** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

----

 

**FORM 10-Q**

 

**(Mark One)**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|       | **For  the quarterly period ended April 30, 2003**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|       | **For  the transition period from                                             to                                             ** |

 

**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** |
|                                                                                                |
|                                                                                                |
| Former Name, Former  Address and Former Fiscal Year, if Changed Since Last Report                   |

 

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

 

Indicate by check whether the registrant is anaccelerated filed (as defined in Exchange Act Rule 12b-2).

Yes  o   No  ý

 

Indicate the number of shares outstanding of each ofthe issuer’s classes of common shares, as of the latest practicable date.

 

| **Common Shares, $.0167 Par Value** |   | **3,027,796  shares**           |
|-------------------------------------|--------|---------------------------------|
| (Title of Class)                    |   | (Outstanding at June  12, 2003) |

 

 

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**POLYDEX PHARMACEUTICALS LIMITED**

 

**TABLE OF CONTENTS**

 
|        |                                                                                                                        | **Page** |
|-------------|-----------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                   |     |
|        |                                                                                                                        |     |
| Item 1      | CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)                                                                              |     |
|        |                                                                                                                        |     |
|        | Consolidated Balance Sheets    April 30, 2003 and January 31, 2003                                                     | 3        |
|        |                                                                                                                        |     |
|        | Consolidated Statements of  Operations  Three months ended April 30, 2003 and 2002                                          | 5        |
|        |                                                                                                                        |     |
|        | Consolidated  Statements of Shareholders’ Equity  and Comprehensive Income  Three months ended April 30, 2003 and 2002 | 6        |
|        |                                                                                                                        |     |
|        | Consolidated Statements of  Cash Flows  Three months ended April 30, 2003 and 2002                                          | 7        |
|        |                                                                                                                        |     |
|        | Segmented Information  Three months ended April 30, 2003 and 2002                                                           | 8        |
|        |                                                                                                                        |     |
|        | Notes to Consolidated Financial Statements  (Unaudited)                                                                     | 9        |
|        |                                                                                                                        |     |
| Item 2      | MANAGEMENT’S DISCUSSION  AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                 | 14       |
|        |                                                                                                                        |     |
| Item  3     | QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                 | 29       |
|        |                                                                                                                        |     |
| Item 4      | CONTROLS AND  PROCEDURES                                                                                                    | 31       |
|        |                                                                                                                        |     |
| **PART II** | **OTHER INFORMATION**                                                                                                       |     |
|        |                                                                                                                        |     |
| Item 6      | EXHIBITS AND  REPORTS ON FORM 8-K                                                                                           | 32       |
|        |                                                                                                                        |     |
|        | Signatures and Certifications                                                                                               | 33       |

 

2

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.  Consolidated Financial Statements (unaudited).**

 

**POLYDEX PHARMACEUTICALS LIMITED**

 

Consolidated Balance Sheets

(Expressed in United States dollars)

 
|                                      |   | **(Unaudited)  April 30,  2003** |       | **January 31,  2003** |   |
|-------------------------------------------|--------|----------------------------------|------------|-----------------------|--------|
|                                      |   |                             |       |                  |   |
| **Assets**                                |   |                             |       |                  |   |
|                                      |   |                             |       |                  |   |
| Current assets:                           |   |                             |       |                  |   |
| Cash                                      |   | $                                | 420,144    |                  | $      | 280,748 |   |
| Trade accounts receivable                 |   | 1,232,922                        |       | 1,351,515             |   |
| Inventories:                              |   |                             |       |                  |   |
| Finished goods                            |   | 1,724,432                        |       | 1,678,250             |   |
| Work in process                           |   | 128,805                          |       | 59,478                |   |
| Raw materials                             |   | 637,234                          |       | 528,235               |   |
|                                      |   |                             |       |                  |   |
| Inventories                               |   | 2,490,471                        |       | 2,265,963             |   |
| Prepaid expenses and other current assets |   | 99,041                           |       | 80,324                |   |
|                                      |   |                             |       |                  |   |
|                                      |   | 4,242,578                        |       | 3,978,550             |   |
|                                      |   |                             |       |                  |   |
| Property, plant and equipment, net        |   | 4,818,839                        |       | 4,665,809             |   |
| Patents, net                              |   | 81,517                           |       | 87,062                |   |
| Due from shareholder                      |   | 966,843                          |       | 981,153               |   |
|                                      |   |                             |       |                  |   |
|                                      |   | $                                | 10,109,777 |                  | $      | 9,712,574 |   |

 

3

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|                                                          |   | **(Unaudited)  April 30  2003** |       | **January 31  2003** |   |
|---------------------------------------------------------------|--------|---------------------------------|------------|----------------------|--------|
|                                                          |   |                            |       |                 |   |
| **Liabilities and Shareholders’  Equity**                |   |                            |       |                 |   |
|                                                          |   |                            |       |                 |   |
| Current liabilities                                           |   |                            |       |                 |   |
| Bank indebtedness                                             |   | $                               | 126,868    |                 | $      | — |   |
| Accounts payable                                              |   | 1,322,369                       |       | 1,205,383            |   |
| Accrued liabilities                                           |   | 480,024                         |       | 423,059              |   |
| Due to Sparhawk Laboratories, Inc.                            |   | 101,453                         |       | 101,453              |   |
| Customer deposits received                                    |   | 5,539                           |       | 137,343              |   |
| Income taxes payable                                          |   | 50,165                          |       | 33,010               |   |
| Current portion of long-term debt                             |   | 456,406                         |       | 439,059              |   |
| Current portion of capital lease obligations                  |   | 121,490                         |       | 110,387              |   |
|                                                          |   |                            |       |                 |   |
|                                                          |   | 2,664,314                       |       | 2,449,694            |   |
|                                                          |   |                            |       |                 |   |
| Long-term debt                                                |   | 170,988                         |       | 186,776              |   |
| Capital lease obligations                                     |   | 313,089                         |       | 319,602              |   |
| Due to shareholder                                            |   | 682,103                         |       | 682,225              |   |
| Deferred income taxes                                         |   | 100,953                         |       | 49,750               |   |
|                                                          |   |                            |       |                 |   |
| Total liabilities                                             |   | 3,931,447                       |       | 3,688,047            |   |
|                                                          |   |                            |       |                 |   |
| Shareholders’ equity:                                    |   |                            |       |                 |   |
| Capital stock                                                 |   |                            |       |                 |   |
| Authorized:                                                   |   |                            |       |                 |   |
| 100,000 Class A preferred shares, par value $0.10 per share   |   |                            |       |                 |   |
| 899,400 Class B preferred shares, par value $0.0167 per share |   |                            |       |                 |   |
| 10,000,000 common shares, par value $0.0167 per share         |   |                            |       |                 |   |
| 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                                           |   | 23,224,128                      |       | 23,224,128           |   |
| Deficit                                                       |   | (16,567,839                     | )          | (16,278,269          | )      |
| Accumulated other comprehensive loss                          |   | (543,403                        | )          | (986,776             | )      |
|                                                          |   |                            |       |                 |   |
|                                                          |   | 6,178,330                       |       | 6,024,527            |   |
|                                                          |   |                            |       |                 |   |
|                                                          |   | $                               | 10,109,777 |                 | $      | 9,712,574 |   |

 

4

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**POLYDEX PHARMACEUTICALSLIMITED**

 

Consolidated Statements of Operations(Unaudited)

(Expressed in United States dollars)

 
|                                                                |   | **Three months ended  April 30,  2003** |      | **Three months ended  April 30,  2002** |   |
|---------------------------------------------------------------------|--------|-----------------------------------------|-----------|-----------------------------------------|--------|
|                                                                |   |                                    |      |                                    |   |
| Sales                                                               |   | $                                       | 3,296,518 |                                    | $      | 3,324,610 |   |
| Cost of products sold                                               |   | 2,518,230                               |      | 2,355,415                               |   |
|                                                                |   |                                    |      |                                    |   |
|                                                                |   | 778,288                                 |      | 969,195                                 |   |
|                                                                |   |                                    |      |                                    |   |
| Expenses:                                                           |   |                                    |      |                                    |   |
| General and administrative                                          |   | 424,978                                 |      | 375,945                                 |   |
| Depreciation                                                        |   | 142,357                                 |      | 135,200                                 |   |
| Research and development                                            |   | 9,439                                   |      | 55,326                                  |   |
| Interest expense                                                    |   | 35,372                                  |      | 41,385                                  |   |
| Selling and promotion                                               |   | 44,213                                  |      | 33,401                                  |   |
| Foreign exchange loss                                               |   | 192,177                                 |      | 28,451                                  |   |
| Amortization                                                        |   | 5,546                                   |      | 5,546                                   |   |
|                                                                |   |                                    |      |                                    |   |
|                                                                |   | 854,082                                 |      | 675,254                                 |   |
|                                                                |   |                                    |      |                                    |   |
| Income (loss) from operations                                       |   | (75,794                                 | )         | 293,941                                 |   |
|                                                                |   |                                    |      |                                    |   |
| Other income (loss):                                                |   |                                    |      |                                    |   |
| Other income (expense)                                              |   | (138,994                                | )         | 2,430                                   |   |
|                                                                |   |                                    |      |                                    |   |
|                                                                |   | (138,994                                | )         | 2,430                                   |   |
|                                                                |   |                                    |      |                                    |   |
| Income (loss) before provision for income taxes                     |   | (214,788                                | )         | 296,371                                 |   |
|                                                                |   |                                    |      |                                    |   |
| Provision for income taxes                                          |   | 74,782                                  |      | 151,369                                 |   |
|                                                                |   |                                    |      |                                    |   |
| Net income (loss) for the period                                    |   | $                                       | (289,570  | )                                       | $      | 145,002 |   |
|                                                                |   |                                    |      |                                    |   |
| Per share information:                                              |   |                                    |      |                                    |   |
| Earnings (loss) per common share for the period:                    |   |                                    |      |                                    |   |
| Basic                                                               |   | $                                       | (0.10     | )                                       | $      | 0.05 |   |
| Diluted                                                             |   | $                                       | (0.10     | )                                       | $      | 0.05 |   |
|                                                                |   |                                    |      |                                    |   |
| Weighted average number of common shares outstanding for the period |   | 3,027,796                               |      | 3,027,777                               |   |

