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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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



For the quarter ended June 30, 2003



or



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



Commission File Number 001-16185



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INNOVATIVE COMPANIES, INC.

(Exact name of small business issuer as specified in its charter)



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|STATE OF FLORIDA                                               |  | 59-2600232                       
|-------------------------------------------------------------- |  | ---------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|6950 Bryan Dairy Road, Largo, Florida                          |  | 33777                            
|(Address of principal executive offices)                       |  | (Zip Code)                       



Issuers
telephone number, including area code: (727) 544-8866



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Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange 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.    x  Yes ̈No



The number of shares outstanding of the Issuers common stock at $.01
par value as of July 28, 2003 was 7,569,674 net of 157,960 treasury shares.



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PART I  FINANCIAL INFORMATION



|Item 1. |  | CONSOLIDATED FINANCIAL STATEMENTS.
|------- |  | ----------------------------------



INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                 |  | March 31, 2003 |             |   | June 30, 2003 |  
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ----------- | - | ------------- | -
|                                                                                                                                                 |  | (Audited)      |             |   | (Unaudited)   |  
|ASSETS                                                                                                                                           |  |                |             |   |               |  
|Current assets:                                                                                                                                  |  |                |             |   |               |  
|Cash and cash equivalents                                                                                                                        |  | $              | 474,033     |   |               | $
|Certificate of deposit, restricted                                                                                                               |  |                | 409,059     |   |               |  
|Certificate of deposit                                                                                                                           |  |                | 294,883     |   |               |  
|Accounts receivable, net                                                                                                                         |  |                | 879,454     |   |               |  
|Accounts receivable, other                                                                                                                       |  |                | 354,293     |   |               |  
|Inventories, net                                                                                                                                 |  |                | 2,140,709   |   |               |  
|Prepaid expenses and other current assets                                                                                                        |  |                | 297,114     |   |               |  
|Due from affiliates, net                                                                                                                         |  |                | 546,426     |   |               |  
|Deferred tax asset                                                                                                                               |  |                | 147,900     |   |               |  
|                                                                                                                                                 |  |                |             |   |               |  
|Total current assets                                                                                                                             |  | $              | 5,543,871   |   |               | $
|                                                                                                                                                 |  |               
|Property, leaseholds and equipment, net                                                                                                          |  |                | 1,477,726   |   |               |  
|                                                                                                                                                 |  |               
|Intangible assets, net                                                                                                                           |  |                | 960,047     |   |               |  
|                                                                                                                                                 |  |               
|Other assets                                                                                                                                     |  |                | 104,072     |   |               |  
|                                                                                                                                                 |  |                |             |   |               |  
|Total assets                                                                                                                                     |  | $              | 8,085,716   |   |               | $
|                                                                                                                                                 |  |                |             |   |               |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                             |  |                |             |   |               |  
|Current liabilities:                                                                                                                             |  |                |             |   |               |  
|Accounts payable                                                                                                                                 |  | $              | 919,710     |   |               | $
|Credit lines payable                                                                                                                             |  |                | 846,016     |   |               |  
|Current portion of long-term obligations                                                                                                         |  |                | 369,066     |   |               |  
|Accrued expenses                                                                                                                                 |  |                | 337,952     |   |               |  
|Obligations to affiliates                                                                                                                        |  |                | 343,624     |   |               |  
|                                                                                                                                                 |  |                |             |   |               |  
|Total current liabilities                                                                                                                        |  | $              | 2,816,368   |   |               | $
|Long-term obligations, less current portion                                                                                                      |  |                | 225,282     |   |               |  
|                                                                                                                                                 |  |                |             |   |               |  
|Total liabilities                                                                                                                                |  | $              | 3,041,650   |   |               | $
|                                                                                                                                                 |  |                |             |   |               |  
|Redeemable series A preferred stock, no par value, $10 face value 150,000 shares authorized; 45,000 shares issued and outstanding, at face value |  | $              | 450,000     |   |               |  
|Commitments and contingencies                                                                                                                    |  |                |             |   |               |  
|Shareholders equity :                                                                                                                           |  |                |             |   |               |  
|Preferred stock, no par value, 5,850,000 Shares authorized; no shares issued and outstanding                                                     |  |                |            |   |               |  
|Common stock, $.01 par value; 24,000,000 Shares authorized; 7,727,634 shares issued and outstanding                                              |  | $              | 77,276      |   |               | $
|Treasury Stock ,$.01 par value; 143,600 and 157,960 shares, respectively                                                                         |  |                | (1,436      | ) |               |  
|Additional paid in capital                                                                                                                       |  |                | 29,840,205  |   |               |  
|Retained earnings (deficit)                                                                                                                      |  |                | (25,321,979 | ) |               |  
|                                                                                                                                                 |  |                |             |   |               |  
|Total shareholders equity                                                                                                                       |  | $              | 4,594,066   |   |               | $
|                                                                                                                                                 |  |                |             |   |               |  
|Total liabilities and shareholders equity                                                                                                       |  | $              | 8,085,716   |   |               | $
|                                                                                                                                                 |  |                |             |   |               |  



See accompanying notes
to condensed consolidated financial statements.



