**SECURITIES AND 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 October 31,  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 PHARMACEUTICALSLIMITED**

(Exact Name ofRegistrant 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 whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90days.     Yes   ý                  No   o

 

Indicate by check whether the registrant is an accelerated filer (asdefined in Exchange Act Rule 12b-2). Yes   o                  No   ý

 

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

 

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

 

 

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**POLYDEX PHARMACEUTICALS LIMITED**

 

**TABLE OF CONTENTS**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                                                                            | **3**  |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|        |                                                                                                                                                                                 |   |
| Item 1      | CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)                                                                                                                                       | 3      |
|        |                                                                                                                                                                                 |   |
|        | Consolidated Balance Sheets   October 31, 2003 and January 31, 2003                                                                                                             | 3      |
|        |                                                                                                                                                                                 |   |
|        | Consolidated Statements of Operations and  Comprehensive Income   Three months ended October 31, 2003 and October 31, 2002   Nine months ended October 31, 2003 and October 31, 2002 | 5      |
|        |                                                                                                                                                                                 |   |
|        | Consolidated Statements of Shareholders’  Equity  Nine months ended October 31, 2003 and October 31, 2002                                                                       | 6      |
|        |                                                                                                                                                                                 |   |
|        | Consolidated Statements of Cash Flows  Nine months ended October 31, 2003 and October 31, 2002                                                                                       | 7      |
|        |                                                                                                                                                                                 |   |
|        | Segmented Information  Three months ended October 31, 2003 and October 31, 2002  Nine months ended October 31, 2003 and October 31, 2002                                             | 8      |
|        |                                                                                                                                                                                 |   |
|        | Notes to Consolidated  Financial Statements (Unaudited)                                                                                                                              | 9      |
|        |                                                                                                                                                                                 |   |
| Item 2      | MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                                                                          | 15     |
|        |                                                                                                                                                                                 |   |
| Item 3      | QUANTITATIVE AND QUALITATIVE DISCLOSURES  ABOUT MARKET RISK                                                                                                                          | 29     |
|        |                                                                                                                                                                                 |   |
| Item 4      | CONTROLS AND PROCEDURES                                                                                                                                                              | 31     |
|        |                                                                                                                                                                                 |   |
| **PART II** | **OTHER INFORMATION**                                                                                                                                                                | **32** |
|        |                                                                                                                                                                                 |   |
| Item 6      | EXHIBITS AND REPORTS ON FORM 8-K                                                                                                                                                     | 32     |
|        |                                                                                                                                                                                 |   |
|        | Signatures                                                                                                                                                                           | 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)**      |       |                 |   |
|-------------------------------------------|--------|----------------------|------------|----------------------|--------|
|                                      |   | **October 31  2003** |       | **January 31  2003** |   |
|                                      |   |                 |       |                 |   |
| **Assets**                                |   |                 |       |                 |   |
|                                      |   |                 |       |                 |   |
| Current assets:                           |   |                 |       |                 |   |
| Cash                                      |   | $                    | 434,469    |                 | $      | 280,748 |   |
| Trade accounts receivable                 |   | 988,723              |       | 1,351,515            |   |
| Inventories:                              |   |                 |       |                 |   |
| Finished goods                            |   | 2,061,235            |       | 1,678,250            |   |
| Work in process                           |   | 167,234              |       | 59,478               |   |
| Raw materials                             |   | 675,297              |       | 528,235              |   |
|                                      |   |                 |       |                 |   |
| Inventories                               |   | 2,903,766            |       | 2,265,963            |   |
| Prepaid expenses and other current assets |   | 102,590              |       | 80,324               |   |
|                                      |   |                 |       |                 |   |
|                                      |   | 4,429,548            |       | 3,978,550            |   |
|                                      |   |                 |       |                 |   |
| Property, plant and equipment:            |   |                 |       |                 |   |
| Land and buildings                        |   | 3,593,752            |       | 3,346,727            |   |
| Machinery and equipment                   |   | 8,513,377            |       | 7,564,097            |   |
|                                      |   | 12,107,129           |       | 10,910,824           |   |
| Less accumulated depreciation             |   | (7,228,493           | )          | (6,245,015           | )      |
| Property, plant and equipment, net        |   | 4,878,636            |       | 4,665,809            |   |
| Patents and intangible assets, net        |   | 149,624              |       | 87,062               |   |
| Due from shareholder                      |   | 923,719              |       | 981,153              |   |
|                                      |   |                 |       |                 |   |
|                                      |   | $                    | 10,381,527 |                 | $      | 9,712,574 |   |

 

3

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|                                                           |   | **(Unaudited)**    |       |               |   |
|----------------------------------------------------------------|--------|--------------------|------------|--------------------|--------|
|                                                           |   | **October 312003** |       | **January 312003** |   |
|                                                           |   |               |       |               |   |
| **Liabilities and Shareholders’ Equity**                  |   |               |       |               |   |
|                                                           |   |               |       |               |   |
| Current liabilities:                                           |   |               |       |               |   |
| Bank indebtedness                                              |   | $                  | 202,657    |               | $      | — |   |
| Accounts payable                                               |   | 1,310,885          |       | 1,205,383          |   |
| Accrued liabilities                                            |   | 609,432            |       | 423,059            |   |
| Due to Sparhawk Laboratories, Inc.                             |   | 101,453            |       | 101,453            |   |
| Customer deposits received                                     |   | 40,663             |       | 137,343            |   |
| Income taxes payable                                           |   | 53,422             |       | 33,010             |   |
| Current portion of long-term debt                              |   | 500,154            |       | 439,059            |   |
| Current portion of capital lease obligations                   |   | 134,941            |       | 110,387            |   |
|                                                           |   |               |       |               |   |
|                                                           |   | 2,953,607          |       | 2,449,694          |   |
|                                                           |   |               |       |               |   |
| Long-term debt                                                 |   | 137,000            |       | 186,776            |   |
| Capital lease obligations                                      |   | 264,524            |       | 319,602            |   |
| Due to shareholder                                             |   | 683,569            |       | 682,225            |   |
| Deferred income taxes                                          |   | 211,184            |       | 49,750             |   |
|                                                           |   |               |       |               |   |
|                                                           |   | 1,296,277          |       | 1,238,353          |   |
|                                                           |   |               |       |               |   |
| Total liabilities                                              |   | 4,249,884          |       | 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 (January  1, 2003 - 3,027,777)         |   | 50,434             |       | 50,434             |   |
| Contributed surplus                                            |   | 23,224,128         |       | 23,224,128         |   |
| Deficit                                                        |   | (17,006,070        | )          | (16,278,269        | )      |
| Accumulated other comprehensive loss                           |   | (151,859           | )          | (986,776           | )      |
|                                                           |   |               |       |               |   |
|                                                           |   | 6,131,643          |       | 6,024,527          |   |
|                                                           |   |               |       |               |   |
|                                                           |   | $                  | 10,381,527 |               | $      | 9,712,574 |   |

 

See accompanying notes.