 

5

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**POLYDEX PHARMACEUTICALS LIMITED**

** **

ConsolidatedStatements of Shareholders’ Equityand Comprehensive Income (Loss) (Unaudited)

(Expressed in United States dollars)

 
|                                           |   | **Three months ended  April 30,  2003** |        | **Three months ended  April 30,  2002** |   |
|------------------------------------------------|--------|-----------------------------------------|-------------|-----------------------------------------|--------|
|                                           |   |                                    |        |                                    |   |
| Preferred Shares:                              |   |                                    |        |                                    |   |
| Balance, beginning and end of period           |   | $                                       | 15,010      |                                    | $      | 15,010 |   |
|                                           |   |                                    |        |                                    |   |
| Common Shares:                                 |   |                                    |        |                                    |   |
| Balance, beginning and end of period           |   | $                                       | 50,434      |                                    | $      | 50,434 |   |
|                                           |   |                                    |        |                                    |   |
| Contributed Surplus:                           |   |                                    |        |                                    |   |
| Balance, beginning and end of period           |   | $                                       | 23,224,128  |                                    | $      | 23,224,128 |   |
|                                           |   |                                    |        |                                    |   |
| Deficit:                                       |   |                                    |        |                                    |   |
| Balance, beginning of period                   |   | $                                       | (16,278,269 | )                                       | $      | (15,604,528 | ) |
| Net income (loss) for the period               |   | (289,570                                | )           | 145,002                                 |   |
|                                           |   |                                    |        |                                    |   |
| Balance, end of period                         |   | $                                       | (16,567,839 | )                                       | $      | (15,459,526 | ) |
|                                           |   |                                    |        |                                    |   |
| Accumulated Other Comprehensive Loss:          |   |                                    |        |                                    |   |
| Balance, beginning of period                   |   | $                                       | (986,776    | )                                       | $      | (1,199,627 | ) |
| Currency translation adjustment for the period |   | 443,373                                 |        | 75,649                                  |   |
|                                           |   |                                    |        |                                    |   |
| Balance, end of period                         |   | $                                       | (543,403    | )                                       | $      | (1,123,978 | ) |
|                                           |   |                                    |        |                                    |   |
| Comprehensive Income for the period:           |   |                                    |        |                                    |   |
| Net income (loss) for the period               |   | $                                       | (289,570    | )                                       | $      | 145,002 |   |
| Currency translation adjustment for the period |   | 443,373                                 |        | 75,649                                  |   |
|                                           |   |                                    |        |                                    |   |
|                                           |   | $                                       | 153,803     |                                    | $      | 220,651 |   |

 

6

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**POLYDEX PHARMACEUTICALSLIMITED**

 

Consolidated Statements of Cash Flows(Unaudited)

(Expressed in United States dollars)

 
|                                                                  |   | **Three months ended  April 30,  2003** |     | **Three months ended  April 30,  2002** |   |
|-----------------------------------------------------------------------|--------|-----------------------------------------|----------|-----------------------------------------|--------|
|                                                                  |   |                                    |     |                                    |   |
| Cash provided by (used in):                                           |   |                                    |     |                                    |   |
|                                                                  |   |                                    |     |                                    |   |
| Operating activities:                                                 |   |                                    |     |                                    |   |
| Net income (loss) for the period                                      |   | $                                       | (289,570 | )                                       | $      | 145,002 |   |
| Add items not affecting cash:                                         |   |                                    |     |                                    |   |
| Depreciation and amortization                                         |   | 147,903                                 |     | 140,746                                 |   |
| Imputed interest on long-term debt                                    |   | 6,598                                   |     | 9,422                                   |   |
| Deferred tax provision                                                |   | 46,010                                  |     | 100,863                                 |   |
| Net change in non-cash working capital balances related to operations |   | 18,022                                  |     | 33,901                                  |   |
|                                                                  |   |                                    |     |                                    |   |
|                                                                  |   | (71,037                                 | )        | 429,934                                 |   |
|                                                                  |   |                                    |     |                                    |   |
| Investing activities:                                                 |   |                                    |     |                                    |   |
| Additions to property, plant and equipment                            |   | (60,998                                 | )        | (83,382                                 | )      |
| Decrease in due from shareholder                                      |   | 14,310                                  |     | 11,464                                  |   |
| Advance to Sparhawk Laboratories, Inc.                                |   | —                                  |     | (1,575                                  | )      |
|                                                                  |   |                                    |     |                                    |   |
|                                                                  |   | (46,688                                 | )        | (73,493                                 | )      |
|                                                                  |   |                                    |     |                                    |   |
| Financing activities:                                                 |   |                                    |     |                                    |   |
| Repayment of long-term debt                                           |   | (5,039                                  | )        | (49,033                                 | )      |
| Repayment of capital lease obligations                                |   | (28,068                                 | )        | (23,643                                 | )      |
| Decrease in due to shareholder                                        |   | (122                                    | )        | (1,662                                  | )      |
| Increase (decrease) in bank indebtedness                              |   | 126,868                                 |     | (43,611                                 | )      |
|                                                                  |   |                                    |     |                                    |   |
|                                                                  |   | 93,639                                  |     | (117,949                                | )      |
|                                                                  |   |                                    |     |                                    |   |
| Effect of exchange rate changes on cash                               |   | 163,483                                 |     | 15,790                                  |   |
|                                                                  |   |                                    |     |                                    |   |
| Increase in cash position                                             |   | 139,396                                 |     | 254,282                                 |   |
|                                                                  |   |                                    |     |                                    |   |
| Cash, beginning of period                                             |   | 280,748                                 |     | 123,418                                 |   |
|                                                                  |   |                                    |     |                                    |   |
| Cash, end of period                                                   |   | $                                       | 420,144  |                                    | $      | 377,700 |   |

 

7

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**POLYDEX PHARMACEUTICALSLIMITED**

** **

Segmented Information (Unaudited)

(Expressed in United States dollars)

 

All operations are carried out through Dextran Products Limited(“Dextran”) in Canada and through Chemdex, Inc. (“Chemdex”) in the UnitedStates.  The operations of Chemdexrepresent the veterinary products business and the operations are carried outthrough its wholly-owned subsidiary, Veterinary Laboratories, Inc. (“VetLabs”).  Vet Labs carries on itsbusiness through a Joint Venture with Sparhawk Laboratories, Inc.  Each of Dextran and Chemdex operates as astrategic business unit offering different products.  Each subsidiary comprises a reportable segment as follows:

 
|   | Dextran - |   | manufactures and sells  bulk quantities of Dextran and several of its derivatives to large  pharmaceutical companies throughout the world.                                                                                         |
|--------|-----------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |      |   |                                                                                                                                                                                                                               |
|   | Chemdex - |   | manufactures and sells  veterinary pharmaceutical products and specialty chemicals in the United  States.  The primary customers are  distributors and private labelers, who in turn sell to the end-user of these  products. |