2



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                       |  | Three Months Ended June 30, |          
|---------------------------------------------------------------------- |  | --------------------------- | ---------
|                                                                       |  | 2002                        |          
|                                                                       |  | (unaudited)                 |          
|Revenues:                                                              |  |                             |          
|PBM                                                                    |  | $                           | 695,549  
|Distribution                                                           |  |                             | 342,601  
|Manufacturing                                                          |  |                             | 3,372,983
|                                                                       |  |                             |          
|Total revenues                                                         |  |                             | 4,411,133
|                                                                       |  |                            
|Cost of goods sold:                                                    |  |                             |          
|PBM                                                                    |  | $                           | 599,389  
|Distribution                                                           |  |                             | 194,784  
|Manufacturing                                                          |  |                             | 2,353,685
|                                                                       |  |                             |          
|Total cost of goods sold                                               |  |                             | 3,147,858
|                                                                       |  |                             |          
|Gross profit:                                                          |  |                             |          
|PBM                                                                    |  | $                           | 96,160   
|Distribution                                                           |  |                             | 147,817  
|                                                                       |  |                            
|Manufacturing                                                          |  |                             | 1,019,298
|                                                                       |  |                             |          
|Total gross profit                                                     |  |                             | 1,263,275
|                                                                       |  |                             |          
|Selling, general and administrative expenses                           |  | $                           | 838,587  
|                                                                       |  |                             |          
|Operating income (loss) before other income and expense                |  | $                           | 424,688  
|Other income (expense), net:                                           |  |                             |          
|Other income, net                                                      |  |                             | 8,644    
|Interest expense, net                                                  |  |                             | (20,027  
|                                                                       |  |                             |          
|Total other income (expense), net                                      |  | $                           | (11,383  
|                                                                       |  |                             |          
|Income before income taxes                                             |  | $                           | 413,305  
|Income tax                                                             |  |                             |         
|                                                                       |  |                             |          
|Net income                                                             |  | $                           | 413,305  
|Preferred stock dividends                                              |  |                             | 37,500   
|                                                                       |  |                             |          
|                                                                       |  |                            
|Net income (loss) available to common shareholders                     |  | $                           | 375,805  
|                                                                       |  |                             |          
|Basic and diluted income (loss) per share                              |  | $                           | 0.05     
|                                                                       |  |                             |          
|Basic and diluted weighted average number of common shares outstanding |  |                             | 7,025,000
|                                                                       |  |                             |          



See accompanying notes
to condensed consolidated financial statements.



3



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS



|                                                                           |  | Three Months Ended June 30,      |         
|-------------------------------------------------------------------------- |  | -------------------------------- | --------
|                                                                           |  | 2002                             |         
|                                                                           |  | (Unaudited)                      |         
|Cash flows from operating activities:                                      |  |                                  |         
|Net income                                                                 |  | $                                | 413,305 
|Adjustments to reconcile net income to net cash from operating activities: |  |                                  |         
|Depreciation and amortization                                              |  |                                  | 94,879  
|Gain on sale of equipment                                                  |  |                                  |        
|Changes in operating assets and liabilities:                               |  |                                  |         
|Accounts receivable, net                                                   |  |                                  | 381,301 
|Accounts receivable, other                                                 |  |                                  |        
|Inventory, net                                                             |  |                                  | 235,287 
|Prepaid expenses and other current assets                                  |  |                                  | 41,914  
|Other assets                                                               |  |                                  | (19,558 
|Accounts payable                                                           |  |                                  | (503,355
|Accrued expenses                                                           |  |                                  | (15,769 
|Due from affiliates, net                                                   |  |                                  | 40,400  
|                                                                           |  |                                  |         
|Net cash provided by operating activities                                  |  | $                                | 668,404 
|                                                                           |  |                                  |         
|                                                                           |  |                                 
|Cash flows from investing activities:                                      |  |                                  |         
|Purchases of property, leaseholds and equipment                            |  | $                                | (39,085 
|Proceeds from sale of equipment                                            |  |                                  |        
|                                                                           |  |                                  |         
|Net cash used in investing activities                                      |  | $                                | (39,085 
|                                                                           |  |                                  |         
|                                                                           |  |                                 
|Cash flows from financing activities:                                      |  |                                  |         
|Net change in credit lines payable                                         |  | $                                |        
|Payments of long-term obligations                                          |  |                                  | (99,573 
|Payments of preferred stock dividends                                      |  |                                  | (37,500 
|Purchase of treasury shares                                                |  |                                  |        
|Payments for redemption of preferred stock                                 |  |                                  | (175,000
|                                                                           |  |                                  |         
|Net cash used in financing activities                                      |  |                                  | (312,073
|                                                                           |  |                                  |         
|Net increase (decrease) in cash                                            |  |                                  | 317,246 
|Cash at beginning of period                                                |  |                                  | 392,638 
|                                                                           |  |                                  |         
|Cash at end of period                                                      |  | $                                | 709,884 
|                                                                           |  |                                  |         
|                                                                           |  |                                 
|                                                                           |  | Three Months Ended June 30, 2002 |         
|Supplemental disclosure of cash flow information:                          |  |                                  |         
|Cash paid during the period for interest                                   |  | $                                | 20,632  
|                                                                           |  |                                  |         
|Cash paid during the period for income taxes                               |  | $                                |        
|                                                                           |  |                                  |         