 

4

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**POLYDEX PHARMACEUTICALS LIMITED**

Consolidated Statements ofOperations and Comprehensive Income (Unaudited)

(Expressedin United States dollars)

 

 
|                                                                 |   | **Three  Months Ended  October 31  2003** |      | **Three  Months Ended  October 31  2002** |   | **Nine  Months Ended  October 31  2003** |   | **Nine  Months Ended  October 31  2002** |       |
|----------------------------------------------------------------------|--------|-------------------------------------------|-----------|-------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|------------|
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Sales                                                                |   | $                                         | 3,681,305 |                                      | $      | 3,455,665                                |   | $                                        | 10,036,192 |   | $ | 9,427,675 |   |
| Cost of products sold                                                |   | 2,817,652                                 |      | 2,696,798                                 |   | 7,709,246                                |   | 6,998,366                                |       |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
|                                                                 |   | 863,653                                   |      | 758,867                                   |   | 2,326,946                                |   | 2,429,309                                |       |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Expenses:                                                            |   |                                      |      |                                      |   |                                     |   |                                     |       |
| General and administrative                                           |   | 495,920                                   |      | 416,644                                   |   | 1,459,777                                |   | 1,204,145                                |       |
| Depreciation                                                         |   | 151,863                                   |      | 137,342                                   |   | 442,921                                  |   | 410,973                                  |       |
| Research and development                                             |   | 23,702                                    |      | 29,358                                    |   | 45,474                                   |   | 141,900                                  |       |
| Interest expense                                                     |   | 31,960                                    |      | 36,355                                    |   | 101,536                                  |   | 116,452                                  |       |
| Selling and promotion                                                |   | 30,173                                    |      | 41,183                                    |   | 112,571                                  |   | 106,384                                  |       |
| Foreign exchange (gain) loss                                         |   | 196,388                                   |      | 7,894                                     |   | 420,771                                  |   | 35,968                                   |       |
| Amortization                                                         |   | 6,688                                     |      | 5,546                                     |   | 17,779                                   |   | 16,637                                   |       |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
|                                                                 |   | 936,694                                   |      | 674,322                                   |   | 2,600,829                                |   | 2,032,459                                |       |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Income (loss) from operations                                        |   | (73,041                                   | )         | 84,545                                    |   | (273,883                                 | )      | 396,850                                  |       |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Other income (loss):                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Other income (expense) (note 5)                                      |   | (76,099                                   | )         | 2,363                                     |   | (270,794                                 | )      | 7,227                                    |       |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Income (loss) before provision for income taxes                      |   | (149,140                                  | )         | 86,908                                    |   | (544,677                                 | )      | 404,077                                  |       |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Provision for income taxes                                           |   | 52,286                                    |      | 98,420                                    |   | 183,124                                  |   | 306,427                                  |       |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Net income (loss) for the period                                     |   | (201,426                                  | )         | (11,512                                   | )      | (727,801                                 | )      | 97,650                                   |       |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Currency translation adjustment for the period                       |   | 347,781                                   |      | 64,782                                    |   | 834,917                                  |   | 99,617                                   |       |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Comprehensive income for the period                                  |   | $                                         | 146,355   |                                      | $      | 53,270                                   |   | $                                        | 107,116    |   | $ | 197,267 |   |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Per share information:                                               |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Earnings (loss) per common share for the period:                     |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Basic                                                                |   | $                                         | (0.07     | )                                         | $      | —                                   |   | $                                        | (0.24      | ) | $ | 0.03 |   |
| Diluted                                                              |   | $                                         | (0.07     | )                                         | $      | —                                   |   | $                                        | (0.24      | ) | $ | 0.03 |   |
|                                                                 |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Weighted average number of common shares  outstanding for the period |   | 3,027,796                                 |      | 3,027,777                                 |   | 3,027,796                                |   | 3,027,777                                |       |

 

See accompanying notes.

 

5

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**POLYDEX PHARMACEUTICALS LIMITED**

ConsolidatedStatements of Shareholders’ Equity (Unaudited)

(Expressed in United States dollars)

 

 
|                                           |   | **Nine  Months Ended  October 31  2003** |        | **Nine  Months Ended  October 31  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               |   | (727,801                                 | )           | 97,650                                   |   |
|                                           |   |                                     |        |                                     |   |
| Balance, end of period                         |   | $                                        | (17,006,070 | )                                        | $      | (15,506,878 | ) |
|                                           |   |                                     |        |                                     |   |
| Accumulated Other Comprehensive Loss:          |   |                                     |        |                                     |   |
| Balance, beginning of period                   |   | $                                        | (986,776    | )                                        | $      | (1,199,627 | ) |
| Currency translation adjustment for the period |   | 834,917                                  |        | 99,617                                   |   |
|                                           |   |                                     |        |                                     |   |
| Balance, end of period                         |   | $                                        | (151,859    | )                                        | $      | (1,100,010 | ) |

 

See accompanying notes.

 

6

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**POLYDEX PHARMACEUTICALS LIMITED**

Consolidated Statements ofCash Flows (Unaudited)

(Expressed in United States dollars)

 
|                                                                       |   | **Nine  Months Ended  October 31  2003** |     | **Nine  Months Ended  October 31  2002** |   |
|----------------------------------------------------------------------------|--------|------------------------------------------|----------|------------------------------------------|--------|
|                                                                       |   |                                     |     |                                     |   |
| Cash provided by (used in):                                                |   |                                     |     |                                     |   |
|                                                                       |   |                                     |     |                                     |   |
| Operating activities:                                                      |   |                                     |     |                                     |   |
| Net income (loss) for the period                                           |   | $                                        | (727,801 | )                                        | $      | 97,650 |   |
| Add (deduct) items not affecting cash:                                     |   |                                     |     |                                     |   |
| Depreciation and amortization                                              |   | 460,700                                  |     | 427,610                                  |   |
| Imputed interest on long-term debt                                         |   | 18,802                                   |     | 9,422                                    |   |
| Deferred tax provision                                                     |   | 146,701                                  |     | 191,794                                  |   |
| Net change in non-cash working capital balances  related to operations     |   | 65,680                                   |     | 61,734                                   |   |
|                                                                       |   |                                     |     |                                     |   |
|                                                                       |   | (35,918                                  | )        | 788,210                                  |   |
|                                                                       |   |                                     |     |                                     |   |
| Investing activities:                                                      |   |                                     |     |                                     |   |
| Additions to property, plant and equipment,  patents and intangible assets |   | (163,862                                 | )        | (260,788                                 | )      |
| Decrease in due from shareholder                                           |   | 57,434                                   |     | 35,830                                   |   |
| Acquisition of minority interest (note 3)                                  |   | (5,860                                   | )        | —                                   |   |
| Advance to Sparhawk Laboratories, Inc.                                     |   | —                                   |     | (5,023                                   | )      |
|                                                                       |   |                                     |     |                                     |   |
|                                                                       |   | (112,288                                 | )        | (229,981                                 | )      |
|                                                                       |   |                                     |     |                                     |   |
| Financing activities:                                                      |   |                                     |     |                                     |   |
| Repayment of long-term debt                                                |   | (135,295                                 | )        | (228,262                                 | )      |
| Repayment of capital lease obligations                                     |   | (89,628                                  | )        | (73,496                                  | )      |
| Increase in due to shareholder                                             |   | 1,344                                    |     | 470                                      |   |
| Increase (decrease) in bank indebtedness                                   |   | 202,657                                  |     | (134,423                                 | )      |
|                                                                       |   |                                     |     |                                     |   |
|                                                                       |   | (20,922                                  | )        | (435,711                                 | )      |
|                                                                       |   |                                     |     |                                     |   |
| Effect of exchange rate changes on cash                                    |   | 322,848                                  |     | 23,844                                   |   |
|                                                                       |   |                                     |     |                                     |   |
| Increase in cash position                                                  |   | 153,721                                  |     | 146,362                                  |   |
|                                                                       |   |                                     |     |                                     |   |
| Cash, beginning of period                                                  |   | 280,748                                  |     | 123,418                                  |   |
|                                                                       |   |                                     |     |                                     |   |
| Cash, end of period                                                        |   | $                                        | 434,469  |                                     | $      | 269,780 |   |

 

See accompanying notes.

