Polydex Pharmaceuticals (POLXF) 10-Q 2002 Q2 Quarterly report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

/x/
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2001

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to              

Commission File Number 1-8366

POLYDEX PHARMACEUTICALS LIMITED
(Exact Name of Registrant as Specified in Its Charter)

Commonwealth of the Bahamas (State or Other Jurisdiction of Incorporation or Organization)	None (I.R.S. Employer Identification No.)
421 Comstock Road, Toronto, Ontario, Canada (Address of Principal Executive Offices)	M1L 2H5 (Zip Code)

(416) 755-2231
Registrant's Telephone Number, Including Area Code

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

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

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

Common Shares, $.0167 Par Value	3,027,778 shares
(Title of Class)	(Outstanding at September 10, 2001)

POLYDEX PHARMACEUTICALS LIMITED

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION
Item 1	CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	Consolidated Balance Sheets July 31, 2001 and January 31, 2001	3
	Consolidated Statements of Operations Three months ended July 31, 2001 and 2000 Six months ended July 31, 2001 and 2000	5
	Consolidated Statements of Shareholders' Equity and Comprehensive Income Six months ended July 31, 2001 and 2000	6
	Consolidated Statements of Cash Flows Six months ended July 31, 2001 and 2000	7
	Segmented Information Three months ended July 31, 2001 and 2000 Six months ended July 31, 2001 and 2000	8
Item 2	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	10
Item 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	14
PART II	OTHER INFORMATION
Item 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	15
Item 6	EXHIBITS AND REPORTS ON FORM 8-K	16
	Signatures	17

2

PART I

FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited).

POLYDEX PHARMACEUTICALS LIMITED

Consolidated Balance Sheets

(Expressed in United States dollars)

			July 31 2001		January 31 2001
			(Unaudited)
Assets
Current assets:
	Cash		$	253,930	$	403,203
	Trade accounts receivable			1,406,074		1,138,872
	Inventories:
		Finished goods		1,708,823		1,567,518
		Work in process		89,626		33,037
		Raw materials		541,946		606,082
	Inventories			2,340,395		2,206,637
	Prepaid expenses and other current assets			53,686		82,832
				4,054,085		3,831,544
Property, plant and equipment, net				4,776,927		5,064,084
Patents, net				120,337		131,428
Due from Sparhawk Laboratories, Inc.				131,640		138,247
Due from shareholder				1,184,626		1,251,200
Deferred income taxes				726,234		781,764
Other assets				18,838		19,059
			$	11,012,687	$	11,217,326

3

				July 31 2001			January 31 2001
				(Unaudited)
Liabilities and Shareholders' Equity
Current liabilities:
	Bank indebtedness			$	246,814		$	—
	Accounts payable				1,238,842			951,597
	Accrued liabilities				537,442			630,223
	Customer deposits received				47,040			85,227
	Income taxes payable				32,664			4,657
	Current portion of long-term debt				313,561			388,812
	Current portion of capital lease obligations				73,759			131,515
					2,490,122			2,192,031
Long-term debt					728,780			844,701
Capital lease obligations					417,830			464,737
Due to shareholder					689,033			722,222
Total liabilities					4,325,765			4,223,691
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
			3,027,477 common shares (2001—3,027,477)		50,434			50,434
	Contributed surplus				23,224,128			23,221,104
	Deficit				(15,612,047	)		(15,397,648	)
	Accumulated other comprehensive income				(990,603	)		(895,265	)
					6,686,922			6,993,635
				$	11,012,687		$	11,217,326

4

POLYDEX PHARMACEUTICALS LIMITED

Consolidated Statements of Operations (Unaudited)

(Expressed in United States dollars)