See accompanying notes to condensed consolidated financial statements.



4



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

AS OF AND FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2003



NOTE 1-BASIS OF PRESENTATION



The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
for interim financial information and with the instruction to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended June 30,
2002 and 2003 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2004. For further information, refer to the consolidated financial statements and footnotes included in the Companys
Form-10KSB as of and for the years ended March 31, 2002 and 2003 as filed with the Securities and Exchange Commission on June 30, 2003.



NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



a. Principles of Consolidation



The condensed consolidated financial statements as of March 31, and June 30, 2003 and for the three months ended June 30, 2002 and 2003 include the
accounts of Innovative Companies, Inc. (the Company), (Innovative), which is continuing to doing manufacturing business as Innovative Health Products, Inc. (Innovative), and its Florida wholly-owned subsidiaries
Breakthrough Engineered Nutrition, Inc. (Breakthrough), Belcher Pharmaceuticals, Inc., (Belcher) and Go2PBM Services, Inc. (PBM). Significant intercompany balances and transactions have been eliminated in
consolidation.



b. Industry Segment



In accordance with the provisions of Statement of Financial Accounting Standards No. 131,
(SFAS 131), Disclosures about Segments of an Enterprise and Related Information, a company is required to disclose selected financial and other related information about its operating segments. Operating segments are components of an enterprise
about which separate financial information is available and is utilized by the chief operating decision maker related to the allocation of resources and in the resulting assessment of the segments overall performance. As of March 31, 2003 and
June 30, 2003, the Company had three industry segments: manufacturing, distribution and pharmacy benefit management. The $8,085,716 of total assets as of March 31, 2003 were comprised of $965,740 attributable to corporate, $5,883,651 attributable to
manufacturing, $587,411 attributable to distribution and $648,914 attributable to pharmacy benefit management. The $8,771,221 of total assets as of June 30, 2003 were comprised of $913,097 attributable to corporate, $6,402,119 attributable to
manufacturing, $771,106 attributable to distribution and $684,899 attributable to pharmacy benefit management.



5



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c. Cash and Cash Equivalents



For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.



d. Restricted Cash



Restricted cash is comprised of one-year certificate of deposits that are collateralizing
lines of credit with a Bank.



e. Inventories



Inventories are stated at lower of cost or market. Cost is determined using the first-in,
first-out method.



f. Property, Leasehold Improvements and Equipment



Depreciation is provided for using the straight-line method, in amounts
sufficient to relate the cost of depreciable assets to operations over their estimated service lives (asset categories range from three to seven years). Leasehold improvements are amortized using the straight-line method over the lives of the
respective leases or the service lives of the improvements, whichever is shorter. Leased equipment under capital leases is amortized using the straight-line method over the lives of the respective leases or over the service lives of the assets,
whichever is shorter, for those leases that substantially transfer ownership. Accelerated depreciation methods are used for tax purposes.



g. Intangible Assets



Intangible assets consist primarily of goodwill and intellectual property. In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets (FAS 141 and FAS 142). FAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FAS 141 also specifies the criteria by which intangible assets
acquired in a purchase method business combination be recognized and reported separately from goodwill. FAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. FAS 142 will also require the intangible assets with definite useful lives be amortized over their respective estimated useful lives, and reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.