 

7

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**POLYDEX PHARMACEUTICALS LIMITED**

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 ofDextran and several of its derivatives to large pharmaceutical companiesthroughout the world.

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

 
|                                                  |   | **Three  Months Ended  October 31  2003** |      | **Three  Months Ended  October 31  2002** |   | **Nine  Months Ended  October 31  2003** |   | **Nine  Months Ended  October 31  2002** |       |
|-------------------------------------------------------|--------|-------------------------------------------|-----------|-------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|------------|
|                                                  |   |                                      |      |                                      |   |                                     |   |                                     |       |
| **Sales:**                                            |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Dextran                                               |   | $                                         | 1,394,439 |                                      | $      | 1,226,725                                |   | $                                        | 4,026,384  |   | $ | 3,706,211 |   |
| Less:   intercompany sales elimination           |   | 89,888                                    |      | 42,606                                    |   | 264,628                                  |   | 342,087                                  |       |
|                                                  |   |                                      |      |                                      |   |                                     |   |                                     |       |
|                                                  |   | 1,304,551                                 |      | 1,184,119                                 |   | 3,761,756                                |   | 3,364,124                                |       |
| Chemdex                                               |   | 2,376,754                                 |      | 2,271,546                                 |   | 6,274,436                                |   | 6,063,551                                |       |
|                                                  |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Total consolidated sales                              |   | $                                         | 3,681,305 |                                      | $      | 3,455,665                                |   | $                                        | 10,036,192 |   | $ | 9,427,675 |   |
|                                                  |   |                                      |      |                                      |   |                                     |   |                                     |       |
| **Income (loss) before provision  for income taxes:** |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Dextran                                               |   | $                                         | (37,368   | )                                         | $      | 188,875                                  |   | $                                        | 111,908    |   | $ | 708,612 |   |
| Chemdex                                               |   | 47,819                                    |      | 41,852                                    |   | (179,686                                 | )      | 141,969                                  |       |
|                                                  |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Total pre-tax income (loss) from segments             |   | 10,451                                    |      | 230,727                                   |   | (67,778                                  | )      | 850,581                                  |       |
| Less:   Unallocated corporate expenses           |   | 159,591                                   |      | 143,819                                   |   | 476,899                                  |   | 446,504                                  |       |
|                                                  |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Total consolidated pre-tax income (loss)              |   | $                                         | (149,140  | )                                         | $      | 86,908                                   |   | $                                        | (544,677   | ) | $ | 404,077 |   |
|                                                  |   |                                      |      |                                      |   |                                     |   |                                     |       |
| **Total Revenue by significant  customer:**           |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Customer A                                            |   | $                                         | 583,844   |                                      | $      | 488,291                                  |   | $                                        | 1,423,231  |   | $ | 1,197,532 |   |
| Customer B                                            |   | 628,856                                   |      | 416,440                                   |   | 1,206,811                                |   | 1,338,773                                |       |
| Customer C                                            |   | 227,713                                   |      | 395,352                                   |   | 911,906                                  |   | 1,082,931                                |       |
|                                                  |   |                                      |      |                                      |   |                                     |   |                                     |       |
| **Sales Revenue by product group:**                   |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Bulk Dextran and derivatives                          |   | $                                         | 1,304,551 |                                      | $      | 1,184,119                                |   | $                                        | 3,761,756  |   | $ | 3,364,124 |   |
| Sterile injectible veterinary products                |   | 1,458,522                                 |      | 1,155,230                                 |   | 3,625,585                                |   | 3,358,698                                |       |
| Oral and topical veterinary products                  |   | 918,232                                   |      | 1,116,316                                 |   | 2,648,851                                |   | 2,704,853                                |       |
|                                                  |   |                                      |      |                                      |   |                                     |   |                                     |       |
| Total consolidated sales                              |   | $                                         | 3,681,305 |                                      | $      | 3,455,665                                |   | $                                        | 10,036,192 |   | $ | 9,427,675 |   |

 

 
|                       |   | **October  31, 2003** |       | **January  31, 2003** |   |
|----------------------------|--------|-----------------------|------------|-----------------------|--------|
|                       |   |                  |       |                  |   |
| **Assets:**                |   |                  |       |                  |   |
| Dextran                    |   | $                     | 5,399,896  |                  | $      | 4,918,829 |   |
| Chemdex                    |   | 3,827,697             |       | 3,569,090             |   |
|                       |   |                  |       |                  |   |
| Total assets from segments |   | 9,227,593             |       | 8,487,919             |   |
| Corporate assets           |   | 1,153,934             |       | 1,224,655             |   |
|                       |   |                  |       |                  |   |
| Total consolidated assets  |   | $                     | 10,381,527 |                  | $      | 9,712,574 |   |

 

See accompanying notes.

 

8

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**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 October 31, 2003 and 2002include all normal recurring adjustments which management considers necessaryfor a fair presentation.  The results ofoperations for the interim periods are not necessarily indicative of the resultsthat may be expected for the entire fiscal year.  The interim consolidated financial statements include theaccounts and transactions of the Company and its majority owned subsidiaries inwhich the Company has equal to or more than a 50% ownership interest andexercises control.

 

**2.**                                      SignificantAccounting Policies:

 

**Basis of consolidation**

 

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

 

**Use of 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.

 

**Long-lived assets**

 

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 and intangible assets are recorded at cost and are amortized ona straight-line basis over their estimated useful lives of ten years.  Intangible assets consist of intellectualproperty, government licenses and government license applications.

 

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.

 

**Revenue recognition**

 

All revenue is from sales of bulk and finished dosage manufacturedproducts and is recognized when title and risk of ownership of products pass tothe customer.  Title and risk ofownership pass to the customer pursuant to the applicable sales contract, eitherupon shipment of product or upon receipt by the customer.

 

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.

 

**Shipping and handling costs**

 

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

 

**Research and development**

 

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

 

10

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**Foreign currency translation**

 

The functional currency of the Company’s Canadian operations has beendetermined to be the Canadian dollar. All asset and liability accounts of the Company have been translatedinto United 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”] andrelated interpretations in accounting for its employee stock options ratherthan the alternative fair value accounting provided for under Statement ofFinancial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” [“SFAS 123”].  UnderAPB 25, because the exercise price of the Company’s employee stock optionsequals the market price of the underlying stock on the date of grant, nocompensation expense 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 October 31, 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 nil at October31, 2003 and October 31, 2002, respectively, were used in the calculation ofdiluted earnings per common share. Options to purchase 431,550 and 419,550 common shares at October 31, 2003and October 31, 2002, respectively, were not included in the computation ofdiluted earnings per common share because their effect was anti-dilutive.