 
|                                                 |   | **Three months ended  April 30,  2003** |       | **Three months ended  April 30,  2002** |   |
|------------------------------------------------------|--------|-----------------------------------------|------------|-----------------------------------------|--------|
|                                                 |   |                                    |       |                                    |   |
| **Sales:**                                           |   |                                    |       |                                    |   |
| Dextran                                              |   | $                                       | 1,298,941  |                                    | $      | 1,372,319 |   |
| Less:  intersegment sales  elimination          |   | 82,921                                  |       | 171,341                                 |   |
|                                                 |   |                                    |       |                                    |   |
|                                                 |   | 1,216,020                               |       | 1,200,978                               |   |
|                                                 |   |                                    |       |                                    |   |
| Chemdex                                              |   | 2,080,498                               |       | 2,123,632                               |   |
|                                                 |   |                                    |       |                                    |   |
| Total consolidated sales                             |   | $                                       | 3,296,518  |                                    | $      | 3,324,610 |   |
|                                                 |   |                                    |       |                                    |   |
| **Income (loss) before provision for income taxes:** |   |                                    |       |                                    |   |
| Dextran                                              |   | $                                       | 33,341     |                                    | $      | 341,730 |   |
| Chemdex                                              |   | (138,068                                | )          | 99,971                                  |   |
|                                                 |   |                                    |       |                                    |   |
| Total pre-tax income (loss) from segments            |   | (104,727                                | )          | 441,701                                 |   |
| Less:  Unallocated corporate  expenses          |   | 110,061                                 |       | 145,330                                 |   |
|                                                 |   |                                    |       |                                    |   |
| Total consolidated pre-tax income (loss)             |   | $                                       | (214,788   | )                                       | $      | 296,371 |   |
|                                                 |   |                                    |       |                                    |   |
|                                                 |   | **April 30,  2003**                     |       | **January 31,  2003**                   |   |
| **Assets:**                                          |   |                                    |       |                                    |   |
| Dextran                                              |   | $                                       | 5,362,792  |                                    | $      | 4,918,829 |   |
| Chemdex                                              |   | 3,555,796                               |       | 3,569,090                               |   |
|                                                 |   |                                    |       |                                    |   |
| Total assets from segments                           |   | 8,918,588                               |       | 8,487,919                               |   |
| Corporate assets                                     |   | 1,191,189                               |       | 1,224,655                               |   |
|                                                 |   |                                    |       |                                    |   |
| Total consolidated assets                            |   | $                                       | 10,109,777 |                                    | $      | 9,712,574 |   |

 

8

----

 

**1.  Basisof Presentation:**

 

The informationcontained in the interim consolidated financial statements is condensed fromthat which would appear in annual consolidated financial statements.  The interim consolidated financialstatements included herein should be read in conjunction with the audited financialstatements, and notes thereto, and other financial information contained in the2003 Annual Report on Form 10-K for the fiscal year ended January 31, 2003 asfiled by Polydex Pharmaceuticals Limited (the “Company”) with the Securitiesand Exchange Commission.  The unauditedinterim consolidated financial statements as of April 30, 2003 and 2002 includeall normal recurring adjustments which management considers necessary for afair presentation.  The results ofoperations for the interim periods are not necessarily indicative of theresults that may be expected for the entire fiscal year.  The interim consolidated financialstatements include the accounts and transactions of the Company and itsmajority owned subsidiaries in which the Company has equal to or more than a50% ownership interest and exercises control.

 

**2. Significant Accounting Policies:**

** **

**Basisof consolidation**

 

The consolidated financial statements include the accounts of theCompany and its subsidiaries.  Allinter-company accounts and transactions have been eliminated on consolidation.

 

**Useof estimates**

 

The preparation of financial statements in conformity with UnitedStates generally accepted accounting principles requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenue andexpenses during the reporting period. Actual results could differ from these estimates.

 

**Inventories**

 

Inventories of raw materials are stated at the lower of cost and netrealizable value, cost being determined on a first-in, first-out basis.  Work-in-process and finished goods arevalued at the lower of cost and net realizable value, and include the cost ofraw materials, direct labour and overhead expenses.

 

**Property,plant and equipment and patents**

 

Property, plant and equipment are recorded at cost.  Depreciation is provided on a straight-linebasis over the estimated useful lives of the assets as follows:

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

 

 

9

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Patents are amortized on a straight-line basis over their estimateduseful lives of ten years.

 

Useful life is the period over which the asset is expected tocontribute to the Company’s cash flows. The Company reviews the recoverability of its long-lived assets whenevents or changes in circumstances occur that indicate that the carrying valueof the asset may not be recoverable. The assessment of possible impairment is based on the Company’s abilityto recover the carrying value of the asset from the expected future pre-taxcash flows of the related operations. If these cash flows are less than the carrying value of such asset, animpairment loss is recognized for the difference between estimated fair valueand carrying value.

 

Costs related to plant refurbishments and equipment upgrades thatrepresent improvements to existing facilities are capitalized.  Costs related to repair and maintenance ofbuildings and equipment are expensed. The Company has no major planned maintenance activity other than theplant refurbishment at one of its subsidiaries.

 

**Revenuerecognition**

 

All revenue is from sales of bulk and finished dosage manufacturedproducts and is recognized upon shipment to the customer.  Title and risk of ownership pass to thecustomer upon contractual shipment terms, either FOB destination or FOBshipping point.

 

Product sold in bulk quantities is tested, prior to release forshipment, to ensure that it meets customer specifications, and in many cases,customers receive samples for their own testing.  Approval is obtained from the customer prior to shipping.  Further purchases by a customer of a bulkproduct with the same specifications do not require approvals.  Returns of bulk product are rare andgenerally are not accepted.

 

No testing and approval is required for finished dosage product becauseof its nature.  Returns of finisheddosage product are rare and generally are not accepted.

 

**Shippingand handling costs**

 

Shipping and handling costs incurred by the Company for shipment ofproducts to customers are classified as cost of goods sold.

 

**Researchand development**

 

Research and development costs are expensed as incurred and are statednet of investment tax credits earned.

 

**Foreigncurrency translation**

 

The functional currency of the Company’s Canadian operations has beendetermined to be the Canadian dollar. All asset and liability accounts of these companies have been translatedinto United

 

10

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States dollars using the current exchange rates at the consolidatedbalance sheet dates.  Revenue andexpense items are translated using the average exchange rates for theyear.  The resulting gains and losseshave been reported separately as other comprehensive loss within shareholders’equity.

 

**Stockoptions**

 

The Company has elected to follow Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees” [“APB 25”] and relatedinterpretations in accounting for its employee stock options rather than thealternative fair value accounting provided for under Statement of FinancialAccounting Standards No. 123, “Accounting for Stock-Based Compensation”[“SFAS 123”].  Under APB 25,because the exercise price of the Company’s employee stock options equals themarket price of the underlying stock on the date of grant, no compensationexpense is recognized.

 

**Earnings(loss) per common share**

 

Basic earnings (loss) per common share are computed using the weightedaverage number of shares outstanding of 3,027,796 at April 30, 2003 (2002 -3,027,777).  Diluted earnings (loss) percommon share are computed using the weighted average number of sharesoutstanding adjusted for the incremental shares, using the treasury stockmethod, attributed to outstanding options to purchase common stock.  Incremental shares of nil and 384 at April30, 2003 and April 30, 2002, respectively, were used in the calculation ofdiluted earnings per common share.  Options to purchase 431,550 and 408,600 common shares at April 30,2003 and April 30, 2002, respectively, were not included in the computation ofdiluted earnings per common share because their effect was anti-dilutive.

 

**3.  TheVet Labs – Sparhawk Joint Venture**

** **

**In 1992, Vet Labs and SparhawkLaboratories, Inc. (“Sparhawk”) entered into the Vet Labs – Sparhawk JointVenture (the “Joint Venture”) for the manufacture and sale of veterinarypharmaceutical products.  Vet Labs andSparhawk each own 50% of the Joint Venture. The Joint Venture is governed by the Agreement for the Operation ofVeterinary Laboratories, Inc.’s Lenexa Facility and Sparhawk Lab of K.C. as aJoint Venture, dated December 1, 1992, by and among Sparhawk, Chemdex and VetLabs (the “Joint Venture Agreement”).**

** **

**Pursuant to the Joint VentureAgreement, the Joint Venture Policy Committee (the “Policy Committee”) isresponsible 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 consists of fivemembers, three of which are selected by Vet Labs and two of which are selectedby Sparhawk.**

** **

**Because the Company controls theoperating, financing and investing decisions of the Joint Venture through VetLabs’ control of the Policy Committee, it consolidates the Joint Venture’sassets, liabilities, revenue and expenses in the Company’s financialstatements.**

** **

**11**

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** **

The Joint Venture Agreement contained a stated termination date ofDecember 1, 2002.  IN anticipation ofthe Joint Venture’s termination, on November 4, 2002, Sparhawk filed a petitionin the District Court of Johnson County, Kansas (the “Court”), against VetLabs, Chemdex and the Company seeking, among other things, judicial supervisionduring the winding up of the Joint Venture. Pursuant to the Standstill Agreement dated December 12, 2002 (theStandstill Agreement”), all parties agreed (i) to continue to operate the JointVenture in the fashion it operated before December 1, 2002, and (ii) that allrights and obligations of each party set forth in the Joint Venture Agreementwould continue during the term of the Standstill Agreement.

 

On December 16, 2002, each of the parties to the Joint VentureAgreement agreed to the appointment by the Court of a Receiver, whose dutiesinclude (i) the supervision of the wind-up of the Joint Venture, including thesubmission to the Court of a proposed plan for the disposal or distribution ofthe property of the Joint Venture and the allocation of the Joint Venture’sassets and liabilities among the parties, and (ii) the oversight of theoperations of the Joint Venture during the winding-up period in order to keepand preserve the assets thereof.  Legaland receiver costs of $141,004 at April 30, 2003 are included in other income(expense) on the consolidated statements of operations.

