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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB/A



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



For the quarter ended December 31, 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 January 13, 2004 was 7,989,301 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 |             |   | December 31, 2003 |  
|                                                                                                                                            |  | (Audited)      |             |   | (Unaudited)       |  
|ASSETS                                                                                                                                      |  |                |             |   |                   |   |             |  
|Current assets:                                                                                                                             |  |                |             |   |                   |   |             |  
|Cash and cash equivalents                                                                                                                   |  | $              | 474,033     |   |                   | $ | 920,520     |  
|Certificate of deposit, restricted                                                                                                          |  |                | 409,059     |   |                   |   | 409,059     |  
|Certificate of deposit                                                                                                                      |  |                | 294,883     |   |                   |   |            |  
|Accounts receivable, net                                                                                                                    |  |                | 879,454     |   |                   |   | 1,414,571   |  
|Accounts receivable, other                                                                                                                  |  |                | 354,293     |   |                   |   | 223         |  
|Inventories, net                                                                                                                            |  |                | 2,140,709   |   |                   |   | 3,203,093   |  
|Prepaid expenses and other current assets                                                                                                   |  |                | 297,114     |   |                   |   | 337,148     |  
|Due from affiliates, net                                                                                                                    |  |                | 546,426     |   |                   |   | 1,129,038   |  
|Deferred tax asset                                                                                                                          |  |                | 147,900     |   |                   |   | 131,200     |  
|                                                                                                                                            |  |                |             |   |                   |   |             |  
|Total current assets                                                                                                                        |  | $              | 5,543,871   |   |                   | $ | 7,544,852   |  
|Property, leaseholds and equipment, net                                                                                                     |  |                | 1,477,726   |   |                   |   | 1,715,832   |  
|Intangible assets, net                                                                                                                      |  |                | 960,047     |   |                   |   | 960,047     |  
|Other assets                                                                                                                                |  |                | 104,072     |   |                   |   | 102,660     |  
|                                                                                                                                            |  |                |             |   |                   |   |             |  
|Total assets                                                                                                                                |  | $              | 8,085,716   |   |                   | $ | 10,323,391  |  
|                                                                                                                                            |  |                |             |   |                   |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                        |  |                |             |   |                   |   |             |  
|Current liabilities:                                                                                                                        |  |                |             |   |                   |   |             |  
|Accounts payable                                                                                                                            |  | $              | 919,710     |   |                   | $ | 2,043,064   |  
|Credit lines payable                                                                                                                        |  |                | 846,016     |   |                   |   | 946,016     |  
|Current portion of long-term obligations                                                                                                    |  |                | 369,066     |   |                   |   | 286,456     |  
|Accrued expenses                                                                                                                            |  |                | 337,952     |   |                   |   | 446,628     |  
|Obligations to affiliates                                                                                                                   |  |                | 343,624     |   |                   |   | 523,024     |  
|                                                                                                                                            |  |                |             |   |                   |   |             |  
|Total current liabilities                                                                                                                   |  | $              | 2,816,368   |   |                   | $ | 4,245,188   |  
|Long-term obligations, less current portion                                                                                                 |  |                | 225,282     |   |                   |   | 139,664     |  
|                                                                                                                                            |  |                |             |   |                   |   |             |  
|Total liabilities                                                                                                                           |  | $              | 3,041,650   |   |                   | $ | 4,384,852   |  
|                                                                                                                                            |  |                |             |   |                   |   |             |  
|Redeemable series A preferred stock, no par value, $10 face value 150,000 shares authorized; 45,000 and 0 shares 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 and 7,929,268 shares issued and outstanding                           |  | $              | 77,276      |   |                   | $ | 79,293      |  
|Treasury Stock, $.01 par value; 143,600 and 157,960 shares, respectively                                                                    |  |                | (1,436      | ) |                   |   | (1,580      | )
|Additional paid in capital                                                                                                                  |  |                | 29,840,205  |   |                   |   | 30,059,417  |  
|Retained earnings (deficit)                                                                                                                 |  |                | (25,321,979 | ) |                   |   | (24,198,591 | )
|                                                                                                                                            |  |                |             |   |                   |   |             |  
|Total shareholders equity                                                                                                                  |  | $              | 4,594,066   |   |                   | $ | 5,938,539   |  
|                                                                                                                                            |  |                |             |   |                   |   |             |  
|Total liabilities and shareholders equity                                                                                                  |  | $              | 8,085,716   |   |                   | $ | 10,323,391  |  
|                                                                                                                                            |  |                |             |   |                   |   |             |  