			Actual Quarter Ended July 31 2001			Actual Quarter Ended July 31 2000			Actual Year to Date July 31 2001			Actual Year to Date July 31 2000
Sales			$	2,884,189		$	3,105,898		$	5,945,380		$	6,498,727
Cost of products sold				2,266,322			2,278,949			4,647,448			4,718,640
				617,867			826,949			1,297,932			1,780,087
Expenses:
	General and administrative			428,477			415,847			821,873			824,252
	Depreciation			131,445			144,355			260,213			282,498
	Research and development			109,368			264,358			207,118			358,109
	Interest expense			53,972			76,142			112,286			150,788
	Selling and promotion			32,024			38,501			63,990			81,547
	Amortization			5,545			5,545			11,091			11,091
	Write down of property, plant and equipment			(29,489	)		—			—			—
				731,342			944,748			1,476,571			1,708,285
Income (loss) from operations				(113,475	)		(117,799	)		(178,639	)		71,802
Other income (loss):
	Gain (loss) on sale of equipment			(27,631	)		—			(27,631	)		—
	Interest and other			50,137			9,125			77,802			20,530
				22,506			9,125			50,171			20,530
Income (loss) before the undernoted				(90,969	)		(108,674	)		(128,468	)		92,332
Provision for (recovery of) income taxes				58,575			45,803			85,931			167,012
Net income (loss) for the period			$	(149,544	)	$	(154,477	)	$	(214,399	)	$	(74,680	)
Per share information:
	Earnings (loss) per common share for the period:
		Basic	$	(0.05	)	$	(0.05	)	$	(0.07	)	$	(0.02	)
		Diluted	$	(0.05	)	$	(0.05	)	$	(0.07	)	$	(0.02	)
Weighted average number of common shares outstanding for the period				3,027,477			3,027,567			3,027,477			3,025,684

5

POLYDEX PHARMACEUTICALS LIMITED

Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited)

(Expressed in United States dollars)

		Year to Date July 31 2001			Year to Date July 31 2000
Preferred Shares:
	Balance, beginning of period	$	15,010		$	15,010
	Private placement of preferred shares		—			—
	Balance, end of period	$	15,010		$	15,010
Common Shares:
	Balance, beginning of period	$	50,434		$	50,203
	Common share options exercised		—			147
	Balance, end of period	$	50,434		$	50,350
Contributed Surplus:
	Balance, beginning of period	$	23,221,104		$	23,121,345
	Common share options issued for services provided		3,024			—
	Common share options exercised		—			29,740
	Balance, end of period	$	23,224,128		$	23,151,085
Deficit:
	Balance, beginning of period	$	(15,397,648	)	$	(15,528,932	)
	Net income (loss) for the period		(214,399	)		(74,680	)
	Balance, end of period	$	(15,612,047	)	$	(15,603,612	)
Accumulated Other Comprehensive Income:
	Balance, beginning of period	$	(895,265	)	$	(692,992	)
	Currency translation adjustment for the period		(95,338	)		(81,599	)
	Balance, end of period	$	(990,603	)	$	(774,591	)
Comprehensive Income for the period:
	Net income (loss) for the period	$	(214,399	)	$	(74,680	)
	Currency translation adjustment for the period		(95,338	)		(81,599	)
		$	(309,737	)	$	(156,279	)

6

POLYDEX PHARMACEUTICALS LIMITED

Consolidated Statements of Cash Flows (Unaudited)

(Expressed in United States dollars)