 

The Standstill Agreement was verbally extended by the parties and theircounsel and will survive until the completion of the Receiver’s role as thecourt-appointed facilitator of judicial supervision of the winding up of theJoint Venture.  The Joint Venture hascontinued to operate on this basis through the date of this quarterly report.

** **

**Sparhawk had an option to purchase40% of the assets held by Vet Labs.  Thepurchase price would be equal to 40% of the fair market value of the land,building and equipment owned by Vet Labs plus $1,000,000.  The land and building have been appraised ata valuation of $2,450,000 as of November 15, 2002.  The equipment has been appraised at a valuation of $230,900 as ofJanuary 22, 2003.  Sparhawk notified theCompany of its intention to exercise this Option in October 2002, but has notyet delivered the purchase price.  Theexistence and alleged exercise of the Option is one of the litigation matterssubject to the Standstill Agreement. The Company cannot at this time estimate the likelihood of Sparhawkconsummating the exercise of the Option and delivering the purchase price.**

** **

Subject to the exerciseof the Option, upon winding up of the Joint Venture, all assets used in theJoint Venture operations that were owned by the respective members of the JointVenture prior to the formation of the Joint Venture are expected to be returnedto the respective owner.  There are noassets of Sparhawk included in the consolidated financial statements of theCompany.  Sparhawk does own rights tocertain generic products currently produced by the Joint Venture, all of whichbelong to the liquids product line, which will be returned to Sparhawk uponwind-up.  During the quarterly periodended April 30, 2003, sales of these products amounted to approximately$288,000.  Rights to several of theproducts currently produced by the Joint Venture, including iron dextran, areowned by the Company and are expected to be returned to the Company, althoughownership of certain of these product rights may be disputed by Sparhawk.  During the quarterly period ended 

 

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April 30, 2003, sales ofthese products amounted to approximately $1,100,000.  The Company plans to continue production of the products to whichVet Labs owns the rights after the winding up of the Joint Venture.  However, no assurance can be given thatsales of these products by the Company after the dissolution of the JointVenture will be consistent with those achieved by the Joint Venture.

 

Assets purchased by theJoint Venture and rights to products developed by the Joint Venture areexpected to be distributed to the members of the Joint Venture as part of thewinding-up process.  Assets andliabilities owned by the Joint Venture are currently included in the Company’sfinancial statements with a book value of $2,204,270 and $1,289,686,respectively.  Depending upon theallocation of the Joint Venture assets upon dissolution, the Company may notreceive ownership of the rights to products developed by the JointVenture.  During the quarterly periodended April 30, 2003, sales of these products amounted to approximately$657,000.

 

It is possible that anegotiated settlement with Sparhawk will be reached that would prevent theallocation of Joint Venture assets by the Court.  Such a settlement would likely result in one of the partiespurchasing the other party’s interest in the Joint Venture at an agreed uponprice.  Because the Joint Ventureoperations are currently fully consolidated in the Company’s financialstatements, the Company’s results of operations would not be significantlyimpacted if the Company were to purchase Sparhawk’s interest in the JointVenture, other than with respect to the cost of the consideration given to Sparhawkin the transaction.

 

If such a settlementresulted in Vet Labs selling its interest in the Joint Venture to Sparhawk, theCompany’s financial statements would show a significant decline in revenues andpossibly a small decline in income before income taxes, which would be at leastpartially offset by the consideration received by Vet Labs in exchange for thesale of its Joint Venture interest.  Thesale proceeds would be allocated to the Joint Venture assets and liabilitiesand any excess would be recorded as a gain. At April 30, 2003, the carrying value of the Joint Venture assets andliabilities is $2,204,270 and $1,289,686, respectively.  During the year ended January 31, 2003,sales of the Joint Venture operations totaled $8,209,947 and net income beforeincome taxes was $31,520.  During thefirst quarter of fiscal 2004, sales of the Joint Venture amounted to$2,080,498, and loss before income taxes totaled $15,529.

 

The Company does notexpect that a sale of Vet Labs’ Joint Venture interest would have an adverseeffect on the operations of Dextran Products, because sales by Dextran Productsto Chemdex and the Joint Venture are not significant.

 

**4. Comparative Interim Consolidated Financial Statements**

 

The comparative interimconsolidated financial statements have been reclassified from statementspreviously presented to conform to the presentation of the 2004 interimconsolidated financial statements.

 

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**Item2.  Management’s Discussion****and Analysis of Financial Condition and Results of Operations.**

 

The fiscal year ofPolydex Pharmaceuticals Limited (the “Company”) ends on January 31 of eachyear.  Therefore fiscal year 2004 refersto the Company’s fiscal year ended January 31, 2004.  The following discussion should be read in conjunction with theApril 30, 2003 consolidated financial statements and notes thereto includedelsewhere in this report.  Operatingresults for the first quarter ended April 30, 2003 are not necessarilyindicative of the results that may be expected for the fiscal year endedJanuary 31, 2004.  For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in the Company’s annual report on Form 10-K for the fiscalyear ended January 31, 2003.  Allamounts are in United States dollars unless otherwise denoted.

### ** **

### **Resultsof Operations**

 

The operations of theCompany are carried on through Dextran Products Limited (“Dextran Products”) inCanada and through Chemdex, Inc. (“Chemdex”) in the United States.  The operations of Chemdex are carried onthrough its wholly-owned subsidiary, Veterinary Laboratories, Inc. (“VetLabs”).  Each of Dextran Products andVet Labs operates as a strategic business unit.  Dextran Products manufactures and sells bulk quantities ofDextran and several of its derivatives to large pharmaceutical companiesthroughout the world.  Vet Labsmanufactures 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.

 

Net loss for the firstquarter ended April 30, 2003 was $289,570, or $0.10 per share, as compared tonet income of $145,002, or $0.05 per share, for the quarter ended April 30,2002.  This decline is primarily due toa large foreign exchange loss at Dextran Products and losses at Vet Labs.  The foreign exchange loss at DextranProducts is due to a significant increase in the value of the Canadian dollarrelative to the value of the U.S. dollar. Dextran Products has a significant net asset exposure to the U.S. dollarbecause the majority of its accounts receivable balance is in U.S. dollars,while the majority of its expenses are in Canadian dollars.  The losses at Vet Labs are due to legal andreceiver fees relating to the Joint Venture (as described below in “The VetLabs – Sparhawk Joint Venture”).

 

During the first quarter ended April 30, 2003, theCompany had a loss from operations of $75,794, as compared to income from operationsof $293,941 for the first quarter of fiscal 2003.  This decline in results from operations is primarily due to adecline in sales and margins at both operating subsidiaries as compared to thesame quarter last year, and the foreign exchange loss at Dextran Products.

** **

**Sales volume for the first quarterof fiscal 2004 was $3,296,518, representing a decrease of $28,092 or 1% ascompared to the first quarter of fiscal 2003. Sales at Dextran Products decreased by $73,379 or 5% as compared to thesame quarter in fiscal 2003.  Thisdecrease in sales at Dextran Products is primarily due to reduced purchases ofraw materials by Chemdex due to lower iron dextran sales.  Sales at Vet Labs during the first quarterof fiscal 2004 decreased by $43,134 or 2%**

** **

**14**

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**as compared to the same quarter infiscal 2003.  This decrease at Vet Labsis due to significant decreases in the injectables product line caused by ageneral decrease in demand.  This salesdecrease was partially offset by sales increases in the liquids productline.  The sales increase in the liquidsproduct line is primarily due to the introduction of a new contract fillproduct.**

 

The summer months are typically slower sales monthsfor Vet Labs as large animals are put outdoors to pasture and therefore haveless need for vitamins and other supplements. Management is therefore forecasting lower sales levels in the secondquarter of fiscal 2004 than were achieved in the first quarter of fiscal 2004at Vet Labs.  Margins are expected toremain steady, but the expected lower sales volume may reduce operating profitsfor the second quarter of fiscal 2004. Management expects sales levels for the second quarter of fiscal 2004 toequal sales levels achieved in the second quarter of fiscal 2003 at Vet Labs,which were typical for a summer quarter.

 

Overall, the Company’s gross margin decreased from 29%in the first quarter of fiscal 2003 to 24% in the first quarter of fiscal2004.  Dextran Products’ gross margin decreasedfrom 45% in the first quarter of fiscal 2003 to 39% during the first quarter offiscal 2004.  Vet Labs’ gross margindecreased from 17% in the first quarter of fiscal 2003 to 14% in the firstquarter of fiscal 2004.

 

The margin decrease at Dextran Products is primarily aresult of a product mix variance, as Dextran Products experienced high salesvolumes in one of its higher margin products during the first quarter of fiscal2003 which were not repeated during the first quarter of fiscal 2004.  In addition, the large increase in the valueof the Canadian dollar in relation to the U.S. dollar adversely impacted themargin percentage at Dextran Products. The majority of the sales at Dextran Products are denominated in U.S.dollars, but all costs are incurred in Canadian dollars. Management expectssales and margins to continue at similar levels at Dextran Products for theforeseeable future.

