1
UNITED STATES
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, 1998
[ ] 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
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POLYDEX PHARMACEUTICALS LIMITED
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(Exact name of registrant as specified in its charter)
Commonwealth of the Bahamas None
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(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
421 Comstock Road, Toronto, Ontario, Canada M1L 2H5
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(Address of principal executive offices)
Registrant's telephone number, including area code (416) 755-2231
---------------
Indicate by check mark 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 2,998,916 shares
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(Title of Class) (Outstanding at August 27, 1998)
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POLYDEX PHARMACEUTICALS LIMITED
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TABLE OF CONTENTS
PAGE
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PART I FINANCIAL INFORMATION
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Consolidated Balance Sheets
July 31, 1998 and January 31, 1998.................................3
Consolidated Statements of Shareholders' Equity
Six Months ended July 31, 1998 and 1997............................4
Consolidated Statements of Operations
Three Months ended July 31, 1998 and 1997 and
Six Months ended July 31, 1998 and 1997............................5
Consolidated Statements of Cash Flows
Six Months ended July 31, 1998 and 1997............................6
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................7
Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.................................................10
PART II OTHER INFORMATION
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............11
Item 6 EXHIBITS AND REPORTS ON FORM 8-K..................................12
Signatures........................................................13
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Consolidated Financial Statements.
POLYDEX PHARMACEUTICALS LIMITED AND
SUBSIDIARIES
Consolidated Balance Sheets
(Expressed in United States dollars)
==================================================================================================================
(Unaudited)
July 31 January 31
1998 1998
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ASSETS
Current assets:
Cash $ 577,228 $ 288,527
Trade accounts receivable 958,799 932,745
Inventories 1,733,733 1,678,280
Prepaid expenses and other current assets 54,295 64,727
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3,324,055 2,964,279
Property, plant and equipment, net 3,964,220 3,800,379
Patents, net 201,258 217,374
Due from Novadex Corp. 712,185 712,185
Due from shareholders 932,406 935,416
Deferred income taxes 591,731 950,000
Other assets 168,420 161,314
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$ 9,894,275 $ 9,740,947
==================================================================================================================
==================================================================================================================
(Unaudited)
July 31 January 31
1998 1998
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 987,837 $ 1,001,620
Accrued liabilities 395,648 355,167
Loan payable 18,250 -
Current portion of long-term debt 60,491 55,392
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1,462,226 1,412,179
Long-term debt 443,124 462,632
Due to shareholders 607,237 590,526
Due to affiliated companies 425,420 425,420
Deferred gain 672,179 672,369
Deferred income taxes 21,450 26,439
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 3,631,636 3,589,565
Redeemable capital stock (149,899 common shares; 1998 - 149,899) 2,000,000 2,000,000
Shareholders' equity:
Capital stock:
Authorized:
100,000 A preferred shares of $0.10 each
899,400 B preferred shares of $0.0167 each
4,000,000 common shares of $0.0167 each
Issued and outstanding:
899,400 B preferred shares 15,010 15,010
2,847,018 common shares (1998 - 2,846,998) 47,283 47,283
Contributed surplus 21,826,025 21,826,025
Deficit (16,792,242) (17,071,168)
Other comprehensive income (833,437) (665,768)
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4,262,639 4,151,382
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$ 9,894,275 $ 9,740,947
==================================================================================================================
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POLYDEX PHARMACEUTICALS LIMITED AND
SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive income
(Unaudited)
(Expressed in United States dollars)
===================================================================================================
Year to Date Year to Date
July 31 July 31
1998 1997
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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 $ 47,283 $ 44,456
Private placement of common shares - 2,787.00
Exercise of options - 40
------------------------------------------------------------------------------------------
Balance, end of period $ 47,283 $ 47,283
===================================================================================================
Contributed Surplus:
Balance, beginning of period $ 21,826,025 $ 20,735,822
Private placement of common shares - 1,072,243
Exercise of options - 17,960
------------------------------------------------------------------------------------------
Balance, end of period $ 21,826,025 $ 21,826,025
===================================================================================================
Deficit:
Balance, beginning of period $ (17,071,168) $ (17,559,330)
Net income (loss) for the period 278,926 (70,593)
------------------------------------------------------------------------------------------
Balance, end of period $ (16,792,242) $ (17,629,923)
===================================================================================================
Other Comprehensive Income:
Balance, beginning of period $ (665,768) $ (535,230)
Currency translation adjustment for the period (167,669) (40,684)
------------------------------------------------------------------------------------------
Balance, end of period $ (833,437) $ (575,914)
===================================================================================================
Comprehensive Income for the period:
Net income (loss) for the period $ 278,926 $ (70,593)
Currency translation adjustment for the period (167,669) (40,684)
------------------------------------------------------------------------------------------
$ 111,257 $ (111,277)
===================================================================================================
NOTE:
The comparative amount presented for shareholders' equity has been
restated to reclassify the common shares subject to the put option with
Continental Grain Company, as described in note 11 of the Company's
Annual Report.