			July 31 2001			July 31 2000
Cash provided by (used in):
Operating activities:
	Net income (loss) for the period		$	(214,399	)	$	(74,680	)
	Add (deduct) items not affecting cash:
		Depreciation and amortization		271,304			293,589
		Imputed interest on long-term debt		31,390			62,437
		Deferred income taxes		45,463			140,566
		Loss (gain) on sale of equipment		27,631			—
		Options issued in exchange for services provided		3,024			—
	Change in non-cash operating working capital			(202,779	)		66,777
				(38,366	)		488,689
Investing activities:
	Additions to property, plant and equipment and patents			(175,701	)		(390,440	)
	Repayment of due from shareholder, net			66,574			4,336
	Repayment from (advance to) Sparhawk Laboratories, Inc.			6,607			—
	Proceeds from sale of equipment			110,000			—
				7,480			(386,104	)
Financing activities:
	Proceeds from long-term debt			—			49,896
	Repayment of long-term debt			(221,243	)		(335,770	)
	Repayment of capital lease obligations			(92,291	)		(56,914	)
	Increase (decrease) in due to shareholder			(33,189	)		21,024
	Increase (decrease) in bank indebtedness			246,814			47,068
	Exercise of common share options			—			29,887
				(99,910	)		(244,809	)
	Effect of exchange rate changes on cash			(18,478	)		1,959
Increase (decrease) in cash position				(149,273	)		(140,265	)
Cash, beginning of period				403,203			799,565
Cash, end of period			$	253,930		$	659,300

7

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 United States. The operations of Chemdex represent the veterinary products business and the operations are carried out through its wholly-owned subsidiary, Veterinary Laboratories, Inc. Each of Dextran and Chemdex operates as a strategic business unit offering different products. Each subsidiary comprises a reportable segment as follows:

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

		Quarter Ended July 31 2001			Quarter Ended July 31 2000			Year to Date July 31 2001			Year to Date July 31 2000
Sales:
	Dextran	$	1,245,033		$	1,331,350		$	2,314,359		$	2,554,124
	Veterinary products		1,725,658			1,901,817			3,832,133			4,176,023
	Total segment sales		2,970,691			3,233,167			6,146,492			6,730,147
	Less: intercompany sales elimination		86,502			127,269			201,112			231,420
	Total consolidated sales	$	2,884,189		$	3,105,898		$	5,945,380		$	6,498,727
Income (loss) from operations:
	Dextran	$	215,228		$	132,935		$	292,570		$	375,585
	Veterinary products		(102,747	)		(4,520	)		(21,794	)		161,792
	Total income from operations from segments		112,481			128,415			270,776			537,377
	Less: Unallocated corporate expenses		225,956			246,214			449,415			465,575
	Total consolidated income from operations	$	(113,475	)	$	(117,799	)	$	(178,639	)	$	71,802
Assets:
	Dextran							$	5,278,425		$	5,839,900
	Veterinary products								4,485,522			4,184,465
	Total assets from segments								9,763,947			10,024,365
	Corporate assets								1,248,740			1,210,304
	Total consolidated assets							$	11,012,687		$	11,234,669

8

1.  Basis of Presentation:

    The information contained in the interim consolidated financial statements is condensed from that which would appear in the annual consolidated financial statements. Accordingly, the interim consolidated financial statements included herein should be read in conjunction with the January 31, 2001 Annual Report on Form 10-K filed by Polydex Pharmaceuticals Limited (the "Company"). The unaudited interim consolidated financial statements as of July 31, 2001 and 2000 include all normal recurring adjustments which management considers necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year. The interim consolidated financial statements include the accounts and transactions of the Company and its majority owned subsidiaries in which the Company has more than a 50% ownership interest and exercises control.

9

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

    The Company's fiscal year ends on January 31st therefore fiscal year 2002 refers to the Company's year ended January 31, 2002. The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere in this report.

(a) Results of Operations

    The operations of the Company are carried on through Dextran Products Limited ("Dextran Products") in Canada and through Chemdex, Inc. ("Chemdex") in the United States. The operations of Chemdex are carried on through its wholly-owned subsidiary, Veterinary Laboratories, Inc. ("Vet Labs"). Each of Dextran Products and Vet Labs operates as a strategic business unit. Dextran Products manufactures and sells bulk quantities of Dextran and several of its derivatives to large pharmaceutical companies throughout the world. Vet Labs manufactures and sells veterinary pharmaceutical products and specialty chemicals in the United States. The primary customers are distributors and private labelers, who in turn sell to the end-user of these products.