 

The margin decrease at Vet Labs is also the result ofa product mix variance, as Vet Labs experienced decreased sales in itsinjectables product line, a higher margin product line, during the firstquarter of fiscal 2004, and increased sales in a lower margin product line ascompared to the first quarter of fiscal 2003.

 

General and administrative expenses in the firstquarter of fiscal 2004 were $424,978, representing an increase of $49,033 or13% as compared to the first quarter of fiscal 2003.  This increase is due primarily to the hiring of a new generalmanager at Vet Labs in the fourth quarter of fiscal 2003 to oversee the jointventure operations and its management on behalf of the Company.  Selling and promotional expenses in thefirst quarter of fiscal 2004 were consistent with the same period in fiscal2003.

 

Interest expense in the first quarter of fiscal 2004was $35,372, representing a decrease of $6,013 or 15% as compared to the firstquarter in fiscal 2003.  This decreaseis due to the partial repayment of long-term debt and capital leaseobligations.

 

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Depreciation and amortization in the first quarter offiscal 2004 was $147,903, representing an increase of $7,157 or 5% from thefirst quarter of fiscal 2003.  Thisdecrease was due to the installation of new equipment at Dextran Products.

 

Other income in the first quarter of fiscal 2004 wasconsistent with amounts earned during the same period in fiscal 2003.  Other expenses consisted of $141,004 oflegal and receiver fees relating to the Vet Labs – Sparhawk Joint Venture.  The Company did not incur similar expensesduring the same period of fiscal 2003.

 

Due to continued direct funding of research anddevelopment expenses by third party public and/or private sector groups asdiscussed below, the Company’s research and development costs in the first quarterof fiscal 2004 was $9,439, representing a decrease of $45,887 or 83% ascompared to the first quarter of fiscal 2003. Funding from existing third-party sources for existing research anddevelopment projects is expected to continue over the remainder of fiscal 2004at historic levels.  The Company’sresearch and development expenditures are expected to increase over theremainder of fiscal 2004 due to additional developmental activities the Companyexpects to perform and fund outside of its partnership relationships.

 

Research and development with respect to the Company’s cellulosesulphate product as a contraceptive gel with antiviral capabilities is beingconducted with the assistance and financial support of the ContraceptiveResearch and Development Program, Consortium for Industrial Collaboration inContraceptive Research and Global Microbicide Program (collectively,“CONRAD”).  CONRAD provides directfinancial assistance in support of, and/or actually conducts specific researchstudies involving the cellulose sulphate product in conjunction with, variouspublic health-oriented entities.  Inexchange for this research assistance, the Company makes its intellectualproperty, namely patent rights and know-how, available for use in thepreparation, clinical evaluation and development of the product.  The Company has no commitments to repay thefunding or to purchase the results of the research.

 

**At the present time four SafetyStudies are underway and further studies are in the planning stages:**

** **

**•**              A Phase I Expanded Safety Study isunderway in collaboration with the World Health Organization in Uganda, Nigeriaand India.  This study will involve 180women in two treatment groups and two cohorts. The final report on this study is expected during the fourth quarter offiscal 2004;

** **

**•**              A Safety Study in HIV-Infectedwomen is being carried out in collaboration with the HIV Prevention TrialsNetwork of the National Institute of Allergy and Infectious Diseases at foursites in the United States.  The studywill involve 96 women and 48 male partners. Although recruitment has taken longer than expected, the study isexpected to be completed during the fourth quarter of fiscal 2004;

** **

**•**              An Expanded Safety Study at threesites in the United States involves 60 healthy women and is expected to becompleted by the fourth quarter of fiscal 2004; and

** **

**16**

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•                                          A SafetyStudy in Cameroon being carried out in collaboration with Family HealthInternational.  The final report is expectedby the second quarter of fiscal 2004.

 

Research and development relating to the Company’s cystic fibrosisproduct, Usherdex (now identified by BCY as DCF 987), is being conducted andfunded directly by BCY Lifesciences, Inc. (“BCY”) pursuant to a licenseagreement.  BCY has identified DCF 987as its lead drug candidate, completed Phase I human clinical trials andcommenced Phase II human clinical trials. This Phase II trial is designed to study the utility of DCF 987 whentreating cystic fibrosis and is being conducted at six centers in Canada.  The company will receive royalty paymentsfrom BCY based upon sales and other revenues upon approval of any developedproduct pursuant to its license agreement with BCY.

 

**Liquidity and Capital Resources**

 

In the first quarter of fiscal 2004 the Company had negative cash flowfrom operations of $71,037, compared to positive cash flow from operations of$429,934 in the first quarter of fiscal 2003. This decrease of $500,971, or 117%, is primarily attributable todecreased earnings during the quarter as discussed in “Results of Operations”above.

 

At April 30, 2003, the Company had trade accounts receivable of$1,232,922 compared to $1,351,515 at January 31, 2003.  The decrease in trade accounts receivableduring the first quarter of fiscal 2004 was primarily due to increasedcollections at Vet Labs during the quarter.

 

At April 30, 2003, the Company has inventory valued at $2,490,471,compared to $2,265,963 at January 31, 2003. This increase in inventory during the first quarter of fiscal 2004 wasprimarily due to a timing variance in customer orders.

 

At April 30, 2003, the Company had accounts payable of $1,322,369, ascompared to $1,205,383 at January 31, 2003. The increase in the accounts payable balance is a function of theincrease in the inventory balance.

 

At April 30, 2003, the Company had customer deposits received of$5,539, as compared to $137,343 at January 31, 2003.  This decrease in the customer deposits received balance is due tothe timing of collections from customers.

 

The Company experienced no significant changes in financing orinvesting activities and made no significant capital expenditures during thefirst quarter of 2004.

 

The accumulated other comprehensive loss of $443,373 during the firstquarter of fiscal 2004 is entirely attributable to the currency translationadjustment of Dextran Products.  DextranProducts’ functional currency is the Canadian dollar.  This currency translation adjustment arises from the translationof Dextran Products’ financial statements to U.S. dollars.

 

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Dextran Products has a CDN$750,000 (US$529,000) line of credit, ofwhich $126,868 was utilized at April 30, 2003. Management anticipates using the credit line for the purposes of fundinga portion of the costs associated with the refurbishment of the Torontofacility.  The Vet Labs – Sparhawk JointVenture (described below in “The Vet Labs – Sparhawk Joint Venture”) has a$175,000 line of credit to fund operations, none of which was utilized at April30, 2003.  There have been no newcapital lease obligations during the first quarter of fiscal 2004.  All long-term debt is due in the next twoyears, while capital lease obligations are due over the next four years.

 

Management expects the primary source of its future capital needs to bea combination of Company earnings and borrowings.  The Company, at present, does not have any material commitmentsfor capital expenditures, although management intends to continue the plantrefurbishment at Dextran Products.

 

The Company believes that based upon current levels of revenues andspending, and taking into account the Joint Venture litigation, its existingworking capital resources will be sufficient to support continuing operationsfor at least the next twelve months.

 

No changes in accounting principles or their application have beenimplemented in the reporting period that would have a material effect onreported income.  Changes in therelative values of the Canadian dollar and the U.S. dollar occur from time totime and may, in certain instances, materially affect the Company’s results ofoperations.

 

The Company does not believe that the impact of inflation and changingprices has had a material affect on its operations or financial results at anytime in the last three years.

 

**The VetLabs – Sparhawk Joint Venture**

 

In 1992, Vet Labs and Sparhawk Laboratories, Inc. (“Sparhawk”) enteredinto the Vet Labs – SparhawkJoint Venture (the “Joint Venture”) for the manufacture and sale of veterinarypharmaceutical products.  Vet Labs andSparhawk each own 50% of the Joint Venture. The Joint Venture is governed by the Agreement for the Operation ofVeterinary Laboratories, Inc.’s Lenexa Facility and Sparhawk Lab of K.C. as a JointVenture, dated December 1, 1992, by and among Sparhawk, Chemdex and Vet Labs(the “Joint Venture Agreement”).

 

Pursuant to the Joint Venture Agreement, the Joint Venture PolicyCommittee (the “Policy Committee”) is responsible for the overall management ofthe Joint Venture, including the direction and control of the personsdesignated with the daily management responsibilities of the Joint Venture, andthe general supervision of the management and conduct of the affairs of theJoint Venture.  The Policy Committeeconsists of five members, three of which are selected by Vet Labs and two ofwhich are selected by Sparhawk.

 

Because the Company controls the operating, financing and investingdecisions of the Joint Venture through Vet Labs’ control of the PolicyCommittee, it consolidates the Joint Venture’s assets, liabilities, revenue andexpenses in the Company’s financial statements.

 

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The Joint Venture Agreement contained a stated termination date of December1, 2002.  In anticipation of the JointVenture’s termination, on November 4, 2002, Sparhawk filed a petition in theDistrict Court of Johnson County, Kansas (the “Court”), against Vet Labs,Chemdex and the Company seeking, among other things, judicial supervisionduring the winding up of the Joint Venture. Pursuant to the Standstill Agreement dated December 12, 2002 (theStandstill Agreement”), all parties agreed (i) to continue to operate the JointVenture in the fashion it operated before December 1, 2002, and (ii) that allrights and obligations of each party set forth in the Joint Venture Agreementwould continue during the term of the Standstill Agreement.

