    |   | 19,018   |   |
|                                           |   | **(74,036**  | **)**      | 124,630  |   | (156,677 | )      |

 

Cash paid during the year forinterest was $65,616 [2003 - $78,087; 2002 - $101,711].  Cash paid during the year for income taxeswas $44,024 [2003 - $11,699; 2002 - $8,139].

 

Capital equipment acquiredunder capital lease of $78,978 [2003 - nil; 2002 - $75,956] were treated asnon-cash additions.  Assets acquiredthrough acquisition of minority interest of $134,602 [2003 and 2002 - nil], lesscash paid on date of closing of $5,860 *[note 11[b]]* were treated as non-cashadditions.

 

63

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**15. SEGMENTED INFORMATION**

 

All of the operations of theCompany are carried on through Dextran Products in Canada and through Chemdexin the United States.  The operations ofChemdex represent the veterinary products business and the operations arecarried out through its wholly-owned subsidiary, Vet Labs.  Vet Labs carries on its business through aJoint Venture with Sparhawk.  Each ofDextran Products and Chemdex operates as a strategic business unit offeringdifferent products.  Each subsidiarycomprises 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.  Themajority of this business was sold in March 2004 *[note 11[a]]*.

 

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 significant accounting policies.

 

[a]                                  Thefollowing is condensed segment financial information for the years endedJanuary 31:

 
|                              |   | **2004**      |       |
|-----------------------------------|--------|---------------|------------|
|                              |   | **Dextran**   |       | **Chemdex** |   | **Total** |   |
|                              |   | **$**         |       | **$** |   | **$** |   |
|                              |   |          |       |   |   |   |   |
| Gross sales                       |   | **5,142,881** | ** ** | **9,349,670** | ** ** | **14,492,551** | ** ** |
| Intercompany sales                |   | **400,362**   | ** ** | **—** | ** ** | **400,362** | ** ** |
| Interest expense                  |   | **48,294**    | ** ** | **20,883** | ** ** | **69,177** | ** ** |
| Depreciation and amortization     |   | **459,054**   | ** ** | **142,844** | ** ** | **601,898** | ** ** |
| Income (loss) before income taxes |   | **58,703**    | ** ** | **(63,029** | **)** | **(4,326** | **)** |
| Interest income                   |   | **445**       | ** ** | **—** | ** ** | **445** | ** ** |
| Segment assets                    |   | **5,045,899** | ** ** | **4,281,084** | ** ** | **9,326,983** | ** ** |
| Capital expenditures              |   | **218,859**   | ** ** | **177,845** | ** ** | **396,704** | ** ** |

 

64

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|                              |   | **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          |   | 424,800     |       | 85,313 |   | 510,113 |   |

 

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

 
|                           |   | **2004**       |       | **2003**   |   | **2002**   |   |
|--------------------------------|--------|----------------|------------|------------|--------|------------|--------|
|                           |   | **$**          |       | **$**      |   | **$**      |   |
|                           |   |           | ** ** |       |   |       |   |
| **Gross sales**                |   |           | ** ** |       |   |       |   |
| Gross sales from segments      |   | **14,492,551** | ** ** | 13,128,430 |   | 12,450,292 |   |
| Intercompany sales elimination |   | **(400,362**   | **)**      | (342,087   | )      | (282,762   | )      |
|                           |   | **14,092,189** |       | 12,786,343 |   | 12,167,530 |   |

 