    During the second quarter ended July 31, 2001, the Registrant's pre-tax loss from operations amounted to $90,969 or $0.05 per share, as compared to a pre-tax loss from operations of $108,674 or $0.05 per share for the second quarter of fiscal 2001, ending July 31, 2000. This improvement in results is primarily due to an increase in operating profits at Dextran Products of $82,293 and a reduction of corporate expenses of $20,258, offset by a decrease in operating profits at Vet Labs of $98,227. The increase in operating profits at Dextran Products is primarily attributable to the decreased research and development expenses as compared to the same quarter last year. The decrease in operating profits at Vet Labs is primarily attributable to a decrease in sales and margins during the quarter as compared to the same quarter last year.

    Sales volume for the second quarter of fiscal 2002 decreased from $3,105,898 to $2,884,189, representing a decrease of $221,709 or 7%. Vet Labs experienced a quarter over quarter decrease in sales of $176,159 or 9% due to significantly decreased sales in the injectable product line. The decrease in sales in the injectable product line was partially offset by an increase in sales in the other product lines. Sales at Dextran Products decreased by $86,317 or 6% as compared to the same quarter in fiscal 2001. This decrease in sales at Dextran Products is primarily due to problems experienced, in the early part of the quarter, in producing a certain Iron Dextran solution. Demand for this product remained strong, however equipment breakdown and product quality issues limited the amount of product that could be shipped during the first half of the quarter. Management expects strong demand to continue at Dextran Products. Management expects that this demand will be met since the equipment problems and the product quality issues have been resolved.

    Gross margins decreased from 27% in the second quarter of fiscal 2001 to 21% in the second quarter of fiscal 2002. Dextran Products' quarter over quarter gross margin remained consistent at 36% while Vet Labs' gross margin decreased from 19% to 10% as compared to the second quarter of fiscal 2001. The margin decrease at Vet Labs is a result of the decreased sales in the injectables product line. This is the higher margin product line. The lower than normal sales resulted in higher average costs for fixed manufacturing overheads, as the fixed costs did not change.

    Management expects strong sales and margins to continue at Dextran Products. As expected, summer months are typically slower sales months for Vet Labs as large animals are put outdoors to pasture and therefore have less need for vitamins and other supplements. Management is therefore forecasting higher sales levels in the third quarter of fiscal 2002 than were achieved in the second quarter at Vet Labs.

    General and administrative expenses in the second quarter of fiscal 2002 increased by $12,630 or 3% from the second quarter of fiscal 2001. Year to date general and administrative expenses in fiscal

10

2002 are consistent with the level of expenses incurred in the same period in fiscal 2001. Depreciation and amortization in the second quarter of fiscal 2002 decreased by $12,910 or 9% from the second quarter of fiscal 2001 due primarily to the reduced capital expenditures and certain equipment becoming fully depreciated.

    Research and development costs in the second quarter of fiscal 2002 decreased by $154,990 or 59% as compared to the second quarter of fiscal 2001. Development costs for various projects are expected to continue, but at a reduced level for the remainder of the year because of funding from various research partners.

    Research and development, in conjunction with the Consortium for Industrial Collaboration in Contraceptive Research (CICCR) and the Rush Medical Center in Chicago, relating to Cellulose Sulfate gel is progressing. Pre-IND tests have indicated that this gel holds great promise as a topical prophylactic for sexually transmitted diseases, including AIDS, and as a contraceptive. Two Phase I human clinical trials to test the safety and tolerance of this gel were successfully completed. These trials were funded by CICCR. The project team is moving ahead to prepare clinical supplies for long-term toxicology and further clinical trials. Management expects funding to continue from CICCR for this project.