 

On December 16, 2002, each of the parties to the Joint VentureAgreement agreed to the appointment by the Court of a Receiver, whose dutiesinclude (i) the supervision of the wind-up of the Joint Venture, including thesubmission to the Court of a proposed plan for the disposal or distribution ofthe property of the Joint Venture and the allocation of the Joint Venture’sassets and liabilities among the parties, and (ii) the oversight of theoperations of the Joint Venture during the winding-up period in order to keepand preserve the assets thereof.  TheCompany has incurred legal and receiver costs of $141,004 at April 30, 2003.

 

The Standstill Agreement was verbally extended by the parties and theircounsel and will survive until the completion of the Receiver’s role as thecourt-appointed facilitator of judicial supervision of the winding up of theJoint Venture.  The Joint Venture hascontinued to operate on this basis through the date of this quarterly report.

 

Sparhawk had an option to purchase 40% of the assets held by VetLabs.  The purchase price would be equalto 40% of the fair market value of the land, building and equipment owned byVet Labs plus $1,000,000.  The land andbuilding have been appraised at a valuation of $2,450,000 as of November 15,2002.  The equipment has been appraisedat a valuation of $230,900 as of January 22, 2003.  Sparhawk notified the Company of its intention to exercise thisOption in October 2002, but has not yet delivered the purchase price.  The existence and alleged exercise of theOption is one of the litigation matters subject to the Standstill Agreement.  The Company cannot at this time estimate thelikelihood of Sparhawk consummating the exercise of the Option and deliveringthe purchase price.

 

Subject to the exercise of the Option, upon winding up of the JointVenture, all assets used in the Joint Venture operations that were owned by therespective members of the Joint Venture prior to the formation of the JointVenture are expected to be returned to the respective owner.  There are no assets of Sparhawk included inthe consolidated financial statements of the Company.  Sparhawk does own rights to certain generic products currentlyproduced by the Joint Venture, all of which belong to the liquids product line,which will be returned to Sparhawk upon wind-up.  During the quarterly period ended April 30, 2003, sales of theseproducts amounted to approximately $288,000. Rights to several of the products currently produced by the JointVenture, including iron dextran, are owned by the Company and are expected to bereturned to the Company, although ownership of certain of these product rightsmay be disputed by Sparhawk.  During thequarterly period ended April 30, 2003, sales of these products amounted toapproximately $1,100,000.  The Companyplans

 

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to continue production of the products to which Vet Labs owns therights after the winding up of the Joint Venture.  However, no assurance can be given that sales of these productsby the Company after the dissolution of the Joint Venture will be consistentwith those achieved by the Joint Venture.

 

Assets purchased by the Joint Venture and rights to products developedby the Joint Venture are expected to be distributed to the members of the JointVenture as part of the winding-up process. Assets and liabilities owned by the Joint Venture are currently includedin the Company’s financial statements with a book value of $2,204,270 and$1,289,686, respectively.  Dependingupon the allocation of the Joint Venture assets upon dissolution, the Companymay not receive ownership of the rights to products developed by the JointVenture.  During the quarterly periodended April 30, 2003, sales of these products amounted to approximately$657,000.

 

It is possible that a negotiated settlement with Sparhawk will be reachedthat would prevent the allocation of Joint Venture assets by the Court.  Such a settlement would likely result in oneof the parties purchasing the other party’s interest in the Joint Venture at anagreed upon price.  Because the JointVenture operations are currently fully consolidated in the Company’s financialstatements, the Company’s results of operations would not be significantlyimpacted if the Company were to purchase Sparhawk’s interest in the JointVenture, other than with respect to the cost of the consideration given toSparhawk in the transaction.

 

If such a settlement resulted in Vet Labs selling its interest in theJoint Venture to Sparhawk, the Company’s financial statements would show asignificant decline in revenues and possibly a small decline in income beforeincome taxes, which would be at least partially offset by the considerationreceived by Vet Labs in exchange for the sale of its Joint Ventureinterest.  During the first quarter offiscal 2004, sales of the Joint Venture amounted to $2,080,498, and loss beforeincome taxes totaled $15,529.

 

The Company does not expect that a sale of Vet Labs’ Joint Ventureinterest would have an adverse effect on the operations of Dextran Products,because sales by Dextran Products to Chemdex and the Joint Venture are notsignificant.

 

**Related Party Transactions**

 

In August 1997, the Company loaned Thomas C. Usher, its Vice-Chairman,Director of Research and Development, and a member of its Board of Directors,$691,500 at an interest rate equal to the prime rate of Toronto Dominion Bankplus 1.50% (the “Loan”).  The Loan wasused to partially fund a $1,000,000 payment to the State of Florida in order toallow Thomas C. Usher to regain possession of 430,000 Common Shares of theCompany then held by the State as collateral security relating to theliquidation of insurance companies formerly owned by Thomas C. Usher.  Repayment of the Loan is accomplished bymonthly payments and through offsets by the Company against royalty paymentsdue Thomas C. Usher pursuant to intellectual property license agreements andbonus payments, if any, granted Thomas C. Usher as an employee of theCompany.  The amount outstanding underthe Loan as of April 30, 2003 was $510,714, as compared to $517,190 at January31, 2003.

 

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In August 1999, Thomas C. Usher personally assumed all of the assetsand liabilities of Novadex Corp., including the balance of receivables (the“Receivables”) due to the Company from Novadex Corp.  The Receivables have no specific repayment terms.  The total outstanding amount of theReceivables as of April 30, 2003 was $426,454, representing no change fromJanuary 31, 2003.  Thomas C. Usher alsoowes $250,000 to a subsidiary of the Company, Novadex International Limited, asof April 30, 2003.  The outstandingamount of this loan has not changed from January 31, 2003.

 

The Company also has an outstanding loan payable to Ruth Usher, amember of the Board of Directors.  Theamount due from the Company pursuant to this loan decreased to $682,103 atApril 30, 2003 from $682,225 at January 31, 2003 due to monthly payments by theCompany.

 

**RiskFactors**

 

In addition to the risks and uncertainties discussed in the JointVenture section above, the risks, uncertainties and other factors describedbelow could materially and adversely affect the Company’s business, financialcondition, operating results and prospects.

 

*The Company’s product developmentefforts may be reduced or discontinued due to difficulties or delays inclinical trials.*

 

To achieve sustained profitability, the Company must, alone or withcorporate partners and collaborators, successfully research, develop andcommercialize identified technologies or product candidates.  Current developmental product candidates arein various stages of clinical and pre-clinical development and will requiresignificant further funding, research, development, preclinical and/or clinicaltesting, regulatory approval and commercialization testing, and are subject tothe risks of failure inherent in the development of products based oninnovative or novel technologies.  Theseproducts are also rigorously regulated by the U.S. federal government,particularly the FDA, and by comparable agencies in state and local jurisdictionsand in foreign countries.  Specifically,each of the following results is possible with respect to any one of theCompany’s developmental product candidates:

 

•                  thatthe Company will not be able to maintain its current research and developmentschedules;

 

•                  thatthe Company will not be able to enter into human clinical trials because ofscientific, governmental or financial reasons, or that it will encounterproblems in clinical trials that will cause a delay or suspension of thedevelopment of the product candidate;

 

•                  thatthe developmental product will be found to be ineffective or unsafe;

 

•                  thatgovernment regulations will delay or prevent the product’s marketing for aconsiderable period of time and impose costly procedures upon the Company’sactivities;

 

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•                  thatthe FDA or other regulatory agencies will not approve the product or theprocess by which the product is manufactured, or will not do so on a timelybasis; and/or

 

•                  thatthe FDA’s policies may change and additional government regulations andpolicies may be instituted, which could prevent or delay regulatory approval ofthe product.

 

If any of the risks set forth above occurs, the Company may not be ableto successfully develop its identified developmental product candidates.

 

*The Company’s developmental productcommercialization efforts may not be successful.*

 

It is possible that, for reasons including, but not limited to thoseset forth below, the Company may be unable to commercialize or receiveroyalties from the sale of any given developmental product, even if it is shownto be effective, if:

 

•                  theproduct is uneconomical or if the market for the product does not develop ordiminishes;

 

•                  theCompany is not able to enter into arrangements or collaborations tocommercialize and/or market the product;

 

•                  theproduct is not eligible for third-party reimbursement from government orprivate insurers;

 

•                  othershold proprietary rights that preclude the Company from commercializing theproduct;

 

•                  othershave brought to market similar or superior products;

 

•                  othershave superior 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

 

•                  theproduct has undesirable or unintended side effects that prevent or limit itscommercial use.

 

*The Company depends on partnershipswith third parties for the development and commercialization of its products.*

 

The Company’s strategy for development and commercialization of itsproducts is to rely on licensing agreements with third party partners.  As a result, the ability of the Company tocommercialize future products is dependent upon the success of third parties inperforming clinical trials, obtaining regulatory approvals, manufacturing andsuccessfully marketing its products. There can be no assurance that such third party collaborations will besuccessful.  If any of the Company’s

 

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current research and development partnerships are discontinued, it maynot be able to find others to develop and commercialize its current productcandidates.