 

**3.             Acquisitionof Minority Interest:**

 

**On September 19, 2003, Chemdex,Inc. (“Chemdex”) redeemed all of the common shares held by the 10% minorityinterest shareholder, which results in the Company controlling 100% of theissued and outstanding shares of Chemdex. The redemption amount was $146,500, which is to be paid in twenty-fiveequal monthly installments of $5,860, which commenced on September 19,2003.  Since this installment contractis non-interest bearing, it has been discounted using a discount rate of 9%.The present value of this installment contract is $134,602, which has beenrecorded in long-term debt. The Company has recorded this acquisition as a steppurchase and has allocated the purchase price based on fair values of theassets as follows:**

** **
| **Land and building**             |   | **$**      | **43,549**  | ** ** |
|-----------------------------------|--------|------------|-------------|------------|
| **Equipment**                     |   | **10,712** | ** **  |
| **Patents and intangible assets** |   | **80,341** | ** **  |
| **Purchase price**                |   | **$**      | **134,602** | ** ** |

 

11

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**4.             Stock-basedEmployee Compensation:**

 

The Company maintains an incentive share option plan for managementpersonnel which provides for options to purchase up to 1,000,000 commonshares.  The Company also issues optionsto certain consultants for services provided to the Company.

 

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

 

The Company uses the intrinsic value method in accordance with APBOpinion No. 25 to account for awards of stock-based employee compensation.  No stock-based employee compensation expensewas recorded during the period from February 1, 2003 to October 31, 2003,because there were no options granted during this period.  Similarly, no stock-based employeecompensation expense was recorded during the period from February 1, 2002 toOctober 31, 2002, because there were no options granted during thisperiod.  There would be no changes toreported net income (loss), basic earnings (loss) per share or diluted earnings(loss) per share if the Company were to use the fair value method to accountfor stock options granted under the provisions of SFAS 148.

 

**5.             TheVet Labs – Sparhawk Joint Venture:**

** **

**In 1992, Veterinary Laboratories,Inc. (“Vet Labs”) and Sparhawk Laboratories, Inc. (“Sparhawk”) entered into theVet Labs — Sparhawk Joint Venture (the “Joint Venture”) for the manufacture andsale of veterinary pharmaceutical products. Vet Labs and Sparhawk each own 50% of the Joint Venture.  The Joint Venture is governed by theAgreement for the Operation of Veterinary Laboratories, Inc.’s Lenexa Facility andSparhawk Lab of K.C. as a Joint Venture, dated December 1, 1992, by and amongSparhawk, Chemdex and Vet Labs (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.  Decisions of the PolicyCommittee require a simple majority vote.**

** **

**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.  The Company has funded theJoint Venture’s cumulative losses since 1992 and, accordingly, has recorded 100%of these losses in the consolidated financial statements.  At a future point in time, if the cumulativedeficit of the Joint Venture is eliminated, a minority interest will berecorded.**

** **

**12**

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** **

The Joint Venture Agreement contained astated termination date of December 1, 2002. In anticipation of the Joint Venture’s termination, on November 4, 2002,Sparhawk filed a petition in the District Court of Johnson County, Kansas (the“Court”), against Vet Labs, Chemdex and the Company seeking, among otherthings, judicial supervision during the winding up of the Joint Venture.

 

On December 16, 2002, each of the parties tothe Joint Venture Agreement agreed to the appointment by the Court of aReceiver, whose duties include (i) the supervision of the wind-up of the JointVenture, including the submission to the Court of a proposed plan for thedisposal or distribution of the property of the Joint Venture and theallocation of the Joint Venture’s assets and liabilities among the parties, and(ii) the oversight of the operations of the Joint Venture during the winding-upperiod in order to keep and preserve the assets thereof.  Legal and receiver costs of $276,617 for thenine-month period ended October 31, 2003 are included in other income (expense)on the consolidated statements of operations.

 

**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 outstandinglitigation matters.  The Company cannotat this time estimate the likelihood of Sparhawk consummating the exercise ofthe 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 would be returned to Sparhawk uponwind-up.  Sales of these productsamounted to approximately $1,065,000 in fiscal 2003, and $691,000 in the ninemonth peroid ended October 31, 2003. Rights to several of the products currently produced by the JointVenture, including iron dextran, are owned by the Company and are expected tobe returned to the Company, although ownership of certain of these productrights may be disputed by Sparhawk. Sales of these products amounted to approximately $5,112,000 in fiscal2003 and $3,515,000 for the nine month period ended October 31, 2003.  The Company plans to continue production ofthe products to which Vet Labs owns the rights after the winding up of theJoint Venture.  However, no assurancecan be given that sales of these products by the Company after the dissolutionof the Joint Venture will be consistent with those achieved by the JointVenture.

 

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 

 

13

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statements.  Depending upon the allocation of the JointVenture assets upon dissolution, the Company may not receive ownership of therights to products developed by the Joint Venture.  Sales of these products amounted to approximately $2,034,000 infiscal 2003 and $2,069,000 during the nine-month period ended October 31, 2003.

 

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 toSparhawk in 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.  The sale proceeds in excess of the carryingvalue of the Joint Venture assets and liabilities would be recorded as again.  At October 31, 2003, the carryingvalue of the Joint Venture assets and liabilities is $2,441,124 and $1,054,590,respectively.  During the year endedJanuary 31, 2003, sales of the Joint Venture operations totaled $8,209,947 andnet income before income taxes was $31,520. During the nine month period ended October 31, 2003, sales of the JointVenture amounted to $6,274,436, and net income before taxes totaled$184,370.  A sale of Vet Labs’ interestin the Joint Venture may have a material adverse effect on the Company’sbusiness and results of operations.

 

The Company does notexpect that a sale of Vet Labs’ Joint Venture interest would have an adverseeffect on the operations of Dextran Products Limited (“Dextran Products”), thesubsidiary through which the Company carries out its Canadian operations,because sales by Dextran Products to Chemdex and the Joint Venture are not significant.

 

**6.             RecentAccounting Pronouncements:**

 

In May 2003,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of bothLiabilities and Equity”.  SFAS No. 150establishes standards for the measurement and classification of certainfinancial instruments with characteristics of both liabilities and equity.  SFAS No. 150 is effective for financialinstruments entered into or modified after May 31, 2003.  Effective June 1, 2003, the Company accountsfor financial instruments in accordance with SFAS No. 150.  The adoption of this standard had no impacton the consolidated financial statements.

 

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

 

InJanuary 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. The Company will account for any variable interest entities inaccordance with FIN 46. The adoption of this Interpretation had no impact onthe Company’s consolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148,“Accounting for Stock-Based Compensation - Transition and Disclosure.”  SFAS No. 148 amends SFAS No. 123,“Accounting for Stock-Based Compensation,” to provide alternative methods oftransition to SFAS No. 123’s fair value method of accounting for stock-basedemployee compensation.  SFAS No. 148also amends the disclosure provisions of SFAS No. 123 and 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.