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POLYDEX PHARMACEUTICALS LIMITED AND
SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
(Expressed in United States dollars)
==================================================================================================================================
Quarter Ended Quarter Ended Year to Date Year to Date
July 31 July 31 July 31 July 31
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Sales $ 2,847,015 $ 2,343,259 $ 5,777,979 $ 4,579,594
Cost of products sold 1,960,032 1,660,309 3,975,314 3,245,214
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886,983 682,950 1,802,665 1,334,380
Expenses:
General and administrative 410,236 449,755 783,383 839,722
Depreciation and amortization 118,376 151,093 235,904 295,685
Selling and promotion 39,453 93,327 83,949 160,985
Research and development 32,695 33,197 75,098 71,568
Interest expense 31,430 29,017 66,336 58,035
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632,190 756,389 1,244,670 1,425,995
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Income (loss) from operations 254,793 (73,439) 557,995 (91,615)
Other income:
Gain on sale of equipment 577 - 7,246 -
Interest and other 22,221 8,842 41,184 19,840
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22,798 8,842 48,430 19,840
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Income (loss) before the undernoted 277,591 (64,597) 606,425 (71,775)
Provision for income taxes (174,678) - (327,499) -
Minority interest in loss - 480 - 1,182
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) for the period $ 102,913 $ (64,117) $ 278,926 $ (70,593)
==================================================================================================================================
Per share information:
Earnings (loss) per common share for the period:
Basic $ 0.03 $ (0.02) $ 0.09 $ (0.02)
Diluted $ 0.03 $ (0.02) $ 0.09 $ (0.02)
==================================================================================================================================
Weighted average number of common shares
outstanding for the period 2,996,917 2,905,058 2,996,907 2,878,445
==================================================================================================================================
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POLYDEX PHARMACEUTICALS LIMITED AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
(Expressed in United States dollars)
=====================================================================================================================
Year to Date Year to Date
July 31 July 31
1998 1997
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Cash provided by (used in):
Operating activities:
Net income (loss) for the period $ 278,926 $ (70,593)
Add (deduct) items not affecting cash:
Depreciation and amortization 235,904 295,685
Deferred income taxes 327,499 -
Loss (gain) on sale of equipment (7,246) -
Legal expenses charged to deferred gain (190) (101,343)
Minority interest - (1,182)
Expenses paid by issuance of common shares - 18,000
Change in non-cash operating working capital (148,677) (93,796)
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686,216 46,771
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Investing activities:
Additions to property, plant and equipment (381,572) (162,020)
Additions to patents (2,055) -
Proceeds from sale of equipment 7,246 -
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(376,381) (162,020)
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Financing activities:
Proceeds from (repayment of) loan payable 18,250 -
Private placement of common shares - 1,000,000
Repayment of long-term debt (34,409) (33,250)
Proceeds from long-term debt 20,000 -
Proceeds from advances from shareholders 16,711 23,585
Repayment of advances to shareholders 3,010 -
Advances from (repayment to) Novadex Corp. - (5,609)
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23,562 984,726
Effect of exchange rate changes on cash (44,696) (29,616)
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Increase (decrease) in cash position 288,701 839,861
Cash, beginning of period 288,527 603,491
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Cash, end of period $ 577,228 $ 1,443,352
=====================================================================================================================
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
POLYDEX PHARMACEUTICALS LIMITED AND SUBSIDIARIES
(a) RESULTS OF OPERATIONS
During the fiscal quarter ended July 31, 1998, the Registrant's pre-tax income
from operations amounted to $254,793, as compared to a pre-tax loss of $73,439
for the same period last year. This improvement in results is due to an increase
in pre-tax income at Dextran Products Limited ("Dextran") of $79,181 and at
Veterinary Laboratories Inc. ("Vet Labs") of $128,314 and a decrease in expenses
at the corporate head office of $127,687.