65

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|                                  |   | **2004**     |       | **2003** |   | **2002** |   |
|---------------------------------------|--------|--------------|------------|----------|--------|----------|--------|
|                                  |   | **$**        |       | **$**    |   | **$**    |   |
|                                  |   |         | ** ** |     |   |     |   |
| **Income (loss) before income taxes** |   |         | ** ** |     |   |     |   |
| Income (loss) before income taxes     |   |         | ** ** |     |   |     |   |
| from segments                         |   | **(4,326**   | **)**      | 624,609  |   | 691,297  |   |
| Unallocated corporate expenses        |   | **(391,641** | **)**      | (546,984 | )      | (729,195 | )      |
|                                  |   | **(395,967** | **)**      | 77,625   |   | (37,898  | )      |

 
|       |   | **2004**       |   | **2003**  |   |
|------------|--------|----------------|--------|-----------|--------|
|       |   | **$**          |   | **$**     |   |
|       |   |           |   |      |   |
| **Assets** |   |           |   |      |   |
| Segment    |   | **9,326,983**  |   | 8,487,919 |   |
| Corporate  |   | **1,183,530**  |   | 1,224,655 |   |
|       |   | **10,510,513** |   | 9,712,574 |   |

 
|                          |   | **2004**            |       |
|-------------------------------|--------|---------------------|------------|
|                          |   | **Total  segments** |       | **Corporate** |   | **Consolidated  totals** |   |
|                          |   | **$**               |       | **$** |   | **$** |   |
|                          |   |                |       |   |   |   |   |
| **Other significant items**   |   |                |       |   |   |   |   |
| Interest expense              |   | **69,177**          | ** ** | **64,205** | ** ** | **133,382** |   |
| Depreciation and amortization |   | **601,898**         | ** ** | **15,787** | ** ** | **617,685** |   |
| Interest income               |   | **445**             | ** ** | **—** | ** ** | **445** |   |
| Capital expenditures          |   | **396,704**         | ** ** | **—** | ** ** | **396,704** |   |

 
|                          |   | **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 |   |

 

66

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|                          |   | **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          |   | 510,113             |   | — |   | 510,113 |   |

 

[c]          Consolidatedsales by destination are as follows:

 
|          |   | **2004**       |   | **2003**   |   | **2002**   |   |
|---------------|--------|----------------|--------|------------|--------|------------|--------|
|          |   | **$**          |   | **$**      |   | **$**      |   |
|          |   |           |   |       |   |       |   |
| United States |   | **10,008,794** |   | 8,923,364  |   | 8,582,049  |   |
| Europe        |   | **2,207,104**  |   | 1,991,107  |   | 1,574,065  |   |
| Pacific Rim   |   | **692,980**    |   | 714,072    |   | 962,231    |   |
| Canada        |   | **655,471**    |   | 510,499    |   | 593,019    |   |
| Other         |   | **527,840**    |   | 647,301    |   | 456,166    |   |
|          |   | **14,092,189** |   | 12,786,343 |   | 12,167,530 |   |

 

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

 
|          |   | **2004**      |   | **2003**  |   |
|---------------|--------|---------------|--------|-----------|--------|
|          |   | **$**         |   | **$**     |   |
|          |   |          |   |      |   |
| United States |   | **1,621,828** |   | 1,695,427 |   |
| Canada        |   | **3,247,473** |   | 3,033,139 |   |
| Bahamas       |   | **8,518**     |   | 24,305    |   |
|          |   | **4,877,819** |   | 4,752,871 |   |

 

67

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[e]          Thefollowing summarizes significant customer sales information for Chemdex for theyears ended January 31.  Dextran has nocustomers that exceed 10% of consolidated sales.

 
|       |   | **2004**      |   | **2003**  |   | **2002**  |   |
|------------|--------|---------------|--------|-----------|--------|-----------|--------|
|       |   | **$**         |   | **$**     |   | **$**     |   |
|       |   |          |   |      |   |      |   |
| Customer A |   | **2,133,597** |   | 1,590,126 |   | 1,751,467 |   |
| Customer B |   | **1,920,282** |   | 1,858,236 |   | 1,665,949 |   |
| Customer C |   | **1,567,135** |   | 1,420,554 |   | 1,241,732 |   |
|       |   | **5,621,014** |   | 4,868,916 |   | 4,659,148 |   |

 