 

*The Company does not currently haveagreements with third parties to market many of its developmental products.*

 

The commercialization of any of the Company’s developmental productsthat receive FDA approval will depend upon the Company’s ability to enter intoagreements with 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.

 

*The Company may be unable tocommercialize its products if it is unable to protect its proprietary rights,and may be liable for significant costs and damages if it faces a claim ofintellectual property infringement by a third party.*

 

The Company’s success depends in part on its ability to obtain andmaintain patents, protect trade secrets and operate without infringing upon theproprietary rights of others.  In theabsence of patent and trade secret protection, competitors may adversely affectthe Company’s business by independently developing and marketing substantiallyequivalent or superior products, possibly at lower prices.  The Company could also incur substantialcosts in litigation and suffer diversion of attention of technical andmanagement personnel if it is required to defend intellectual propertyinfringement suits brought by third parties, with or without merit, or ifrequired to initiate litigation against others to protect or assertintellectual property rights.  Moreover,any such litigation may not be resolved in favor of the Company.

 

The Company has received various patents covering the uses of itsproduct candidates.  However, the patentposition of companies in the pharmaceutical industry generally involves complexlegal and 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 Officeregarding the breadth of claims allowed in biotechnology patents.

 

In addition, because patent applications in the United States aremaintained in secrecy until patents issue, and because publication ofdiscoveries in scientific or patent literature often lags behind actualdiscoveries, the Company cannot be certain that it and its licensors are thefirst creators of inventions covered by any licensed patent applications orpatents or that the Company or such licensors are the first to file.  The United States Patent and TrademarkOffice may commence interference proceedings involving patents or patentapplications, in which the question of first inventorship is contested.  Accordingly, the patents owned by orlicensed to the Company may not be valid or may not afford the Companyprotection against competitors with similar intellectual property.

 

It is also possible that the Company’s patents may infringe on patentsor other rights owned by

 

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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 to the products for which the Company has patents or havefiled patent applications, the Company relies upon unpatented proprietarytechnology and may not be able to meaningfully protect its rights with regardto that unpatented proprietary technology.

 

**CriticalAccounting Policies**

 

The critical accounting policies of the Company include the use ofestimates and allowances and their impact on accounts receivable, the usefullives of assets and the realizability of deferred tax assets.

 

Management is required to make estimates and assumptions, in preparingthe consolidated financial statements, that affect the reported amounts ofassets and liabilities, the disclosure of contingent assets and liabilities atthe date of the consolidated financial statements and the reported amounts ofrevenue and expenses during the periods. The actual results could differ from these estimates.  Significant estimates made by managementinclude the calculation of reserves for uncollectible accounts, inventoryallowances, useful lives of long-lived assets and the realizability of deferredtax assets.

 

Revenue Recognition

 

All revenue is from sales of bulk and finished dosage manufacturedproducts and is recognized upon shipment to the customer.  Title and risk of ownership pass to thecustomer upon contractual shipment terms, either FOB destination or FOBshipping point.  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.  Asignificant change in these estimates could have a material impact on theresults of operations.

 

Allowances for Doubtful Accounts

 

Accounts receivable is stated net of allowances for doubtfulaccounts.  Allowances for doubtfulaccounts are determined 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 customers receivables.

 

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Long-Lived Assets

 

Long-lived assets are stated at cost, less accumulated depreciation oramortization computed using the straight-line method based on their estimateduseful lives ranging from three to fifteen years.  Useful life is the period over which the asset is expected tocontribute to the Company’s cash flows. A significant change in these estimates 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 relatedoperations.  If these cash flows areless than the********carrying value of such asset, animpairment loss is recognized for the difference between********estimatedfair value and carrying value.  Themeasurement of impairment requires management to********makeestimates of these cash flows related to long-lived assets as well as otherfair value********determinations.**

 

Deferred Tax Assets

 

The Company has recorded a valuation allowance on deferred tax assetsprimarily related to operating loss carryforwards of the U.S. operations basedon the uncertainty involved with the Joint Venture.  A change in the outlook for future taxable income in the U.S. operationscould result in the recognition of some portion or all of these losscarryforwards, which could result in a material increase in the results ofoperations through the recovery of deferred tax assets.

 

**Recent Accounting Pronouncements**

 

In April 2003, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 149, “Amendmentof Statement 133 on Derivative Instruments and Hedging Activities.”  SFAS 149 is intended to result in moreconsistent reporting of contracts as either freestanding derivative instrumentssubject to Statement 133 in their entirety, or as hybrid instruments with debthost contracts and embedded derivative features.  The Statement is effective for contracts entered into or modifiedafter June 30, 2003, and hedging relationships designated after June 30,2003.  The Company will account for anyderivative instruments and hedging activities in accordance with SFAS 149.  The Company does not expect the adoption ofthis amendment to have a material impact on the Company’s results of operationsor financial condition.

 

In January 2003, the FASB issued FASB Interpretation (“FIN”) No. 46,“Consolidation of Variable Interest Entities an interpretation of ARB No. 51”(the “Interpretation”). The Interpretation introduces a new consolidation model- the variable interests model - which determines control (and consolidation)based on potential variability in gains and losses of the entity beingevaluated for consolidation. The Interpretation requires disclosure of certaininformation in financial statements initially issued after January 31, 2003, ifit is reasonably possible that an enterprise will consolidate or discloseinformation about a variable interest entity when Interpretation 46 becomeseffective.

 

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The Company will account for any variable interest entities inaccordance with FIN 46. The adoption of this Interpretation had no impact onthe Company’s results of operations or financial condition.

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASBStatements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and TechnicalCorrections.”  SFAS No. 145 requires anygain or loss on extinguishments of debt to be classified as income or loss fromcontinuing operations, rather than as an extraordinary item.  Effective February 1, 2003, the Companyaccounts for any extinguishments of debt in accordance with SFAS 145.  The adoption of this statement had no impacton the Company’s results of operations or financial condition.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for a cost associated with anexit or disposal activity be recognized when the liability is incurred. SFASNo. 146 also establishes that the liability should be measured initially atfair value. SFAS No. 146 is effective for exit or disposal activities initiatedafter December 31, 2002.  EffectiveJanuary 1, 2003, the Company accounts for any exit costs or disposal activitiesin accordance with SFAS No. 146.  Theadoption of SFAS No. 146 had no impact on the Company’s results of operationsor financial condition.

 

In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accountingand Disclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.”  FIN No. 45clarifies and expands on existing disclosure requirements for a guarantorregarding its obligations under certain guarantees it has issued. FIN No. 45also requires that the guarantor must recognize a liability for the fair valueof its obligations under certain guarantees. The disclosure requirements are effective for fiscal years ending afterDecember 15, 2002.  The initialrecognition and measurement provisions apply on a prospective basis toguarantees issued after December 31, 2002. The Company has adopted the disclosure requirements of FIN No. 45effective January 31, 2003, and has adopted the recognition and measurement provisionsfor guarantees issued after December 31, 2002. The adoption of FIN 45 had no impact on the Company’s results ofoperations or financial condition.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting forStock-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 Accounting PrinciplesBoard Opinion (“APB”) No. 28, “Interim Financial Reporting,” to requiredisclosure in the summary of significant accounting policies of the effects ofan entity’s accounting policy with respect to stock-based employee compensationon reported net income and earnings per share in annual and interim financialstatements.  SFAS No. 148 is effectivefor fiscal years ending after December 15, 2002.  The Company has elected to continue to use the intrinsic valuebased method under the provisions of APB No. 25, “Accounting for Stock Issuedto Employees,” and has adopted the required disclosures of SFAS No. 148effective January 31, 2003.

 

In August 2001, the FASB issued SFAS No. 144, “Accounting for theImpairment or Disposal of

 

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Long-Lived Assets,” effective for fiscal years beginning after December15, 2001.  SFAS No. 144 addressesfinancial accounting and reporting for the impairment or disposal of long-livedassets and supersedes SFAS No. 121, “Accounting for the Impairment ofLong-Lived Assets and for Long-Lived Assets to be Disposed Of,” and theaccounting and reporting provisions of Accounting Principles Board Opinion No.30, “Reporting the Results of Operations for a disposal of a segment of abusiness.”  The Company adopted SFAS No.144 as of February 1, 2002.  Theadoption of SFAS No. 144 had no impact on the Company’s results of operationsor financial condition.

 

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations”.  SFAS No. 143applies to all entities and requires legal obligations arising from theretirement of tangible long-lived assets associated with their acquisition,construction, or development and (or) normal operation, except for certainlease obligations, to be initially measured at their fair value.  SFAS No. 143 is effective for financialstatements issued for fiscal years beginning after June 15, 2002.  Effective February 1, 2003, the Companyaccounts for any asset retirement obligations in accordance with SFAS 143. Theadoption of SFAS No. 143 had no impact on the Company’s results of operationsor financial condition.