See accompanying notes
to condensed consolidated financial statements.



2



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|------------------------------------------------------------ |  | ------------------------------- | --------- | - | ------------------------------ | - | --------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                             |  | Three Months Ended December 31, |           |   | Nine Months Ended December 31, |  
|                                                             |  | 2002                            |           |   | 2003                           |   |           | 2002 |  |   | 2003       |  
|Revenues:                                                    |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|PBM                                                          |  | $                               | 895,325   |   |                                | $ | 1,591,942 |      |  | $ | 2,301,087  |   |  | $ | 4,038,070  |  
|Distribution                                                 |  |                                 | 268,550   |   |                                |   | 680,707   |      |  |   | 1,011,411  |   |  |   | 1,942,708  |  
|Manufacturing                                                |  |                                 | 2,116,497 |   |                                |   | 3,647,937 |      |  |   | 7,657,963  |   |  |   | 10,144,212 |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Total revenues                                               |  | $                               | 3,280,372 |   |                                | $ | 5,920,586 |      |  | $ | 10,970,461 |   |  | $ | 16,124,990 |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Cost of goods sold:                                          |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|PBM                                                          |  |                                 | 806,688   |   |                                |   | 1,515,206 |      |  |   | 2,015,815  |   |  |   | 3,802,565  |  
|Distribution                                                 |  |                                 | 189,006   |   |                                |   | 432,873   |      |  |   | 664,020    |   |  |   | 1,120,674  |  
|Manufacturing                                                |  |                                 | 1,480,939 |   |                                |   | 2,276,165 |      |  |   | 5,240,704  |   |  |   | 6,719,922  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Total cost of goods sold                                     |  | $                               | 2,476,633 |   |                                | $ | 4,224,244 |      |  | $ | 7,920,539  |   |  | $ | 11,643,161 |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Gross profit:                                                |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|PBM                                                          |  |                                 | 88,637    |   |                                |   | 76,736    |      |  |   | 285,272    |   |  |   | 235,505    |  
|Distribution                                                 |  |                                 | 79,544    |   |                                |   | 247,834   |      |  |   | 347,391    |   |  |   | 822,034    |  
|Manufacturing                                                |  |                                 | 635,558   |   |                                |   | 1,371,772 |      |  |   | 2,417,259  |   |  |   | 3,424,290  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Total gross profit                                           |  | $                               | 803,739   |   |                                | $ | 1,696,342 |      |  | $ | 3,049,922  |   |  | $ | 4,481,829  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Selling, general and administrative expenses                 |  |                                 | 885,832   |   |                                |   | 1,136,025 |      |  |   | 2,597,275  |   |  |   | 3,244,246  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Operating income (loss) before Other income and expense      |  | $                               | (82,093   | ) |                                | $ | 560,317   |      |  | $ | 452,647    |   |  | $ | 1,237,583  |  
|Other income (expense), net:                                 |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Other income (expense), net                                  |  |                                 | 240,485   |   |                                |   | 3,704     |      |  |   | 461,605    |   |  |   | 77,921     |  
|Interest expense, net                                        |  |                                 | (22,238   | ) |                                |   | (20,555   | )    |  |   | (60,424    | ) |  |   | (57,268    | )
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Total other income (expense), net                            |  | $                               | 218,247   |   |                                | $ | (16,851   | )    |  | $ | 401,181    |   |  | $ | 20,653     |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Income (loss) before income taxes                            |  | $                               | 136,154   |   |                                | $ | 543,466   |      |  | $ | 853,828    |   |  | $ | 1,258,236  |  
|Income tax benefit (expense)                                 |  |                                 | 147,900   |   |                                |   | (69,204   | )    |  |   | 147,900    |   |  |   | (69,204    | )
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Net income (loss)                                            |  | $                               | 284,054   |   |                                | $ | 474,262   |      |  | $ | 1,001,728  |   |  | $ | 1,189,032  |  
|Preferred stock dividends                                    |  |                                 | 26,848    |   |                                |   | 13,500    |      |  |   | 93,961     |   |  |   | 65,640     |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Net income (loss) available to common shareholders           |  | $                               | 257,206   |   |                                | $ | 460,762   |      |  | $ | 907,767    |   |  | $ | 1,123,392  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Basic income (loss) per share                                |  | $                               | .04       |   |                                | $ | .06       |      |  | $ | .13        |   |  | $ | .15        |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Basic weighted average number of common shares outstanding   |  |                                 | 7,025,000 |   |                                |   | 7,654,922 |      |  |   | 7,025,000  |   |  |   | 7,599,199  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Diluted income (loss) per share                              |  | $                               | .04       |   |                                | $ | .05       |      |  | $ | .13        |   |  | $ | .12        |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  
|Diluted weighted average number of common shares outstanding |  |                                 | 7,025,000 |   |                                |   | 9,181,786 |      |  |   | 7,025,000  |   |  |   | 9,126,063  |  
|                                                             |  |                                 |           |   |                                |   |           |      |  |   |            |   |  |   |            |  