We were required to adopt the provisions of FAS 141 effective July 1, 2001 and FAS 142 effective April 1, 2002. For the year ended March 31, 2003 and for the three months ended June 30, 2003, amortization expense associated with goodwill
was $0. The unamortized balance of goodwill at March 31, and June 30, 2003 was $728,896.



6



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NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)



h. Impairment of Assets



In accordance with the provisions of Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, the Companys policy is to evaluate whether there has been a permanent impairment in the value of long-lived assets, certain identifiable intangibles and goodwill when certain
events have taken place that indicate the remaining unamortized balance may not be recoverable. When factors indicate that the intangible assets should be evaluated for possible impairment, the Company uses an estimate of related undiscounted cash
flows. Factors considered in the valuation include current operating results, trends and anticipated undiscounted future cash flows. In accordance with the implementation of FAS 144, a Company is to select an initial valuation and assessment date to
perform a valuation to determine whether there is a risk of asset impairment. The Company has selected its annual valuation date for assessment of long-lived assets, certain identifiable intangibles and goodwill impairment as January 1, 2003 for
each of its operating units, for the fiscal year ending March 31, 2003 and then for each fiscal year thereafter. There have been no impairment losses recorded for the fiscal year ended March 31,2003 or for the three months ended June 30, 2003.



i. Income Taxes



The Company utilizes the guidance provided by Statement of Financial Accounting Standards
No. 109 (SFAS 109), Accounting for Income Taxes. Under the liability method specified by SFAS 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences reverse. Deferred tax expense is the result of changes in deferred tax assets and liabilities.



j. Earnings (Loss) Per Common Share



Earnings (loss) per share are computed using the basic and diluted calculations on the face of the statement of operations. Basic earnings (loss) per share are calculated
by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted earnings (loss) per share is calculated by dividing net income (loss) by the weighted average
number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. There were no potentially dilutive instruments outstanding for any of the periods presented.



k. Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting
principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at March 31, and June 30, 2003, as well as the reported amounts of
revenues and expenses for the three months ended June 30, 2002 and 2003. The actual outcome of the estimates could differ from the estimates made in the preparation of the financial statements.



7



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l. Concentration of Credit and Sales Risk



Concentrations of credit risk with respect to trade accounts receivable are limited due to the distribution of sales over a large customer
base as of March 31, and June 30, 2003. As related to consolidated sales revenues for the three months ended June 30, 2003, four customers accounted for 31.9%, 14.9%, 10.1% and 6.9%; the customers that had 31.9% and 10.1% of revenues are related
parties.



The Company has no concentration of customers within specific
geographic areas outside the United States that would give rise to significant geographic credit risk.



m. Revenue Recognition



In accordance
with SAB 101, Revenue Recognition, revenues are recognized by the Company when the merchandise is shipped to the customer.



n. Advertising Costs



The Company charges advertising costs to expense as incurred. Advertising expense was $9,016 and $38,748 for the three months ended June 30, 2002 and 2003, respectively.



o. Fair Value of Financial Instruments



The Company, in estimating its fair value disclosures for financial instruments, uses the
following methods and assumptions:



Cash, Accounts Receivable, Accounts Payable
and Accrued Expenses: The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable and accrued expenses approximate their fair value due to their relatively short maturity.



Long-term Obligations: The fair value of the Companys fixed-rate long-term obligations
is estimated using discounted cash flow analyses, based on the Companys current incremental borrowing rates for similar types of borrowing arrangements. At March 31, and June 30, 2003, the fair value of the Companys long-term obligations
approximated its carrying value.



Credit Lines Payable: The carrying amount of
the Companys credit lines payable approximates fair market value since the interest rate on these instruments corresponds to market interest rates.



p. Reclassifications



Certain reclassifications have been made to the financial statements for the three months ended June 30, 2002 to conform to the presentation for the three months ended June 30, 2003.



8



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NOTE 3-STOCK OPTION PLAN







NonEmployee
Stock Option Plan





On April 1, 2003, the Board of Directors received a total of 145,000 options an exercise price of $.80, the NASDAQ common stock closing price as of that date. In addition, on April 1, 2003, a nonemployee consultant
was granted a total of 150,000 common stock options stock with exercise prices as follows:



|Grant date |  | No. of options |  | Exercise price
|---------- |  | -------------- |  | --------------
|4/01/03    |  | 25,000         |  | $             
|4/01/03    |  | 25,000         |  | $             
|4/01/03    |  | 25,000         |  | $             
|4/01/03    |  | 25,000         |  | $             
|4/01/03    |  | 50,000         |  | $             



All of the stock options vest under a
three-year vesting schedule with the first year of vesting being attained one year from the date of grant.