Sales volume this quarter increased from the same period last year by $503,756.
This increase in sales volume is attributable to an increase at Vet Labs of
$338,368 and an increase at Dextran of $165,388. Sales at Vet Labs increased
relative to the same period last year because of greater market penetration in
all product lines. Sales at Dextran increased quarter over quarter due to
increased demand for iron dextran.
Gross margins increased from 29% in the second quarter last year to 31% this
quarter. Dextran's quarter over quarter gross margin decreased from 45% to 41%
while Vet Labs' gross margin increased from 12% to 18%. The margin decrease at
Dextran is due to increased intercompany sales. The intercompany product sales
are lower margin because they are further refined at Vet Labs. The increase in
margin at Vet Labs is attributable to increased sales of higher margin products,
primarily in the injectable and solution product groups. The gross margin
achieved at both operating divisions this quarter is consistent with that
experienced in the first quarter this year.
Management expects strong sales and margins to continue at Dextran. 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 than was achieved in the second quarter at Vet Labs. Margins are
expected to remain steady at Vet Labs as well.
General and administrative expenses have decreased by $39,519 this quarter as
compared to the same quarter last year, primarily due to a reduction in salary
expense due to the January 1998 departure of the former Chairman, Dr. Alec
Keith.
Depreciation and amortization expenses have decreased by $32,717 primarily due
to the reduction in patent amortization resulting from the write-down of the
cellulose sulphate patent at January 31, 1998.
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Selling and promotion expenses in the quarter decreased by $53,874 as compared
to the second quarter last year due to the termination during the first quarter
this year of a contract with a marketing company.
There was no significant quarter over quarter change in either research and
development expenses or interest expense.
Operating results for the second quarter ended July 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended January 31,
1999. 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, 1998.
(b) LIQUIDITY AND CAPITAL RESOURCES
During the second quarter, the Registrant generated cash flow from operations of
$497,964 compared to the prior year second quarter cash flow from operations of
$38,635 which increase is primarily attributable to the large increase in net
income for the quarter as compared to the prior year.
There were no significant changes in receivables or inventory levels at either
Dextran or Vet Labs during the quarter.
The majority of capital expenditures on plant and equipment during the quarter
relate to engineering plans for the plant refurbishment at Dextran. Management
plans to begin to purchase equipment for this refurbishment during the third
quarter. There are no production interruptions planned for the next quarter due
to this refurbishment.
FORWARD-LOOKING STATEMENTS SAFE HARBOR
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 and the sufficiency of the
Company's cash flow for the Company's future liquidity and capital resource
needs. In addition, statements containing expressions such as "believes",
"anticipates" 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
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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. Results actually achieved
may differ materially from expected results included in these statements as a
result of these or other factors.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with 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, 1998
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
31-Jan-99 31-Jan-00 31-Jan-01 31-Jan-02 31-Jan-03 Thereafter Total Value
--------- --------- --------- --------- --------- ---------- ----- -----
(US$ Equivalent)
ASSETS
Notes receivable:
Variable rate ($US) 65,910 133,929 125,777 85,530 92,372 342,974 846,491 846,491
Average interest rate 7.71% 7.79% 7.89% 8.00% 8.00% 8.00% 7.90%
LIABILITIES:
Short-term debt:
Fixed rate ($CDN) 12,074 6,176 18,250 18,250
Average interest rate 7.90% 7.90% 7.90%
Long-term debt:
Fixed rate ($US) 15,640 357,766 16,015 1,297 -- -- 390,718 390,718
Average interest rate 10.40% 10.42% 9.50% 9.50% 0.00% 0.00% 9.95%
Fixed rate ($CDN) 13,617 29,574 32,141 34,932 -- -- 110,264 110,264
Average interest rate 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
Variable rate ($US) (48,578) (52,464) (56,661) (61,194) (66,089) 892,204 607,219 607,219
Average interest rate 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00%
POLYDEX PHARMACEUTICALS LIMITED
JULY 31, 1998
EXCHANGE RATE SENSITIVITY
The table below provides information about the Company's financial
instruments that are sensitive to changes in foreign currency exchange
rates. All financial instruments are held for other than trading purposes.