    The Company licensed the cystic fibrosis product, Usherdex, to BCY Lifesciences Inc. ("BCY Lifesciences") of Vancouver, British Columbia. Under this license agreement, BCY Lifesciences will provide funding for research and development and will pay a royalty to the Company based on sales and sublicensing revenue in return for the exclusive right to sublicense, manufacture, distribute and sell the product or products developed. BCY Lifesciences filed an Investigative New Drug application in Canada to seek approval to conduct a Phase I clinical trial, during the second quarter of fiscal 2002. BCY Lifesciences is completing preparations for the Phase I clinical trial. In anticipation of successful Phase I human clinical testing, BCY Lifesciences is already planning to commence Phase II clinical trials in the first half of fiscal 2003.

    Interest expense in the second quarter of fiscal 2002 decreased by $22,170 or 29% as compared to the second quarter in fiscal 2001 due to the repayment of long-term debt and capital lease obligations. In addition, interest expense, during the second quarter of fiscal 2002, includes imputed interest on both the share value guarantee payable, resulting from the acquisition of Vet Labs in 1992, and the lawsuit settlement payable, totaling $14,766.

    Selling and promotion expenses in the second quarter of fiscal 2002 decreased by $6,477 or 17% as compared to the second quarter of fiscal 2001 due to reduced costs incurred by the operating subsidiaries.

    Interest and other income in the second quarter of fiscal 2002 increased by $41,012 or 449% as compared to the second quarter of fiscal 2001 due to payouts received, during the quarter, from the Vitamin Anti-trust lawsuit.

    The Foot and Mouth disease problem in Europe, following so closely on the heels of the Bovine Spongiform Encephalopathy outbreak, may still be of concern. Dextran Products continues to be in contact with its agents overseas and to date the problem seems to be more related to sheep and cattle. The modern practice of isolating pig units for health reasons and taking the animals directly to slaughter has limited the impact on this sector. The Iron Dextran sold by Dextran Products is mainly for treatment of pigs. The situation is, however, very fluid and the Company is still in contact with its distributors. Feedback from Asia, Europe and the United States shows limited effect to date. The impact of the Foot and Mouth disease problem has had minimal impact on Vet Labs.

    The raw material supplier of Pentobarbital used in euthanasia product, for Vet Labs, appears to have resolved their regulatory problems with their production. Vet Labs began to receive shipments of Pentobarbital during the quarter allowing for production of euthanasia product. Management expects

11

future sales of these products to return to normal levels. Sales of euthanasia products in the second quarter of fiscal 2002 amounted to $225,731, as compared to sales of $264,833 in the second quarter of fiscal 2001.

    Operating results for the second quarter ended July 31, 2001 are not necessarily indicative of the results that may be expected for the year ended January 31, 2002. For further information, refer to the consolidated statements and footnotes thereto included in the Registrant's annual report on Form 10-K for the year ended January 31, 2001.

(b) Liquidity and Capital Resources

    The Registrant, in the second quarter of fiscal 2002, generated cash flow from operations of $39,324 compared to cash flow from operations of $423,519 in the second quarter of fiscal 2001. This decrease of $384,195 or 91% is primarily attributable to the decrease in profits and the increase in non-cash working capital during the quarter. The increase in non-cash working capital levels, during the second quarter of 2002, resulted from increases in accounts receivable and inventories in excess of increases in accounts payable. There were no significant changes in financing or investing activities during the second quarter of 2002.

    At July 31, 2001, the Company had trade accounts receivable of $1,406,074 and $2,340,395 in inventories compared to $1,138,872 and $2,206,637, respectively, at January 31, 2001. The increase in trade accounts receivable was due to timing of sales and collections at quarter-end. The inventory levels remained consistent at Dextran Products during the second quarter of fiscal 2002. Inventory levels at Vet Labs were increased in anticipation of increased sales volume in the third quarter of fiscal 2002.

    There were no significant capital expenditures during the second quarter of fiscal 2002.

    The change in the accumulated other comprehensive income is entirely attributable to the currency translation adjustment of Dextran Products. Dextran Products' functional currency is the Canadian dollar. This currency translation adjustment arises from the translation of Dextran Products' financial statements to U.S. dollars.