 

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**Item 2.  Management’s Discussion and Analysis ofFinancial 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 theOctober 31, 2003 consolidated financial statements and notes thereto includedelsewhere in this report.  Operatingresults for the third quarter ended October 31, 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 andChemdex operates as a strategic business unit. Dextran Products manufactures and sells bulk quantities of Dextran andseveral of its derivatives to large pharmaceutical companies throughout theworld.  Chemdex manufactures and sellsveterinary pharmaceutical products and specialty chemicals in the UnitedStates.  The primary customers aredistributors and private labelers, who in turn sell to the end-user of these products.

 

Net loss for the thirdquarter ended October 31, 2003 was $201,426, or $0.07 per share, as compared toa net loss of $11,512, or less than $0.01 per share, for the quarter endedOctober 31, 2002.  This decline isprimarily due to foreign exchange losses at Dextran Products, legal and receiverfees at Chemdex and increased corporate administrative costs, includinginsurance. This foreign exchange loss at Dextran Products is due to an increasein the value of the Canadian dollar relative to the value of the U.S. dollar.  Dextran Products has a significant net assetexposure to the U.S. dollar because the majority of its accounts receivablebalance and significant intercompany receivables are denominated in U.S.dollars, while the majority of its liabilities and expenses are in Canadian dollars.  The legal and receiver fees at Chemdex are aresult of the winding up of the Vet Labs – Sparhawk Joint Venture (the “JointVenture”), as described below in “The Vet Labs – Sparhawk Joint Venture.”

 

During the third quarter ended October 31, 2003, theCompany had a loss from operations of $73,041, as compared to income fromoperations of $84,545 for the third quarter of fiscal 2003.  This decline from operations is primarilydue to the foreign exchange loss at Dextran Products and increased corporate administrativecosts which are partially offset by an increase in margins at Chemdex ascompared to the same quarter last year.

** **

**Sales volume for the third quarterof fiscal 2004 increased from $3,455,665 to $3,681,305, representing anincrease of $225,640 or 7%, as compared to the third quarter of fiscal2003.  Sales to**

** **

**15**

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** **

**third parties by Dextran Productsincreased by $120,432 or 10% as compared to the same quarter in fiscal2003.  This increase in sales at DextranProducts is primarily due to increased product demand.  Sales by Chemdex during the third quarter offiscal 2004 increased by $105,208 or 5% as compared to the same quarter infiscal 2003.  This increase at Chemdexis primarily due to the introduction of a new contract fill product and a newinjectable product.**

 

Overall, the Company’s gross margin increased from 22%in the third quarter of fiscal 2003 to 24% in the third quarter of fiscal2004.  Dextran Products’ gross margindecreased from 37% in the third quarter of fiscal 2003 to 35% during the thirdquarter of fiscal 2004.  Chemdex’ grossmargin increased from 13% in the third quarter of fiscal 2003 to 16% in thethird quarter of fiscal 2004.

 

The margin decrease at Dextran Products is primarily aresult of a large increase in the value of the Canadian dollar in relation tothe U.S. dollar.  The majority of thesales at Dextran Products are denominated in U.S. dollars, but all costs areincurred in Canadian dollars.

 

The margin increase at Chemdex is a result of aproduct mix variance, as Chemdex experienced increased sales in the injectablesproduct line, its highest margin product line, and particularly in irondextran, as compared to the third quarter of fiscal 2003.

 

General and administrative expenses in the thirdquarter of fiscal 2004 were $495,920, representing an increase of $79,276 or19%, from the third quarter of fiscal 2003. This increase is due primarily to increased insurance and other corporateadministrative costs and the hiring of a new general manager at Chemdex in thefourth quarter of fiscal 2003 to oversee the Joint Venture operations andmanagement on behalf of the Company. Selling and promotional expenses in the third quarter of fiscal 2004were generally consistent with the same period in fiscal 2003.

 

Interest expense in the third quarter of fiscal 2004was $31,960, representing a decrease of $4,395, or 12%, as compared to thethird quarter in fiscal 2003, due to the repayment of long-term debt andcapital lease obligations.  Depreciationand amortization in the third quarter of fiscal 2004 was $158,551, representingan increase of $15,663, or 11%, from the third quarter of fiscal 2003 primarilydue to the installation of new equipment at Dextran Products.

 

Other expenses in the third quarter of fiscal 2004consist of $77,927 of legal and receiver fees relating to the winding up of theJoint Venture.  The Company did notincur similar expenses during the same period in fiscal 2003.

 

Due to continued direct funding of research anddevelopment expenses by third party public and/or private sector groups, theCompany’s research and development costs in the third quarter of fiscal 2004decreased by $5,656, or 19%, to $23,702 as compared to the third quarter offiscal 2003.  Funding from existingthird-party sources for existing research and development projects is expectedto continue at historic levels for the foreseeable future.  The Company’s research and developmentexpenditures are expected to increase over the remainder of the year due toadditional development activities the Company expects to perform and fundoutside of its partnership relationships.

 

16

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Research and development with respect to the Company’s cellulose sulphateproduct as a contraceptive gel with antiviral capabilities is being conductedwith the assistance and financial support of the Contraceptive Research andDevelopment Program, Consortium for Industrial Collaboration in ContraceptiveResearch and Global Microbicide Program (collectively, “CONRAD”).  CONRAD provides direct financial assistancein support of, and/or actually conducts specific research studies involving thecellulose sulphate product in conjunction with, various public health-orientedentities.  In exchange for this researchassistance, the Company makes its intellectual property, namely patent rightsand know-how, available for use in the preparation, clinical evaluation anddevelopment of the product.  The Companyhas no commitments to repay the funding or to purchase the results of theresearch.

 

**At the present time the followingfour Safety Studies are underway and further studies are in the planningstages:**

** **

**•**                  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

** **

**•**                  A Safety Study in Cameroon is beingcarried out in collaboration with Family Health International.  The final report is expected by the fourthquarter of fiscal 2004.

** **

Research and development relating to the Company’s cystic fibrosisproduct, Usherdex (now identified as DCF 987), is being conducted and fundeddirectly by BCY Lifesciences Inc. (“BCY”) pursuant to a license agreement.  BCY has identified DCF 987 as its lead drugcandidate and has completed the Phase II human clinical trial to assess theefficacy of DCF 987.  The results ofthis clinical trial were positive with DCF 987 demonstrating a strong safetyprofile and data suggesting positive improvements in lung function and areduction of bacterial load.  BCY wasalso granted a patent entitled “Use of Dextran and Other Polysaccharides toImprove Mucus Clearance” by the European Patent Office.  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.

 

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### **Liquidityand Capital Resources**

 

In the third quarter of fiscal 2004, the Company hadnegative cash flow from operations of $232,090, compared to positive cash flowof $267,813 in the third quarter of fiscal 2003.  This decrease of $499,903, or 187%, is primarily attributable tolosses during the quarter and increases in receivables and inventory.

 

At October 31, 2003, theCompany had trade accounts receivable of $988,723 compared to $1,351,515 atJanuary 31, 2003 and $765,675 at July 31, 2003.  The increase in trade accounts receivable during the thirdquarter of fiscal 2004 was primarily due to increased sales at Chemdex duringthe quarter and timing of collections at Dextran Products.