See accompanying notes
to condensed consolidated financial statements.



3



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INNOVATIVE COMPANIES, INC. AND SUBSIDIARIES

STATEMENTS OF CASH FLOWS



|                                                                           |  |                                |           |   |             |   |            |  
|-------------------------------------------------------------------------- |  | ------------------------------ | --------- | - | ----------- | - | ---------- | -
|                                                                           |  | Nine Months Ended December 31, |          
|                                                                           |  | 2002                           |           |   | 2003        |  
|                                                                           |  | (Unaudited)                    |           |   | (Unaudited) |  
|Cash flows from operating activities:                                      |  |                                |           |   |             |   |            |  
|Net income                                                                 |  | $                              | 1,001,728 |   |             | $ | 1,189,032  |  
|Adjustments to reconcile net income to net cash from operating activities: |  |                                |           |   |             |   |            |  
|Depreciation and amortization                                              |  |                                | 280,794   |   |             |   | 318,826    |  
|Gain on sale of equipment                                                  |  |                                |          |   |             |   | (2,857     | )
|Income tax expense, current                                                |  |                                |          |   |             |   | 52,504     |  
|(Increase) decrease in net deferred income tax asset                       |  |                                | (147,900  | ) |             |   | 16,700     |  
|Changes in operating assets and liabilities:                               |  |                                |           |   |             |   |            |  
|Accounts receivable, trade, net                                            |  |                                | 209,196   |   |             |   | (535,117   | )
|Accounts receivable, other                                                 |  |                                | (233,308  | ) |             |   | 354,070    |  
|Inventory, net                                                             |  |                                | (110,389  | ) |             |   | (1,062,384 | )
|Prepaid expenses and other current assets                                  |  |                                | (269,656  | ) |             |   | (40,034    | )
|Other assets, net                                                          |  |                                | (3,287    | ) |             |   | 1,412      |  
|Accounts payable                                                           |  |                                | (121,362  | ) |             |   | 1,123,354  |  
|Accrued expenses                                                           |  |                                | 53,627    |   |             |   | 56,172     |  
|Due from affiliates, net                                                   |  |                                | (386,127  | ) |             |   | (583,212   | )
|                                                                           |  |                                |           |   |             |   |            |  
|Net cash provided by operating activities                                  |  | $                              | 273,316   |   |             | $ | 888,466    |  
|                                                                           |  |                                |           |   |             |   |            |  
|Cash flows from investing activities:                                      |  |                                |           |   |             |   |            |  
|Insured disposal of leasehold improvements                                 |  | $                              | 121,000   |   |             | $ |           |  
|Purchases of property, leaseholds and equipment                            |  |                                | (186,446  | ) |             |   | (574,079   | )
|Proceeds from sale of equipment                                            |  |                                |          |   |             |   | 20,000     |  
|                                                                           |  |                                |           |   |             |   |            |  
|Net cash used in investing activities                                      |  | $                              | (65,446   | ) |             | $ | (554,079   | )
|                                                                           |  |                                |           |   |             |   |            |  