The following represents the nonemployees common stock options outstanding as of June 30, 2003:





|Option balance outstanding, March 31, 2003 |  | 527,500
|------------------------------------------ |  | -------
|Granted                                    |  | 295,000
|Exercised                                  |  | 0      
|Forfeited                                  |  | 0      
|                                           |  |        
|Option balance outstanding, June 30, 2003  |  | 822,000
|                                           |  |        





As of June 30, 2003, of the 822,000 nonemployees common stock options outstanding, 259,334 of those options were vested with 401,667 options being nonvested.





NOTE 5-RELATED PARTY TRANSACTIONS





Revenues: For the three months ended June 30, 2002 and 2003, manufacturing revenues of approximately $61,215 and $54,370 respectively, were recorded from sales by the
Company to subsidiaries of Dynamic Health Products, an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder. For the three months ended June 30, 2002 and 2003, manufacturing
revenues of $0 and $41,393, respectively, were recorded from sales by the



9



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Company to DrugMax, Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company, is a principal shareholder.
For the three months ended June 30, 2002 and 2003, manufacturing revenues of $8,149 and $221,003, respectively, were recorded from sales by the Company to VerticalHealth Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman
of the Board of the Company, is a principal shareholder.



For the three months
ended June 30, 2002 and 2003, distribution revenues of approximately $0 and $2,401 were recorded from sales by the Company to VerticalHealth Inc., an affiliate of the Company, and of which Jugal K. Taneja, the Chairman of the Board of the Company,
is a principal shareholder.



For the three months ended June 30, 2002 and 2003,
pharmacy benefit management revenues of approximately $695,549 and $1,201,863 respectively, were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the Companys board members Mssrs. Lawson and Zappala. Our wholly-owned
subsidiary, Go2PBMServices, Inc., derives 100% of its revenues from this contract.



Trade Accounts Receivable/ Trade Accounts Payable: Amounts due to affiliates and amounts due from affiliates represent balances owed by or amounts owed to the Company for sales occurring in the normal course of business. Amounts due to and
amounts due from these affiliates are in the nature of trade payables or receivables and fluctuate based on sales volume and payments received.



As of March 31, and June 30, 2003, for the manufacturing segment, $18,297 and $50,024 was due from subsidiaries of Dynamic Health Products. $57,700 and $57,700,
respectively, was due to DrugMax., $28,982 and $151,812 was due from VerticalHealth,Inc., and $59,380 and $59,380 was due from Careplus Health.



As of March 31, and June 30, 2003, for the distribution segment, $10,470 and $0 was due to DrugMax.



As of March 31, and June 30, 2003, for the pharmacy benefit management segment, $391,743 and $377,149 was due from CarePlus Health.



Preferred Stock Transactions: In September 1999, the Company issued 150,000
shares of redeemable series A preferred stock to Dynamic Health Products, Inc. in satisfaction of $1,500,000 of outstanding liabilities. The shares of preferred stock were subsequently transferred to JB Capital Corp., a company affiliated with our
Chairman, Jugal K. Taneja. The redeemable series A preferred stock pays dividends at the rate of 10% per annum, which is cumulative from the date of issuance and payable quarterly which commenced March 31, 2001. For the three months ended June 30,
2002 and 2003, $37,500 and $26,070 of accrued preferred dividends were paid to JB Capital Corp. As of June 30, 2003, the holders of the preferred stock have redeemed 77,500 shares, or $775,000. As recorded within due to affiliates, as of June 30,
2003, the balance due was approximately $359,000, of which $275,000, or an additional 27,500 shares, are available for redemption based on the Company attaining certain positive net income as defined by the preferred stock redemption agreement.



10



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|Item 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- |  | --------------------------------------------------------------------------------------



The statements contained in this Report that are not historical are forward-looking statements, including statements regarding the
Companys expectations, intentions, beliefs or strategies regarding the future. Forward-looking statements include the Companys statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All
forward-looking statements included in this Report are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statement. It is important to note that the
Companys actual results could differ materially from those in such forward-looking statements. Additionally, the following discussion and analysis should be read in conjunction with the Financial Statements and notes thereto appearing
elsewhere in this Report. The discussion is based upon such financial statements that have been prepared in accordance with U.S. Generally Accepted Accounting Principles.