 

At October 31, 2003, theCompany had inventory valued at $2,903,766 compared to $2,265,963 at January31, 2003 and $2,738,753 at July 31, 2003. The increase in inventory at Chemdexis in anticipation of fourth quarter sales and stocking of new products.

 

The Company had accountspayable of $1,310,885 at October 31, 2003 as compared to $1,215,734 at July 31,2003 and $1,205,383 at January 31, 2003. This increase in accounts payable is due to the increase in inventory atChemdex.

 

The Company had customerdeposits received of $40,663 at October 31, 2003 as compared to $110,687 atJuly 31, 2003 and $137,343 at January 31, 2003.  The change in the customer deposits received balance is due totiming of collections from customers.

 

The Company experienced nosignificant changes in financing or investing activities and made nosignificant capital expenditures during the third quarter of 2004.

 

The Company experienced acurrency translation adjustment gain of $347,781 during the third quarter offiscal 2004 as compared to a gain of $64,782 during the third quarter of fiscal2003.  Dextran Products’ functionalcurrency is the Canadian dollar.  Thiscurrency translation adjustment is entirely attributable to the translation ofDextran Products financial statements to U.S. dollars.  The large gain is due to a significantstrengthening of the Canadian dollar against the U.S. dollar.

 

Dextran Products has aCDN$1,250,000 (US$938,000) line of credit, of which $202,657 was utilized atOctober 31, 2003.  The Joint Venture hasa $175,000 line of credit to fund operations, none of which was utilized atOctober 31, 2003.  There have been nonew capital lease obligations during the third 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.

 

**On September 19, 2003, Chemdexredeemed all of the common shares held by the 10% minority interestshareholder, which results in the Company controlling 100% of the issued andoutstanding shares of Chemdex.  Theredemption amount was $146,500, which is to be paid in twenty-five equalmonthly installments of $5,860, which commenced on September 19, 2003.  Since this installment contract isnon-interest bearing, it has been discounted using a discount rate of 9%. Thepresent value of this installment contract is $134,602, which has been recordedin long-term debt. The**

** **

**18**

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** **

**Company has recorded thisacquisition as a step purchase and accordingly allocated the fair valueincrement to the respective assets acquired.**

 

Management expects theprimary source of its future capital needs to be a combination of Companyearnings and borrowings.  The Company,at present, does not have any material commitments for capital expenditures.

 

The Company believes thatbased upon current levels of revenues and spending, and taking into account theJoint Venture litigation, its existing working capital resources will besufficient to support continuing operations for at least the next twelvemonths.

 

No changes in accountingprinciples or their application have been implemented in the reporting periodthat would have a material effect on reported income.  Changes in the relative values of the Canadian dollar and theU.S. dollar occur from time to time and may, in certain instances, materiallyaffect the Company’s results of operations.

 

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

 

**The Vet Labs – Sparhawk Joint Venture**

** **

**In 1992, Vet Labs and SparhawkLaboratories, Inc. (“Sparhawk”) entered into the Joint Venture for themanufacture and sale of veterinary pharmaceutical products.  Vet Labs and Sparhawk each own 50% of theJoint Venture.  The Joint Venture isgoverned by the Agreement for the Operation of Veterinary Laboratories, Inc.’sLenexa Facility and Sparhawk Lab of K.C. as a Joint Venture, dated December 1,1992, by and among Sparhawk, Chemdex and Vet Labs (the “Joint VentureAgreement”).**

** **

**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 five members,three of which are selected by Vet Labs and two of which are selected bySparhawk.  Decisions of the PolicyCommittee require a simple majority vote.**

** **

**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.  The Company has funded theJoint Venture’s cumulative losses since 1992 and, accordingly, has recorded100% of these losses in the consolidated financial statements.  At a future point in time, if the cumulativedeficit of the Joint Venture is eliminated, a minority interest will berecorded.**

** **

The Joint Venture Agreement contained astated termination date of December 1, 2002. In 

 

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anticipation of the Joint Venture’stermination, on November 4, 2002, Sparhawk filed a petition in the DistrictCourt of Johnson County, Kansas (the “Court”), against Vet Labs, Chemdex andthe Company seeking, among other things, judicial supervision during thewinding up of the Joint Venture.

 

On December 16, 2002, each of the parties tothe Joint Venture Agreement agreed to the appointment by the Court of aReceiver, whose duties include (i) the supervision of the wind-up of the JointVenture, including the submission to the Court of a proposed plan for thedisposal or distribution of the property of the Joint Venture and theallocation of the Joint Venture’s assets and liabilities among the parties, and(ii) the oversight of the operations of the Joint Venture during the winding-upperiod in order to keep and preserve the assets thereof.  Legal and receiver costs of $276,617 for thenine-month period ended October 31, 2003 are included in other income (expense)on the consolidated statements of operations.

 

**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 outstandinglitigation matters.  The Company cannotat this time estimate the likelihood of Sparhawk consummating the exercise ofthe 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 would be returned to Sparhawk uponwind-up.  Sales of these productsamounted to approximately $1,065,000 in fiscal 2003, and $691,000 in the ninemonth peroid ended October 31, 2003. Rights to several of the products currently produced by the JointVenture, including iron dextran, are owned by the Company and are expected tobe returned to the Company, although ownership of certain of these productrights may be disputed by Sparhawk. Sales of these products amounted to approximately $5,112,000 in fiscal2003 and $3,515,000 for the nine month period ended October 31, 2003.  The Company plans to continue production ofthe products to which Vet Labs owns the rights after the winding up of theJoint Venture.  However, no assurancecan be given that sales of these products by the Company after the dissolutionof the Joint Venture will be consistent with those achieved by the JointVenture.

 

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.  Depending uponthe allocation of the Joint Venture assets upon dissolution, the Company maynot receive ownership of 

 

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the rights to productsdeveloped by the Joint Venture.  Salesof these products amounted to approximately $2,034,000 in fiscal 2003 and$2,069,000 during the nine-month period ended October 31, 2003.

 

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 toSparhawk in 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.  The sale proceeds in excess of the carryingvalue of the Joint Venture assets and liabilities would be recorded as again.  At October 31, 2003, the carryingvalue of the Joint Venture assets and liabilities is $2,441,124 and $1,054,590,respectively.  During the year endedJanuary 31, 2003, sales of the Joint Venture operations totaled $8,209,947 andnet income before income taxes was $31,520. During the nine month period ended October 31, 2003, sales of the JointVenture amounted to $6,274,436, and net income before taxes totaled$184,370.  A sale of Vet Labs’ interestin the Joint Venture may have a material adverse effect on the Company’sbusiness and results of operations.

 

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.