    Dextran Products has a CDN$750,000 (US$500,000) line of credit, of which CDN$250,000 (US$163,000) was drawn at July 31, 2001. Management anticipates using the credit line for the purposes of funding a portion of the costs associated with the refurbishment of the Toronto facility. The Vet Labs—Sparhawk Joint Venture has a $75,000 line of credit to fund operations. At July 31, 2001, $37,000 was drawn on this line of credit. Vet Labs has a loan commitment for $400,000 to be used for building construction. Management is not planning any construction at Vet Labs during fiscal 2002.

    Management expects the primary source of its future capital needs to be a combination of company earnings and borrowings. The Company, at present, does not have any material commitments for capital expenditures, although management intends to continue the plant refurbishment at Dextran Products.

    No changes in accounting principles or their application have been implemented in the reporting period that would have a material effect on reported income. Changes in the relative values of the Canadian dollar and the U.S. dollar occur from time to time and may, in certain instances, materially affect the Company's results of operations.

    The Company does not believe that the impact of inflation and changing prices on its operations are material.

(c) Long-term Objectives

    At the beginning of the year, two critical long-term objectives were identified.

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1.

Bring new products to market. During the second quarter, development work has continued on the cellulose sulfate project and a raw material for a human injectable product. Vet Labs is continuing development of new veterinary products.

2.

Upgrade and refurbish existing production facilities to increase capacity and efficiency. Refurbishment of the Dextran plant is continuing and planning for the next two phases is nearing completion.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

    This Form 10-Q, including the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company's expectations or beliefs concerning future events, including, but not limited to statements regarding management's expectations of regulatory approval and the commencement of sales. In addition, statements containing expressions such as "believes", "anticipates", "plans" or "expects" used in this Form 10-Q, the Company's Annual Report, and the Company's periodic reports on Forms 10-K and 10-Q previously filed with the Securities and Exchange Commission are intended to identify forward-looking statements. The Company cautions that these and similar statements in this Form 10-Q, the Company's Annual Report, and in previously filed periodic reports including reports filed on Forms 10-K and 10-Q are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements. These factors include, without limitation, changing market conditions, the progress of clinical trials, and the results obtained, the establishment of new corporate alliances, the impact of competitive products and pricing, and the timely development, FDA approval and market acceptance of the Company's products, none of which can be assured.

    The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, 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 Disclosures about Market Risk.

POLYDEX PHARMACEUTICALS LIMITED
July 31, 2001
Interest Rate Sensitivity

    The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. All financial instruments are held for other than trading purposes. The Company does not have a material exposure to interest rate risk.

    The table presents principal cash flows and related weighted average interest rates by expected maturity dates.

			Expected Maturity Date
																	Fair Value
			31-Jan-02		31-Jan-03		31-Jan-04		31-Jan-05		31-Jan-06		Thereafter		Total
			(US$Equivalent)
Assets
Notes receivable:
	Variable rate ($US)		39,491		50,150		54,162		58,495		63,175		387,137		652,611		652,611
		Average interest rate	8.00	%	8.00	%	8.00	%	8.00	%	8.00	%	8.00	%	8.00	%
Liabilities:
Long-term debt:
	Fixed rate ($US)		49,817		327,667		4,226		—		—		—		381,710		381,710
		Average interest rate	9.31	%	9.07	%	9.38	%	0.00	%	0.00	%	0.00	%	9.25	%
	Fixed rate ($CDN)		183,768		85,263		86,081		94,156		102,989		102,813		655,070		655,070
		Average interest rate	9.03	%	9.23	%	9.00	%	9.00	%	9.00	%	9.00	%	9.04	%
	Variable rate ($US)		21,607		(19,048	)	(20,572	)	(22,217	)	(23,995	)	786,427		722,203		722,203
		Average interest rate	8.00	%	8.00	%	8.00	%	8.00	%	8.00	%	8.00	%	8.00	%