[f]            Thefollowing summarizes significant enterprise-wide product group salesinformation of the Company for the years ended January 31:

 
|                                    |   | **2004**       |   | **2003**   |   | **2002**   |   |
|-----------------------------------------|--------|----------------|--------|------------|--------|------------|--------|
|                                    |   | **$**          |   | **$**      |   | **$**      |   |
|                                    |   |           |   |       |   |       |   |
| Bulk Dextran  and derivatives           |   | **4,742,519**  |   | 4,575,359  |   | 4,246,635  |   |
| Sterile  injectible veterinary products |   | **5,697,292**  |   | 4,480,327  |   | 4,390,967  |   |
| Oral and  topical veterinary products   |   | **3,652,378**  |   | 3,730,657  |   | 3,529,928  |   |
|                                    |   | **14,092,189** |   | 12,786,343 |   | 12,167,530 |   |

 

**16. FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

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 and accounts payable approximate their fair values atJanuary 31, 2004 because of the short period to maturity of thesefinancial instruments.

 

The estimated fair values ofthe bank indebtedness, due to shareholder, due to Sparhawk, long-term debt andcapital lease obligations are not materially different from the carrying valuesfor financial statement purposes as at January 31, 2004 and 2003.  The estimated fair value of the amount duefrom shareholder is not determinable because the amount has no fixed terms ofrepayment.

 

68

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**17. OTHER DISCLOSURES**

 

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

 

At January 31,2004, three [2003 - three] customers of the Company comprised 59% [2003 - 45%]of the trade accounts receivable balance. No other customers had trade accounts receivable outstanding at year endthat represented more than 10% of the Company’s trade accounts receivablebalance.

 

**[b] Foreign currency 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.RECENT ACCOUNTING PRONOUNCEMENTS**

 

In December 2003, the FinancialAccounting Standards Board [the “FASB”] issued FASB Interpretation [“FIN”] No.46R, “Consolidation of Variable Interest Entities an interpretation of ARB No.51” [the “Interpretation”], which is a revision of FIN No. 46 originally issuedin January 2003.  The Interpretationintroduces a new consolidation model - the variable interests model - whichdetermines control [and consolidation] based on potential variability in gainsand losses of the entity being evaluated for consolidation.  It also requires application in financialstatements of public entities for periods ended after December 15, 2003 tospecial purpose entities, and in financial statements for periods ending afterMarch 15, 2004 to other types of variable interest entities.  The Company does not have any interests inspecial purpose entities, and will account for any variable interest entities inaccordance with the Interpretation.  Theadoption of this Interpretation had no impact on the Company’s consolidatedfinancial statements.

 

**19. COMPARATIVE CONSOLIDATED FINANCIALSTATEMENTS**

 

The comparative consolidatedfinancial statements have been reclassified from statements previouslypresented to conform to the presentation of the 2004 consolidated financialstatements.

 

69

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ITEM 9.                             CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Notapplicable.

 

ITEM 9A.                                           CONTROLSAND PROCEDURES

 

The Company completed anevaluation as of the end of the period covered by this report under thesupervision and with the participation of management, including its ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of its disclosure controls and procedures pursuant to Rule13a-14 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures areeffective in alerting them on a timely basis of material information relatingto the Company (including its consolidated subsidiaries) required to beincluded in its periodic Securities and Exchange Commission filings.

 

There have been no changesin the Company’s internal control over financial reporting identified inconnection with the evaluation discussed above that occurred in the Company’slast fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

70

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PART III

 

ITEM 10.                                               DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

 

The informationrequired under this item is incorporated herein by reference from the materialcontained under the captions “Board of Directors,” “Proposals,” “ExecutiveOfficers” and “Section 16(a) Beneficial Ownership Reporting Compliance” inthe Company’sdefinitive proxy statement to be filed with the Securities and ExchangeCommission pursuant to Regulation 14A, not later than 120 days after theend of the fiscal year.