General



We manufacture, package and ship high-quality private label dietary supplements, over-the-counter drugs, and health and beauty care products for companies
worldwide from our two manufacturing locations. Through our wholly-owned subsidiary, Breakthrough Engineered Nutrition, Inc. (Breakthrough), we market the Companys product lines, Lean Protein and Thermo Fuel ZXE Through our wholly-owned subsidiary, Go2PBM Services, Inc., (PBM) we
administer pharmacy benefit management services to health plans for unions, insurance companies, and other self-insured companies.



Results of Operations



Overview



We derive our
revenues from developing, manufacturing, and wholesaling a wide variety of non-prescription dietary supplements, and health and beauty care products. We also derive revenues from the distribution of our branded product lines, Lean Protein and Thermo
Fuel ZXE. In addition, we derive revenues from the services provided in connection with pharmacy benefit management. Revenues derived from our manufacturing and distribution segments are billed and recognized as product is produced and shipped, net
of discounts, allowances, returns and credits. Service revenues are billed and recognized once the service has been provided.



Cost of goods sold is comprised of direct manufacturing and manufacturing and distribution material product costs, contracted service fees, direct
personnel compensation and other statutory benefits and indirect costs relating to labor to support product manufacture and the warehousing of production and other manufacturing overhead as well as for prescription and claim-related costs
attributable to providing pharmacy benefit management services. Research and development expenses are charged against cost of goods sold as incurred. Selling, general and administrative costs include management and general office salaries,
advertising and promotional expenses, sales and marketing and other indirect operating costs.



Interest expense, net consists primarily of interest expense associated with borrowings to finance capital equipment expenditures and other working capital needs as partially offset by interest income earned on our
funds held at banks.



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Three Months Ended June 30, 2002 Compared To Three Months Ended June 30, 2003



Revenues. Total revenues decreased approximately $305,000, or 6.9%,
to approximately $4,106,000 for the three months ended June 30, 2003, as compared to approximately $4,411,000 for the three months ended June 30, 2002. Pharmacy benefit management revenues increased approximately $506,000, or 72.8%, to approximately
$1,202,000 for the three months ended June 30, 2003, as compared to $696,000 for the three months ended June 30, 2002. Pharmacy benefit management revenues increased for the three months ended June 30, 2003 solely due to the increase of
participating plan members based on the PBM activity derived from two HMO health plans as compared to only one HMO health plan in the corresponding period in 2002. Distribution revenues decreased approximately $61,000, or 17.9%, to approximately
$281,000 for the three months ended June 30, 2003, as compared to $343,000 for the three months ended June 30, 2002. For the three months ended June 30, 2003, revenues were derived from two product lines, 5,905 cases of Lean Protein Bites and 1365
cases of Thermo ZXE were sold as compared to 9,241 cases sold for Lean Protein Bites for the corresponding period in 2002. Thermo ZXE product line was not introduced until September 2002. Distribution revenues decreased overall due to lower customer
sales order volume as compared to the corresponding period. In addition, distribution revenues for June 2003 were lower than plan due to unplanned delays surrounding freight and other logistics matters directly related to our launch of our new
branded product line, CarbSlim, now ready for launch July 2003. Manufacturing revenues decreased approximately $750,000, or 22.2%, to approximately $2,623,000 for the three months ended June 30, 2003, as compared to approximately $3,373,000 for the
corresponding period. Decreases in manufacturing segment revenues was primarily caused by the decreased sizes of customer orders and shipments of private label and OTC manufacturing segment sales in the current three month period as compared to the
previous three month period ended June 30, 2002.



Gross
profit. Total gross profit decreased approximately $295,000, or 23.3%, to approximately $969,000 for the three months ended June 30, 2003, as compared to approximately $1,263,000 for the three months ended June 30, 2002. Total gross margins
decreased from 28.6% for the three months ended June 30, 2002, to 23.6% for the three months ended June 30, 2003. Pharmacy benefit management gross profits decreased approximately $18,000, or 18.3%, to approximately $79,000 for the three months
ended June 30, 2003, as compared to $96,000 for the three months ended June 30, 2002. Pharmacy benefit management gross margin decreased to 6.5% for the three months ended June 30, 2003 as compared to 13.8% for the three months ended June 30, 2002.
Gross profit dollars and gross margins decreased although sales revenues and HMO members increased as due to continued increasing costs associated with member-generated pharmacy claims which translate into higher net claims dollars incurred and paid
per member as compared to the corresponding three-month period. Distribution gross profit increased approximately $8,000, to approximately $156,000 for the three months ended June 30, 2003, as compared to $148,000 for the three months ended June 30,
2002. Distribution gross margins increased to 55.4% for the three months ended June 30, 2003 as compared to 43.2% in the corresponding period in 2002. Although sales revenues decreased, gross profit dollars and gross margins increased due to the
change in the mix of sales in the current three month period as influenced by sales of both product lines, Lean Protein Bites and Thermo ZXE as compared to only sales from Lean Protein Bites in the corresponding period in 2002. In addition, for the
three-month period ended June 30, 2002, distributor and retail-level promotional sampling and other demo programs that were employed during that period caused increased net product costs. Manufacturing gross profit decreased approximately $285,000,
or 28%, to approximately $734,000 for the three months ended June 30, 2003, as compared to approximately $1,019,000 in the corresponding three-month period in 2002. For the three months ended June 30, 2003, manufacturing gross margin decreased to
28%, from 30.2% in the corresponding three-month period in 2002. The decreases in gross profit dollars and gross margins are primarily attributable