The Company's major exposure to exchange rate risk is that the Canadian
dollar rises dramatically in relation to the U.S. dollar and that this
significantly reduces the gross margin experienced at Dextran Products.
Management monitors the margin at Dextran to ensure that an acceptable
margin level is maintained. Management has the ability, to some extent, to
adjust sales prices to maintain an acceptable margin level.
The table presents principal cash flows and related weighted average
interest rates by expected maturity dates.
Expected Maturity Date
------------------------------------------------------------------------------- Fair
31-Jan-99 31-Jan-00 31-Jan-01 31-Jan-02 31-Jan-03 Thereafter Total Value
--------- --------- --------- --------- --------- ---------- ----- -----
(US$ Equivalent)
LIABILITIES:
Long-term debt:
Fixed rate ($CDN) 13,617 29,574 32,141 34,932 -- -- 110,264 110,264
Average interest rate 8.50% 8.50% 8.50% 8.50% 8.50% 8.50% 8.50%
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The 1998 Annual General Meeting of the Members (the
"Annual Meeting") was held on June 19, 1998.
(b) Not applicable.
(c) At the Annual Meeting, Mr. Joseph Buchman was elected as a
director of the Company to hold office for a three-year term
expiring at the Annual General Meeting of the Members held in
2001 or until a successor is duly elected and qualified. The
tabulation of votes in person or by proxy at the Annual
Meeting with respect to Mr. Buchman's election are as follows:
Class For Withheld
----- --- --------
Common Shares 1,706,137 1,290,760
Class B Preferred 899,400 --
Shares
The Shareholders of the Company also approved proposals to:
(i) authorize the Board of Directors to appoint the Company's
independent public accountants and fix their remuneration
("Proposal No. 2"), (ii) amend the Articles of Association to
set forth the rights and characteristics of the Class B
Preferred Shares ("Proposal No. 3"), and (iii) amend the
Articles of Association to increase the quorum necessary to
transact business at any General Meeting of the Members
("Proposal No. 4"). The tabulation of votes present in person
or by proxy at the Annual Meeting with respect to the
foregoing proposals are as follows:
Class For Against Withheld
----- --- ------- --------
Proposal Common Shares 1,883,392 21,508 1,091,997
No. 2 Class B Preferred 899,400 -- --
Shares
Proposal Common Shares 756,841 118,883 2,121,173
No. 3 Class B Preferred 899,400 -- --
Shares
Proposal Common Shares 809,299 81,313 2,106,285
No. 4 Class B Preferred 899,400 -- --
Shares
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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 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
27 Financial Data Schedule
(b) Reports on Form 8-K
Not applicable.
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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 the
undersigned thereunto duly authorized.
Date: September 9, 1998
POLYDEX PHARMACEUTICALS LIMITED
(Registrant)
By \s\ George G. Usher
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George G. Usher, Chairman, President and Chief
Executive Officer
(Principal Executive Officer)
By \s\ Sharon L. Wardlaw
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Sharon L. Wardlaw, Treasurer, Secretary and
Chief Financial and Accounting Officer
(Principal Financial Officer)
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EXHIBIT INDEX
Exhibit Number Exhibit Description
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3.2 Articles of Association of Polydex
Pharmaceuticals Limited, as amended
to date
27 Financial Data Schedule