 

**Code ofEthics**

 

The Company has adopted acode of ethics that applies to all of its directors, officers, (including itschief executive officer, chief financial officer, chief accounting officer,controller, and any person performing similar functions) and employees.  The Company has filed a copy of this Code ofEthics as Exhibit 14 to this Form 10-K. The Company has also made the Code of Ethics available on its website at*www.polydex.com* under the caption“Investor Relations.”

 

ITEM 11.                                               EXECUTIVECOMPENSATION

 

Theinformation required under this item is incorporated herein by reference fromthe material contained under the captions “Board of Directors,” “Board Meetingsand Committees,” “Compensation of Executive Officers,” “Employment Agreements”and “Company Stock Performance” in the Company’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 12.                                               SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS

 

Theinformation required under this item is incorporated herein by reference fromthe material contained under the captions “Ownership of Voting Securities” and“Equity Compensation Plan Information” in the Company’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

 

Theinformation required under this item is incorporated herein by reference fromthe material contained under the captions “Compensation of Executive Officers,”“Compensation Committee Interlocks and Insider Participation” and “TransactionsWith the Company” in the Company’s definitive proxy statement to be filed with theSecurities and Exchange Commission pursuant to Regulation 14A, not laterthan 120 days after the end of the fiscal year.

 

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ITEM 14.                                               PRINCIPALACCOUNTANT FEES AND SERVICES

 

Theinformation required under this item is incorporated herein by reference fromthe material contained under the caption “Principal Accountant Fees andServices” in the Company’sdefinitive proxy statement to be filed with the Securities and ExchangeCommission pursuant to Regulation 14A, not later than 120 days after theend of the fiscal year.

 

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PART IV

 

ITEM 15.                                               EXHIBITS,FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

 
| (a)    |   | The  following documents are filed as a part of this Annual Report on Form 10-K:                                                                                                                                                  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                              |   |   |
|   | (1)    | Financial  Statements included in the Company’s Annual Report to Shareholders for the fiscal year  ended January 31, 2004 and incorporated by reference from  Exhibit 13 filed herewith                            |
|   |   |                                                                                                                                                                                                                              |   |   |
|   |   | Report of  Independent Auditors — Ernst & Young LLP Chartered Accountants                                                                                                                                                |
|   |   | Consolidated  Balance Sheets                                                                                                                                                                                                      |
|   |   | Consolidated  Statements of Shareholders’ Equity                                                                                                                                                                             |
|   |   | Consolidated  Statements of Operations                                                                                                                                                                                            |
|   |   | Consolidated  Statements of Cash Flows                                                                                                                                                                                            |
|   |   | Notes to  Consolidated Financial Statements                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                              |
|   | (2)    | Financial  Statement Schedules                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                              |   |   |
|   |   | Schedules  for which provision is made in the applicable accounting regulation of the  Securities and Exchange Commission are not required under the related  instructions or are inapplicable, and therefore, have been omitted. |
|   |   |                                                                                                                                                                                                                              |   |
|   | (3)    | Exhibits                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                              |   |   |
|   |   | 3.1                                                                                                                                                                                                                               |   | Memorandum  of Association of Polydex Pharmaceuticals Limited, as amended (filed as  Exhibit 3.1 to the Annual Report on Form 10-K filed April 30,  1997, and incorporated herein by reference) |
|   |   |                                                                                                                                                                                                                              |   |   |
|   |   | 3.2                                                                                                                                                                                                                               |   | Articles of  Association of Polydex Pharmaceuticals Limited, as amended (filed as  Exhibit 3.2 to the Quarterly Report on Form 10-Q filed September  13, 1999, and incorporated herein by reference) |
|   |   |                                                                                                                                                                                                                              |   |   |
|   |   | 10.1                                                                                                                                                                                                                              |   | Employment  Agreement between Polydex Pharmaceuticals Limited and Thomas C. Usher dated  December 22, 1993, as amended on November 1, 1996 (filed as  Exhibit 10.1 to the Annual Report on Form 10-K filed April 30,  1997, and incorporated herein by reference) |
|   |   |                                                                                                                                                                                                                              |   |   |
|   |   | 10.2                                                                                                                                                                                                                              |   | Amendment to  Employment Agreement between Polydex Pharmaceuticals Limited and Thomas C.  Usher dated February 1, |
|        |        |                                                                                                                                                                                                                                   |  |  |  |  |