 

**Related Party Transactions**

 

In August 1997, theCompany loaned Thomas C. Usher, its Vice-Chairman, Director of Research andDevelopment, and a member of its Board of Directors, $691,500 at an interestrate equal to the prime rate of Toronto Dominion Bank plus 1.50% (the“Loan”).  The Loan was used to partiallyfund a $1,000,000 payment to the State of Florida in order to allow Thomas C.Usher to regain possession of 430,000 Common Shares of the Company then held bythe State as collateral security relating to the liquidation of insurancecompanies formerly owned by Thomas C. Usher. Repayment of the Loan is accomplished by monthly payments and throughoffsets by the Company against royalty payments due Thomas C. Usher pursuant tointellectual property license agreements and bonus payments, if any, grantedThomas C. Usher as an employee of the Company. The amount outstanding under the Loan as of October 31, 2003 was$483,241, as compared to $517,190 at January 31, 2003, including accruedinterest.  The Company has taken acumulative provision of $235,976 against accrued interest on this loan atOctober 31, 2003, compared to a cumulative provision of $212,491 at January 31,2003.

 

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In August 1999, Thomas C.Usher personally assumed all of the assets and liabilities of Novadex Corp.,including the balance of receivables (the “Receivables”) due to the Companyfrom Novadex Corp.  The Receivables haveno specific repayment terms.  The totaloutstanding amount of the Receivables as of October 31, 2003 was $426,454,representing no change from January 31, 2003. Thomas C. Usher also owes $250,000 to a subsidiary of the Company,Novadex International Limited, as of October 31, 2003.  The outstanding amount of this loan has notchanged from January 31, 2003.

 

The Company also has anoutstanding loan payable to Ruth Usher, a member of the Board ofDirectors.  The amount due from theCompany pursuant to this loan increased to $683,589 at October 31, 2003 from$682,225 at January 31, 2003 due to interest charges less monthly payments bythe Company.

 

**RiskFactors**

 

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

 

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

 

To achieve sustained profitability, the Companymust, alone or with corporate partners and collaborators, successfullyresearch, develop and commercialize identified technologies or productcandidates.  Current developmentalproduct candidates are in various stages of clinical and pre-clinicaldevelopment and will require significant further funding, research, development,preclinical and/or clinical testing, regulatory approval and commercializationtesting, and are subject to the risks of failure inherent in the development ofproducts based on innovative or novel technologies.  These products are also rigorously regulated by the U.S. federalgovernment, particularly the FDA, and by comparable agencies in state and localjurisdictions and in foreign countries. Specifically, each of the following results is possible with respect toany one of the Company’s developmental product candidates:

 

•                  that the Company will not be able to maintain itscurrent research and development schedules;

 

•                  that the Company will not be able to enter into humanclinical trials because of scientific, governmental or financial reasons, orthat it will encounter problems in clinical trials that will cause a delay orsuspension of the development of the product candidate;

 

•                  that the developmental product will be found to be ineffective orunsafe;

 

•                  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, theCompany may not be able to successfully develop its identified developmentalproduct candidates.

 

*The Company’s developmental product commercializationefforts may not be successful.*

 

It is possible that, for reasons including, but notlimited to those set forth below, the Company may be unable to commercialize orreceive royalties from the sale of any given developmental product, even if itis shown to be effective, if:

 

•                  the product is uneconomical or if the market for the product does notdevelop or diminishes;

 

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

 

•                  the product is not eligible for third-party reimbursement fromgovernment or private 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 partnerships with third parties forthe development and commercialization of its products.*

 

The Company’s strategy for development andcommercialization of its products is to rely on licensing agreements with thirdparty partners.  As a result, theability of the Company to commercialize future products is dependent upon thesuccess of third parties in performing clinical trials, obtaining regulatoryapprovals, manufacturing and successfully marketing its products.  There can be no assurance that such thirdparty collaborations will be successful. If any of the Company’s 

 

23

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current research and development partnershipsare discontinued, it may not be able to find others to develop andcommercialize its current product candidates.

 

*The Company does not currently have agreements with thirdparties to market its developmental products.*

 

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

 

*The Company may be unable to commercialize its products if it is unableto protect its proprietary rights, and may be liable for significant costs anddamages if it faces a claim of intellectual property infringement by a thirdparty.*

 

The Company’s success depends in part on itsability to obtain and maintain patents, protect trade secrets and operatewithout infringing upon the proprietary rights of others.  In the absence of patent and trade secretprotection, competitors may adversely affect the Company’s business byindependently developing and marketing substantially equivalent or superiorproducts, possibly at lower prices.  TheCompany could also incur substantial costs in litigation and suffer diversionof attention of technical and management personnel if it is required to defendintellectual property infringement suits brought by third parties, with orwithout merit, or if required to initiate litigation against others to protector assert intellectual property rights. Moreover, any such litigation may not be resolved in favor of theCompany.

 

The Company has received various patentscovering the uses of its developmental products.  However, the patent position of companies in the pharmaceuticalindustry generally involves complex legal and factual questions, and recentlyhas been the subject of much litigation. Any patents the Company has obtained, or may obtain in the future, maybe challenged, invalidated or circumvented. To date, no consistent policy has been developed by the United StatesPatent and Trademark Office regarding the breadth of claims allowed inbiotechnology patents.

 

In addition, because patent applications inthe United States are maintained in secrecy until patents issue, and becausepublication of discoveries in scientific or patent literature often lags behindactual discoveries, the Company cannot be certain that it and its licensors arethe first 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’spatents may infringe on patents or 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 theCompany has patents or have filed patent applications, the Company relies uponunpatented proprietary technology and may not be able to meaningfully protectits rights with regard to that unpatented proprietary technology.

 

# **Critical Accounting 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 when title and risk of ownership of products pass tothe customer.  Title and risk ofownership pass to the customer pursuant to the applicable sales contract,either upon shipment of product or upon receipt by the customer.  Since returns are rare and generally notaccepted, management has not made provision for returns.  In addition, product sold in bulk quantitiesis tested, prior to release for shipment, to ensure that it meets customerspecifications, and in many cases, customers receive samples for their owntesting.  Approval is obtained from thecustomer prior to shipping.  Asignificant change in these estimates could have a material impact on theresults of operations.

 

# Allowance for DoubtfulAccounts

 

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 customersreceivables.

 

# Long-Lived Assets

 

Long-lived assets are stated at cost, less accumulated depreciation oramortization computed using 

 

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the straight-line method basedon their estimated useful lives ranging from three to fifteen years.  Useful life is the period over which theasset is expected to contribute to the Company’s cash flows.  A significant change in these estimatescould have a material impact on the results of operations.  The Company reviews the recoverability ofits long-lived assets, including buildings, equipment and other intangibleassets, when events or changes in circumstances occur that indicate that thecarrying value of the asset may not be recoverable.  **The assessment of possible impairment is based on theCompany’s ability to recover********the carrying value of the asset from theexpected future pre-tax cash flows (undiscounted and********withoutinterest charges) of the related operations. If these cash flows are less than the********carryingvalue of such asset, an impairment loss is recognized for the differencebetween********estimated fair value and carrying value.  The measurement of impairment requires managementto********make estimates of these cash flows related to long-livedassets as well as other fair 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.

 

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## **Forward-LookingStatements**

 

This Form 10-Q, including the Management’sDiscussion and Analysis of Financial Condition and Results of Operations,contains various “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended, which represent the Company’s expectations orbeliefs concerning future events, including, but not limited to statementsregarding management’s expectations of regulatory approval and the commencementof sales.  In addition, statementscontaining expressions such as “believes”, “anticipates”, “plans” or “expects”used in this Form 10-Q, the Company’s Annual Report, and the Company’s periodicreports on Forms 10-K and 10-Q previously filed with the Securities andExchange Commission 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 inthis quarterly report speak only as to the date of this report.  Except as otherwise required by federalsecurities laws, we undertake no obligation to publicly update or revise anyforward-looking statements or the risk factors described in this quarterlyreport, whether as a result of new information, future events, changedcircumstances or any other reason after the date of this report.