 

**Forward-Looking Statements**

 

This Form 10-Q, including the Management’s Discussion and Analysis ofFinancial Condition and Results of Operations, 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, statements containingexpressions such as “believes”, “anticipates”, “plans” or “expects” used inthis Form 10-Q, the Company’s Annual Report, and the Company’s periodic reportson Forms 10-K and 10-Q previously filed with the Securities and ExchangeCommission are intended to identify forward-looking statements.  The Company cautions that various risks anduncertainties and other factors could cause actual results to differ materiallyfrom those expressed in or implied by the forward-looking statements.  These factors include, without limitation,changing market conditions, the progress of clinical trials, and the resultsobtained, the establishment of new corporate alliances, the impact ofcompetitive products and pricing, the timely development, FDA approval andmarket acceptance of the Company’s products, and 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, we undertake noobligation to publicly update or revise any forward-looking statements or therisk factors described in this quarterly report, whether as a result of newinformation, future events, changed circumstances or any other reason after thedate of this report.

 

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The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with United States generally acceptedaccounting principles for interim financial information and the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normally recurring accruals)considered necessary for a fair presentation have been included.

 

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**Item3.  Quantitative and QualitativeDisclosures about Market Risk.**

 

Exchange Rate Sensitivity

 

The Company’s operations consist of manufacturing activities in theUnited States and Canada.  The Company’sproducts are sold in the United States, Canada, Europe and the Pacific Rim.

 

While the majority of the sales of Dextran Products, the Company'sCanadian operations, 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 ensure that an acceptablemargin level at Dextran Products is maintained.  Management has the ability, to some extent, to adjust salesprices to maintain an acceptable margin level.

 

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

 
|                   |   | **Expected Maturity Date** |   |        |   |        |   |
|------------------------|--------|----------------------------|--------|-------------|--------|-------------|--------|
|                   |   | **1/31/04**                |   | **1/31/05** |   | **1/30/06** |   | **1/31/07** |   | **1/31/08** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
|                   |   | **(US$ Equivalent)**       |   |        |   |
| **Liabilities**:       |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt:        |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate  ($CDN)     |   | 110,388                    |   | 117,703     |   | 101,035     |   | 100,863 |   | — |   | — |   | 429,989 |   | 429,989 |   |
| Average interest  rate |   | 8.45                       | %      | 8.49        | %      | 9.00        | %      | 9.00 | % | — |   | — |   | 8.73 | % |   |   |

 

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Interest Rate Sensitivity

 

The Company has no significant interest earning assets and the majorityof its debt is at fixed rates.  Thevariable rate debt represents the shareholder loan payable, which isapproximately 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 the Company’s financialinstruments that are sensitive to changes in interest 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** |   |        |   |        |   |
|------------------------|--------|----------------------------|--------|-------------|--------|-------------|--------|
|                   |   | **1/31/04**                |   | **1/31/05** |   | **1/30/06** |   | **1/31/07** |   | **1/31/08** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
|                   |   | **(US$ Equivalent)**       |   |        |   |
| **Assets:**            |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Notes receivable:      |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| (Variable rate  ($US)  |   | 46,976                     |   | 56,718      |   | 60,121      |   | 63,728 |   | 67,552 |   | 222,096 |   | 517,191 |   | 517,191 |   |
| Average interest  rate |   | 6.00                       | %      | 6.00        | %      | 6.00        | %      | 6.00 | % | 6.00 | % | 6.0 | % | 6.00 | % |   |   |
|                   |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**:       |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt:        |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate ($US)       |   | 280,365                    |   | —      |   | —      |   | — |   | — |   | — |   | 280,365 |   | 280,365 |   |
| Average interest  rate |   | 8.11                       | %      | —      |   | —      |   | — |   | — |   | — |   | 8.11 | % |   |   |
| Fixed rate  ($CDN)     |   | 110,388                    |   | 117,703     |   | 101,035     |   | 100,863 |   | — |   | — |   | 429,989 |   | 429,989 |   |
| Average interest  rate |   | 8.45                       | %      | 8.49        | %      | 9.00        | %      | 9.00 | % | — |   | — |   | 8.73 | % |   |   |
| Variable rate  ($US)   |   | (432                       | )      | 1,042       |   | 1,104       |   | 1,170 |   | 1,241 |   | 678,083 |   | 682,208 |   | 682,208 |   |
| Average interest  rate |   | 6.00                       | %      | 6.00        | %      | 6.00        | %      | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % |   |   |

 

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**Item4.  Controls and Procedures.**

 

**(a)****                                  Evaluationof Controls and Procedures**

 

Within 90 days prior to the date of filing of this report, the Companycarried out an evaluation, under the supervision and with the participation ofits management, including the Chief Executive Officer and the Chief FinancialOfficer, of the design and operation of its disclosure controls andprocedures.  Based on this evaluation,its Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures are effective for gathering,analyzing and disclosing the information the Company is required to disclose inthe reports it files under the Securities Exchange Act of 1934, within the timeperiods specified in the SEC’s rules and forms.

 

**(b)****                                  Changesin Controls and Procedures**

 

There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of the Company’s most recent evaluation.

 

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**PART II**

**OTHER INFORMATION**

 

**Item6.  Exhibits and Reports on Form 8-K.**

 

(a)                                  Exhibits

 

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

 

3.2                        Articlesof Association of Polydex Pharmaceuticals Limited, as amended to date (filed asExhibit 3.2 to the Registrant’s Quarterly Report on Form 10-Q filed September13, 1999, and incorporated herein by reference)

 

99.1                  Certification ofChief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002

 

99.2                  Certification ofChief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Actof 2002

 

(b)                                 Reportson Form 8-K

 

There were no reports on Form 8-K filed during thefiscal quarter ended April 30, 2003.

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
| Date:  | June 16, 2003                                                                                                       |                  |
|--------|---------------------------------------------------------------------------------------------------------------------|-----------------------|
|   |                                                                                                                |
|   |                                                                                                                |
|   | POLYDEX PHARMACEUTICALS LIMITED                                                                                     |
|   | (Registrant)                                                                                                        |
|   |                                                                                                                |
|   |                                                                                                                |
|   | By                                                                                                                  | /s/ George G. Usher   |   |
|   | George G. Usher,  Chairman, President and Chief  Executive Officer  (Principal Executive Officer)              |
|   |                                                                                                                |
|   |                                                                                                                |
|   | By                                                                                                                  | /s/ Sharon L. Wardlaw |   |
|   | Sharon L. Wardlaw,  Treasurer, Secretary and Chief  Financial and Accounting Officer  (Principal Financial Officer) |
|        |                                                                                                                     |                       |  |  |  |  |

 

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**CHIEFEXECUTIVE OFFICER CERTIFICATION**

 

I, George G. Usher, Chief Executive Officer of Polydex PharmaceuticalsLimited (the “Company”) do hereby certify that:

 

(1)                                  Ihave reviewed this quarterly report on Form 10–Q of the Company for thequarterly period ended April 30, 2003;

 

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

 

(3)                                  Basedon my knowledge, the financial statements and other financial information includedin this quarterly report, fairly present in all material respects, thefinancial condition, results of operations and cash flows of the Company as of,and for, the period presented in this quarterly report;

 

(4)                                  TheCompany’s other certifying officer and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a–14 and 15d–14) for the Company and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the Company, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in whichthis quarterly report was being prepared;

 

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

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

(5)                                  TheCompany’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the Company’s auditors and the audit committee of theCompany’s board of directors:

 

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

 

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

 

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

 
| Dated:  June  16, 2003 |                            |
|-----------------------------|---------------------------------|
|                        |                            |
|                        |                            |
|                        | /s/  George  G. Usher      |   |
|                        | Chief Executive Officer         |
|                        | Polydex Pharmaceuticals Limited |

 

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**CHIEFFINANCIAL OFFICER CERTIFICATION**

 

I, Sharon L. Wardlaw, Chief Financial Officer of PolydexPharmaceuticals Limited (the “Company”) do hereby certify that:

 

(1)                                  Ihave reviewed this quarterly report on Form 10–Q of the Company for the quarterlyperiod ended April 30, 2003;

 

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

 

(3)                                  Basedon my knowledge, the financial statements and other financial informationincluded in this quarterly report, fairly present in all material respects, thefinancial condition, results of operations and cash flows of the Company as of,and for, the period presented in this quarterly report;

 

(4)                                  TheCompany’s other certifying officer and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a–14 and 15d–14) for the Company and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the Company, including its consolidated subsidiaries, is made knownto us by others within those entities, particularly during the period in whichthis quarterly report was being prepared;

 

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

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

(5)                                  TheCompany’s other certifying officer and I have disclosed, based on our mostrecent evaluation, to the Company’s auditors and the audit committee of theCompany’s board of directors:

 

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

 

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

 

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

 

 
| Dated:  June  16, 2003 |                            |
|-----------------------------|---------------------------------|
|                        |                            |
|                        |                            |
|                        | /s/  Sharon  L. Wardlaw    |   |
|                        | Chief Financial Officer         |
|                        | Polydex Pharmaceuticals Limited |

 

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**Exhibit Index**

 

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

 

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