|Cash flows from financing activities:                                      |  |                                |           |   |             |   |            |  
|Net change in credit lines payable                                         |  | $                              | 75,000    |   |             | $ | 100,000    |  
|Proceeds from issuance of long-term obligations                            |  |                                | 284,050   |   |             |   | 214,257    |  
|Payments of long-term obligations                                          |  |                                | (313,928  | ) |             |   | (382,485   | )
|Payments of preferred stock dividends                                      |  |                                | (93,961   | ) |             |   | (65,640    | )
|Redemption of a certificate of deposit                                     |  |                                |          |   |             |   | 294,883    |  
|Proceeds from stock options exercised                                      |  |                                |          |   |             |   | 226,085    |  
|Purchase of treasury shares                                                |  |                                |          |   |             |   | (5,000     | )
|Payments for redemption of preferred stock                                 |  |                                | (275,000  | ) |             |   | (270,000   | )
|                                                                           |  |                                |           |   |             |   |            |  
|Net cash provided by (used in) financing activities                        |  | $                              | (323,839  | ) |             | $ | 112,100    |  
|                                                                           |  |                                |           |   |             |   |            |  
|Net increase (decrease) in cash                                            |  |                                | (115,969  | ) |             |   | 446,487    |  
|Cash at beginning of period                                                |  |                                | 392,638   |   |             |   | 474,033    |  
|                                                                           |  |                                |           |   |             |   |            |  
|Cash at end of period                                                      |  | $                              | 276,669   |   |             | $ | 920,520    |  
|                                                                           |  |                                |           |   |             |   |            |  



|                                                  |  |                                     |        |                                     |   |       
|------------------------------------------------- |  | ----------------------------------- | ------ | ----------------------------------- | - | ------
|                                                  |  | Nine Months Ended December 31, 2002 |        | Nine Months Ended December 31, 2003
|Supplemental disclosure of cash flow information: |  |                                     |        |                                     |   |       
|Cash paid during the period for interest          |  | $                                   | 59,920 |                                     | $ | 58,529
|                                                  |  |                                     |        |                                     |   |       
|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

AS OF AND FOR THE THREE
AND NINE MONTHS ENDED DECEMBER 31, 2002 AND 2003

(UNAUDITED)



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 instructions 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 and nine month period ended
December 31, 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 December 31, 2003 and for the three and nine months ended December 31, 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 Health), 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
December 31, 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 $10,323,391 of total assets as of December 31, 2003 were comprised of $648,585 attributable to corporate, $7,261,440
attributable to manufacturing, $1,301,969 attributable to distribution and $1,111,397 attributable to pharmacy benefit management.



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.



5



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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 and therefore, amortization expense is not longer recorded.
For the year ended March 31, 2003 and for the nine months ended December 31, 2003, no impairment losses have been recorded. The unamortized balance of goodwill at March 31, and December 31, 2003 was $728,896.



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 nine months ended December 31, 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.