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to a current change in our private-label and OTC contract manufacturing sales portfolio that is yielding a lower gross margin. In addition, also affecting
production is the research and development efforts being employed as based on our plans to gain FDA approval via NDA and ANDA applications in process for the formulation and manufacture of generic drugs in the future.



Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of advertising and promotional expenses; personnel costs related to general management functions, finance, accounting and information systems, payroll expenses and sales commissions; professional fees
related to legal, audit and tax matters; and depreciation and leasehold amortization expense. Selling, general and administrative expenses increased approximately $86,000, or 10.3%, to approximately $925,000 for the three months ended June 30, 2003,
as compared to approximately $839,000 in the corresponding period. The increase is primarily attributable to rising insurance expenses in addition to increases in advertising and promotional expenses associated with our distribution segment, rents,
as well as payroll expenses and costs associated with fringe benefits to support our distribution, manufacturing and pharmacy benefit management growth. As a percentage of sales, selling, general and administrative expenses increased to 22.5% for
the three months ended June 30, 2003 from 19.0% in the corresponding three-month period in 2002.



Interest income (expense), net. Interest expense, net of interest income, increased approximately $1,000 to approximately $(21,000) for the three
months ended June 30, 2003, from approximately $(20,000) for the three months ended June 30, 2002. The increase in net interest expense is primarily attributable to the increase in credit line borrowings as partially offset by a decline in interest
rates thus affecting expense incurred on borrowings outstanding as partially offset by lower income earned based on both declining interest rates and amounts held idle in banks.



Income taxes. At June 30, 2003, the Company has $147,900 recorded as a deferred tax asset as it is more likely than
not that the asset will be recognized in the future based on current earnings levels, available net operating loss carryforwards and other financials assumptions made based on current and future earnings projections.



Financial Condition, Liquidity and Capital Resources



The Company has financed its operations through available borrowings under
its credit line facilities, cash provided from operations and cash provided from the proceeds received from our initial public offering consummated November 2000. The Company had working capital of approximately $2,684,000 at June 30, 2003,
inclusive of current portion of long-term obligations and credit facilities, as compared to working capital of approximately $2,728,000 at March 31, 2003. The decrease in working capital is primarily attributable to net increases in payables based
on purchasing activity associated with lab and machinery equipment upgrades to continue meeting our business plan of gaining FDA approval for the formulation and the manufacture of generic drugs in the future in addition to normal purchasing cycles
in support of our product line launch in July 2003 of CarbSlim, our new branded distribution product line. All of which is inline with the Companys business plans.



Net cash provided by operating activities was approximately $207,000 for the three months ended June 30, 2003, as compared
to net cash provided by operating activities of approximately $668,000 for the three months ended June 30, 2002. Cash provided is primarily attributable to declines in prepaid expenses of approximately $152,000 based on normal amortization of
prepaid account balances to the



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statement of operations, increases in accrued expenses of approximately $79,000, depreciation of approximately $103,000, a decrease in accounts
receivable-other of approximately $83,000 based on collections received from our insurance company as related to our August 27, 2002 fire insurance claim, all of which is partially offset by an approximate $576,000 increase in trade accounts
receivable representing increases in credit sales, a net increase in inventory of approximately $265,000 and accounts payable of $678,000 primarily due to customary purchasing cycles to meet open manufacturing customer orders in addition to
increased purchasing for the distribution segment to meet customer pre-orders for CarbSlim tm, our new product line launching and shipping in July 2003 and an increase in due from affiliates, net of approximately $78,000 based on a net increase of
trade credit sales.



Net cash used in investing activities of
approximately ($113,000) for the three months ended June 30, 2003 as compared to ($39,000) net cash used in investing activities for the corresponding period in 2002. The $113,000 was used primarily to purchase lab equipment and related upgrades in
addition to continued leasehold improvements in order to continue to meet our business plans surrounding our ability and belief in the future to receive FDA approval to formulate and manufacture our own brand of generic drugs.