 

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|   |   |   |   | 1999 (filed  as Exhibit 10.2 to the Annual Report on Form 10-K filed April 29, 1999, and  incorporated herein by reference)                                                                                                                                                                                                                |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                       |
|   |   | 10.3   |   | Employment  Agreement between Polydex Pharmaceuticals Limited and George G. Usher  dated December 22, 1993 (filed as Exhibit 10.2 to the Annual Report on  Form 10-K filed April 30, 1997, and incorporated herein by  reference)                                                                                      |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                       |
|   |   | 10.4   |   | Amendment to  Employment Agreement between Polydex Pharmaceuticals Limited and George G.  Usher dated February 1, 1999 (filed as Exhibit 10.4 to the Annual Report on  Form 10-K filed April 29, 1999, and incorporated herein by reference)                                                                                               |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                       |
|   |   | 10.5   |   | Research  Agreement 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 on Form 10-K filed April 30, 1997, and incorporated herein  by reference) |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                       |
|   |   | 10.6   |   | Joint  Venture Agreement among Chemdex, Inc., Veterinary Laboratories Inc. and  Sparhawk Laboratories, Inc., dated December 1, 1992 (filed as  Exhibit 10.5 to the Annual Report on Form 10-K filed April 30,  1997, and incorporated herein by reference)                                                             |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                       |
|   |   | 10.7   |   | Manufacturing  Agreement among Sparhawk Laboratories, Inc., Agri Laboratories, Ltd. and  Veterinary Laboratories Inc., dated September 23, 1996 (filed as  Exhibit 10.6 to the Annual Report on Form 10-K filed April 30,  1997, and incorporated herein by reference)                                                 |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                       |
|   |   | 10.8   |   | Stock Sale  and Purchase Agreement between Continental Grain Company and Polydex  Pharmaceuticals Limited dated October 30, 1992, as amended on  November 22, 1996 (filed as Exhibit 10.8 to the Annual Report on  Form 10-K filed April 30, 1997, and incorporated herein by  reference)                         |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                       |
|   |   | 10.9   |   | Asset  Purchase Agreement dated as of January 13, 2004, by and among Sparhawk  Laboratories, Inc., Polydex Pharmaceuticals Limited, Chemdex, Inc. and  Veterinary Laboratories, Inc.                                                                                                                                                       |
|   |   |   |   |                                                                                                                                                                                                                                                                                                                                       |
|   |   | 10.10  |   | Supply  Agreement, dated as of March 1, 2004, by and between Chemdex, Inc. and  Sparhawk Laboratories, Inc.                                                                                                                                                                                                                                |

 

74

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|   |   | 10.11  |   | Unsecured  Subordinated Promissory Note dated March 4, 2004 made by Sparhawk  Laboratories, Inc. in favor of Chemdex, Inc.                                           |
|--------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                 |
|   |   | 10.12  |   | Warrant and  Repurchase Agreement, dated March 4, 2004 issued by Sparhawk Laboratories,  Inc. to Chemdex, Inc.                                                       |
|   |   |   |   |                                                                                                                                                                 |
|   |   | 14     |   | Code of  Ethics                                                                                                                                                      |
|   |   |   |   |                                                                                                                                                                 |
|   |   | 21     |   | Subsidiaries  of Polydex Pharmaceuticals Limited (filed as Exhibit 21 to the Annual Report  on Form 10-K filed April 28, 2000, and incorporated herein by reference) |
|   |   |   |   |                                                                                                                                                                 |
|   |   | 31.1   |   | Certification  of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of  2002                                                                     |
|   |   |   |   |                                                                                                                                                                 |
|   |   | 31.2   |   | Certification  of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of  2002                                                                     |
|   |   |   |   |                                                                                                                                                                 |
|   |   | 32.1   |   | Certification of Chief  Executive Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                      |
|   |   |   |   |                                                                                                                                                                 |
|   |   | 32.2   |   | Certification of Chief  Financial Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002                                                                      |
|   |   |   |   |                                                                                                                                                                 |