POLYDEX PHARMACEUTICALS LIMITED
July 31, 2001
Exchange Rate Sensitivity

    The table below provides information about the Company's financial instruments that are sensitive to changes in foreign currency exchange rates. All financial instruments are held for other than trading purposes. The Company's major exposure to exchange rate risk is that the Canadian dollar rises dramatically in relation to the U.S. dollar and that this significantly reduces the gross margin experienced at Dextran Products. Management monitors the margin at Dextran to ensure that an acceptable margin level is maintained. Management has the ability, to some extent, to adjust sales prices to maintain an acceptable margin level.

    The table presents principal cash flows and related weighted average interest rates by expected maturity dates.

			Expected Maturity Date
																	Fair Value
			31-Jan-02		31-Jan-03		31-Jan-04		31-Jan-05		31-Jan-06		Thereafter		Total
			(US$Equivalent)
Liabilities:
Long-term debt:
	Fixed rate ($CDN)		183,768		85,263		86,081		94,156		102,989		102,813		655,070		655,070
		Average interest rate	9.03	%	9.23	%	9.00	%	9.00	%	9.00	%	9.00	%	9.04	%

14

PART II
OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders.

(a)

The 2001 Annual General Meeting of the Members was held on June 22, 2001.

(b)

Not applicable.

(c)

At the Annual Meeting, Mr. Joseph Buchman and Mr. John L.E. Seidler were elected as directors of the Company to hold office for a three-year term expiring at the Annual General Meeting of the Members held in 2004 or until successors are duly elected and qualified. The tabulation of votes in person or by proxy at the Annual Meeting with respect to Mr. Joseph Buchman's and Mr. John L.E. Seidler's election are as follows:

	Class	For		Withheld	Abstain and Non-Votes
Joseph Buchman	Common Shares Class B Preferred Shares	572,840 1,798,800	(1)	76,198 —	2,378,389 —
John L.E. Seidler	Common Shares Class B Preferred Shares	572,810 1,798,800	(1)	76,228 —	2,378,389 —

(1)

the 899,400 outstanding Class B Preferred Shares of the Company have two votes per share.

The Shareholders of the Company also approved a proposal to authorize the Board of Directors of the Company to approve and adopt the Polydex Pharmaceuticals Limited 2001 Stock Incentive Plan ("Proposal No. 2"). The tabulation of votes present in person or by proxy at the Annual Meeting with respect to the foregoing proposal is as follows:

	Class	For		Withheld	Abstain and Non-Votes
Proposal No. 2	Common Shares Class B Preferred Shares	882,407 1,798,800	(1)	137,118 —	2,007,902 —

(1)

the 899,400 outstanding Class B Preferred Shares of the Company have two votes per share.

15

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)
(b)	Reports on Form 8-K
	Not applicable.

16

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 the undersigned thereunto duly authorized.

Date: September 14, 2001

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)

17

QuickLinks

POLYDEX PHARMACEUTICALS LIMITED TABLE OF CONTENTS
PART I FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements (unaudited).

POLYDEX PHARMACEUTICALS LIMITED Consolidated Balance Sheets (Expressed in United States dollars)
POLYDEX PHARMACEUTICALS LIMITED Consolidated Statements of Operations (Unaudited) (Expressed in United States dollars)
POLYDEX PHARMACEUTICALS LIMITED Consolidated Statements of Shareholders' Equity and Comprehensive Income (Unaudited) (Expressed in United States dollars)
POLYDEX PHARMACEUTICALS LIMITED Consolidated Statements of Cash Flows (Unaudited) (Expressed in United States dollars)
POLYDEX PHARMACEUTICALS LIMITED Segmented Information (Unaudited) (Expressed in United States dollars)

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

PART II OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders.

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

SIGNATURES