Net cash used in financing activities was approximately $(122,000) for the
three months ended June 30, 2003, as compared to net cash used in financing activities of approximately $(312,000) for the three months ended June 30, 2002. Net cash used during the three months ended June 30, 2003 represented payments on long-term
obligations of approximately $140,000, preferred stock dividend payments of approximately $26,000, which is a related party activity, as partially offset by net proceeds received from revolving credit lines of $50,000.



Subsequent to March 31, 2003, the Company received insurance proceeds of
approximately $83,000 as directly related to the claims outstanding, that are currently recorded in accounts receivable, other as of June 30, 2003, as a direct resulting from the August 27, 2002 fire insurance claim. The final amount of the
insurance proceeds due and payable to the Company has not yet been finalized by the Company or by the Companys insurance company. As of June 30, 2003, accounts receivable, other, was $271,209.



Management believes that cash expected to be generated from operations,
current cash reserves, and existing financial arrangements will be sufficient for the Company to meet its capital expenditures and working capital needs for its operations as presently conducted. The Companys future liquidity and cash
requirements will depend on a wide range of factors, including the level of business in existing operations, continued expansion of existing capacities and capabilities, the publics acceptance as evidenced through sales of our own branded
distribution product lines Lean Protein Bites, Thermo ZXE and our new product line launching in July 2003, CarbSlim, the successful completion of and the FDAs acceptance of our ANDAs and NDAs for generic drug formulation and manufacture currently in
process, and possible acquisitions. In particular, if cash flows from operations and available credit facilities are not sufficient, it will be necessary for the Company to seek additional financing. There can be no assurance that such financing
will be available in amounts and on terms acceptable to the Company.



Item
3. Controls and Procedures



Based on their most recent
review, which was completed within 90 days prior to the filing of this report, the Companys principal executive officer and principal financial officer have concluded that the



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Companys disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it
files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to the Companys management, including its principal executive officer and principal financial officer, as appropriate to allow timely
decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. There were no significant changes in the
Companys internal controls or in other factors that could significantly affect those controls subsequent to the date of their evaluation.



Part II - OTHER INFORMATION



|Item 1. |  | LEGAL PROCEEDINGS.
|------- |  | ------------------



On April 11, 2003, the Company filed a lawsuit against Joseph Zappala, a member of the Companys board of Directors in the Sixth Judicial Circuit in
and for Pinellas County, Florida. The lawsuit seeks to rescind a purported agreement between the Company and Mr. Zappala, breach of a consulting agreement between the Company and Mr. Zappala and related claims involving these agreements. Mr. Zappala
has denied the material allegations against him and has filed a counterclaim against the Company for breach of the consulting agreement.



From time to time the Company is subject to litigation incidental to its business. Such claims, if successful, could exceed applicable insurance coverage.
The Company is not currently a party to any material legal proceedings other than what is currently disclosed herein.



|Item 2. |  | CHANGES IN SECURITIES AND USE OF PROCEEDS.
|------- |  | ------------------------------------------



None.



|Item 3. |  | DEFAULTS UPON SENIOR SECURITIES.
|------- |  | --------------------------------



Not applicable.



|Item 4. |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
|------- |  | ----------------------------------------------------



Not applicable.



|Item 5. |  | OTHER INFORMATION.
|------- |  | ------------------



Not applicable.



|Item 6. |  | EXHIBITS AND REPORTS ON FORM 8-K.
|------- |  | ---------------------------------



(a) Exhibits.



Exhibit 10.18   Financial Consulting Agreement

Exhibit 31.1     Certification of Principal Executive Officer

Exhibit 31.2  
  Certification of Principal Financial Officer

Exhibit 32.1     Certification Pursuant to 18 U.S.C. Section
1350

Exhibit 32.2     Certification Pursuant to 18 U.S.C. Section 1350



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(b) Reports on Form 8-K.



The Company filed an 8-K on August 11, 2003 as related to the June 30, 2003 fiscal quarter ended financial results.



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SIGNATURES



In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                      |  |  |  | Innovative Companies, Inc.
|--------------------- |  |  |  | --------------------------
|                      |  |  | 
|Date: August 14, 2003 |  |  |  | By:                       
|                      |  |  |  |                           
|                      |  |  |  |                           
|                      |  |  | 
|Date: August 14, 2003 |  |  |  | By:                       
|                      |  |  |  |                           
|                      |  |  |  |                           



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