 

(b)                                 Reports on Form 8-K

 

1.                                       TheCompany filed a Current Report on Form 8-K on January 14, 2004 to report theCompany’s issuance of a press release announcing the signing of a definitiveagreement to sell its United States finished product veterinary pharmaceuticalbusiness.  (Items 5 and 7 on Form 8-K).

 

2.                                       TheCompany filed a Current Report on Form 8-K on March 19, 2004 to report theCompany’s completion of the sale of its United States finished productveterinary pharmaceutical business. (Items 2 and 7 on Form 8-K).

 

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SIGNATURES

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                       | POLYDEX  PHARMACEUTICALS LIMITED      |
|----------------------------|---------------------------------------|
| Date:  April 30, 2004 | By:                                   |  /s/ George G. Usher |
|                       |  George  G. Usher, President and |
|                       |   Chief  Executive Officer  |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| Date:** **April 30, 2004 | /s/ George  G. Usher                                 |   |
|-------------------------------|------------------------------------------------------|--------|
|                          | George G.  Usher, Director, President                |
|                          |   and Chief Executive Officer                   |
|                          |   (Principal Executive Officer)                 |
|                          |                                                 |
| Date:  April  30, 2004   | /s/ Sharon  Wardlaw                                  |   |
|                          | Sharon  Wardlaw, Treasurer, Secretary                |
|                          |   and Chief Financial Officer                   |
|                          |   (Principal Financial and Accounting  Officer) |
|                          |                                                 |
| Date:  April  30, 2004   | /s/ Joseph  Buchman                                  |   |
|                          | Joseph  Buchman, Director                            |
|                          |                                                 |
| Date:  April  30, 2004   | /s/ Derek  John Michael Lederer                      |   |
|                          | Derek John  Michael Lederer, Director                |
|                          |                                                 |
| Date:  April  30, 2004   | /s/ John  L.E. Seidler                               |   |
|                          | John L.E.  Seidler, Director                         |
|                          |                                                 |
| Date:  April  30, 2004   | /s/ Thomas  C. Usher                                 |   |
|                          | Thomas C.  Usher, Director                           |

 

76

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EXHIBIT INDEX

 
| 10.9   |   | Asset  Purchase Agreement dated as of January 13, 2004, by and among Sparhawk  Laboratories, Inc., Polydex Pharmaceuticals Limited, Chemdex, Inc. and  Veterinary Laboratories, Inc. |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                 |
| 10.10  |   | Supply  Agreement, dated as of March 1, 2004, by and between Chemdex, Inc. and  Sparhawk Laboratories, Inc.                                                                          |
|   |   |                                                                                                                                                                                 |
| 10.11  |   | Unsecured  Subordinated Promissory Note dated March 4, 2004 made by Sparhawk  Laboratories, Inc. in favor of Chemdex, Inc.                                                           |
|   |   |                                                                                                                                                                                 |
| 10.12  |   | Warrant and  Repurchase Agreement, dated March 4, 2004 issued by Sparhawk Laboratories,  Inc. to Chemdex, Inc.                                                                       |
|   |   |                                                                                                                                                                                 |
| 14     |   | Code of  Ethics                                                                                                                                                                      |
|   |   |                                                                                                                                                                                 |
| 31.1   |   | Certification  of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of  2002                                                                                     |
|   |   |                                                                                                                                                                                 |
| 31.2   |   | Certification  of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of  2002                                                                                     |
|   |   |                                                                                                                                                                                 |
| 32.1   |   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002                                                                                 |
|   |   |                                                                                                                                                                                 |
| 32.2   |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002                                                                            |

 

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