 

The accompanying unaudited condensedconsolidated financial statements have been prepared in accordance with UnitedStates generally accepted accounting principles for interim financialinformation and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they 

 

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do not include all of the information andfootnotes required by generally accepted accounting principles for completefinancial statements.  In the opinion ofmanagement, all adjustments (consisting of normally recurring accruals)considered necessary for a fair presentation have been included.

 

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**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk.**

 

Exchange Rate Sensitivity

 

The Company’s operationsconsist of manufacturing activities in the United States and Canada.  The Company’s products are sold in NorthAmerica, Europe and the Pacific Rim.

 

While the majority of the sales of DextranProducts, the Company’s Canadian operation, are denominated in United Statesdollars, the majority of its expenses are incurred in Canadian dollars.  The majority of the assets and liabilitiesof Dextran Products are denominated in Canadian dollars prior to the currencytranslation adjustment necessary for preparation of the financial statements ofthe Company contained in this report. Therefore, Dextran Products has a net asset exposure to the UnitedStates dollar.  When the Canadian dollarrises in value relative to the United States dollar, the carrying value of theassets and liabilities 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 monitorscurrency fluctuations to ensure that an acceptable margin level at DextranProducts is maintained.  Management hasthe ability, to some extent, to adjust sales prices to maintain an acceptablemargin level.

 

The following tablepresents information about the Company’s financial instruments other thanaccounts receivable that are sensitive to changes in foreign currency exchangerates.  All financial instruments areheld for other than trading purposes. The table presents principal cash flows and related weighted averageinterest rates by expected maturity dates.

 
|                   |   | **Expected Maturity Date** |   |        |   |        |   |
|------------------------|--------|----------------------------|--------|-------------|--------|-------------|--------|
|                   |   | **1/31/04**                |   | **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)     |   | 125,024                    |   | 133,310     |   | 114,432     |   | 114,237 |   | — |   | — |   | 487,003 |   | 487,003 |   |
| Average  interest rate |   | 8.45                       | %      | 8.49        | %      | 9.00        | %      | 9.00 | % | — |   | — |   | 8.73 | % |   |   |

 

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Interest Rate Sensitivity

 

The Company has nosignificant interest earning assets and the majority of its debt is at fixedrates.  The variable rate debtrepresents the shareholder loan payable, which is approximately offset with theshareholder loan receivable.  Both ofthese financial instruments carry the same interest rate.  As such, the Company has no significant riskexposure to changes in interest rates.

 

The following tablepresents information about the Company’s financial instruments that aresensitive to changes in interest rates. All financial 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)**       |   |        |   |
| **Assets:**            |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Notes  receivable:     |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Variable  rate ($US)   |   | 48,878                     |   | 56,832      |   | 60,242      |   | 63,856 |   | 67,668 |   | 219,695 |   | 517,190 |   | 517,190 |   |
| Average  interest rate |   | 6.00                       | %      | 6.00        | %      | 6.00        | %      | 6.00 | % | 6.00 | % | 6.0 | % | 6.00 | % |   |   |
|                   |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities**:       |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Long-term debt:        |   |                       |   |        |   |        |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate  ($US)      |   | 280,365                    |   | —      |   | —      |   | — |   | — |   | — |   | 280,365 |   | 280,365 |   |
| Average  interest rate |   | 4.25                       | %      | —      |   | —      |   | — |   | — |   | — |   | 4.25 | % |   |   |
| Fixed rate  ($CDN)     |   | 125,024                    |   | 133,310     |   | 114,432     |   | 114,237 |   | — |   | — |   | 487,003 |   | 487,003 |   |
| Average interest  rate |   | 8.45                       | %      | 8.49        | %      | 9.00        | %      | 9.00 | % | — |   | — |   | 8.73 | % |   |   |
| Variable  rate ($US)   |   | (432                       | )      | 1,042       |   | 1,104       |   | 1,170 |   | 1,241 |   | 678,083 |   | 682,207 |   | 682,207 |   |
| Average  interest rate |   | 6.00                       | %      | 6.00        | %      | 6.00        | %      | 6.00 | % | 6.00 | % | 6.00 | % | 6.00 | % |   |   |

 

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**Item 4. Controls and Procedures.**

 

**(a)           Evaluation of Controls and Procedures**

 

Within 90 days prior to the date of filing ofthis report, the Company carried out an evaluation, under the supervision andwith the participation of its management, including the Chief Executive Officerand the Chief Financial Officer, of the design and operation of its disclosurecontrols and procedures.  Based on thisevaluation, its Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective forgathering, analyzing and disclosing the information the Company is required todisclose in the reports it files under the Securities Exchange Act of 1934,within the time periods specified in the SEC’s rules and forms.

 

**(b)           Changes in Controls and Procedures**

 

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

 

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**PART II**

**OTHER INFORMATION**

 

**Item 6.  Exhibits and Reports on Form 8-K.**

 
| (a)                                                                                        |   | Exhibits |
|--------------------------------------------------------------------------------------------|--------|----------|
|                                                                                       |   |     |
|                                                                                       |   | 3.1      | Memorandum of Association of Polydex  Pharmaceuticals Limited, as amended to date (filed as Exhibit 3.1 to the  Registrant’s Annual Report on Form 10-K filed April 30, 1997, and  incorporated herein by reference) |
|                                                                                       |   |     |   |
|                                                                                       |   | 3.2      | Articles of Association of Polydex  Pharmaceuticals Limited, as amended to date (filed as Exhibit 3.2 to the  Registrant’s Quarterly Report on Form 10-Q filed September 13, 1999, and  incorporated herein by reference) |
|                                                                                       |   |     |   |
|                                                                                       |   | 31.1     | Certification of Chief Executive Officer  pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
|                                                                                       |   |     |   |
|                                                                                       |   | 31.2     | Certification of Chief Financial Officer  pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 |
|                                                                                       |   |     |   |
|                                                                                       |   | 32.1     | Certification of Chief Executive Officer  pursuant to 19 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|                                                                                       |   |     |   |
|                                                                                       |   | 32.2     | Certification of Chief Financial Officer  pursuant to 19 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 |
|                                                                                       |   |     |   |
| (b)                                                                                        |   |     | Reports on Form 8-K |
|                                                                                       |   |     |   |
| There were no reports on Form 8-K filed  during the fiscal quarter ended October 31, 2003. |

 

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**SIGNATURES**

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
| Date:  December 15, 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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**ExhibitIndex**

 

31.1                           Certificationof Chief Executive Officer pursuant to Rule 13a-14(a) under the SecuritiesExchange Act of 1934

 

31.2                           Certificationof Chief Financial Officer pursuant to Rule 13a-14(a) under the SecuritiesExchange Act of 1934

 

32.1                           Certificationof Chief Executive Officer pursuant to 19 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002

 

32.2                           Certificationof Chief Financial Officer pursuant to 19 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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