As of December 31, 2003, the reconciliation of basic and fully diluted earnings per share is as follows:



|                                   |  |                    |  |                  
|---------------------------------- |  | ------------------ |  | -----------------
|                                   |  | Three months ended |  | Nine months ended
|Weighted average shares            |  | 7,654,922          |  | 7,599,199        
|Dilutive potential common shares   |  | 1,526,864          |  | 1,526,864        
|                                   |  |                    |  |                  
|Diluted weighted average shares    |  | 9,181,786          |  | 9,126,063        
|                                   |  |                    |  |                  
|Anti-dilutive options not included |  |                   |  |                 



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



6



---

at March 31, and December 31, 2003, as well as the reported amounts of revenues and expenses for the three and nine
months ended December 31, 2002 and 2003. The actual outcome of the estimates could differ from the estimates made in the preparation of the financial statements.



l. Concentration of Credit and Sales Risk



As related to consolidated sales revenues for the three and nine months ended December 31, 2003, three customers accounted for 26.9%, 8.2% and 5.3% for the three
months ended and four customers accounted for 25%, 17.4%, 5.4% and 5.1% for the nine months ended. The customers with the 26.9%, the 25% and the 5.4% are related parties. As of December 31, 2003, the evaluation of credit risk concentration with
respect to consolidated trade accounts receivable resulted in two customers representing 20.2% and 8.9% of the total outstanding; one of these customers is also the same customer who are disclosed representing 8.2% and 5.1% revenues for each of the
respective periods described.



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 $18,191 and $14,567 for the three months ended December 31, 2002 and 2003,
respectively, with $51,565 and $79,273 representing advertising expense for the nine months ended December 31, 2002 and 2003.



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 December 31, 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 nine months ended December 31, 2002 to conform to the presentation for the nine months ended December 31, 2003.



NOTE 3ACCOUNTS RECEIVABLE, NET



Accounts receivable, net, consist of the following:



|                                          |  |                |           |   |                   |   |           |  
|----------------------------------------- |  | -------------- | --------- | - | ----------------- | - | --------- | -
|                                          |  | March 31, 2003 |           |   | December 31, 2003 |  
|Trade accounts receivable                 |  | $              | 1,088,968 |   |                   | $ | 1,558,718 |  
|Less allowance for uncollectible accounts |  |                | (209,514  | ) |                   |   | (144,147  | )
|                                          |  |                |           |   |                   |   |           |  
|                                          |  | $              | 879,454   |   |                   | $ | 1,414,571 |  
|                                          |  |                |           |   |                   |   |           |  



7



---

As of March 31, 2003, the total accounts receivable balance of $1,088,968 includes $934,484 related to the Companys
manufacturing segment and $154,484 related to the Companys distribution segment. As of December 31, 2003, the total accounts receivable balance of $1,558,718 includes $1,254,722 related to the Companys manufacturing segment and $303,996
related to the Companys distribution segment.



NOTE 4STOCK
OPTION PLAN



Employee Stock Option Plan



The following represents the employees common stock options outstanding as of December
31, 2003:



|                                               |  |         |  
|---------------------------------------------- |  | ------- | -
|Option balance outstanding, September 30, 2003 |  | 835,000 |  
|Granted                                        |  | 0       |  
|Exercised                                      |  | (10,000 | )
|Forfeited                                      |  | 0       |  
|                                               |  |         |  
|Option balance outstanding, December 31, 2003  |  | 825,000 |  
|                                               |  |         |  



For the three months December 31,
2003, 10,000 vested stock options were exercised all at their $2.00 exercise price resulting in $20,000 net proceeds being received by or in transit to the Company as of December 31, 2003. As of December 31, 2003, of the 825,000 employees
common stock options outstanding, 341,665 of those options were vested with 483,335 options being nonvested.



NonEmployee Stock Option Plan



The following represents the nonemployees common stock options outstanding as of December 31, 2003:



|                                               |  |          |  
|---------------------------------------------- |  | -------- | -
|Option balance outstanding, September 30, 2003 |  | 836,865  |  
|Granted                                        |  | 0        |  
|Exercised                                      |  | (138,334 | )
|Forfeited                                      |  | 0        |  
|Option balance outstanding, December 31, 2003  |  | 698,531  |  



For the three months ended December
31, 2003, 138,334 vested stock options were exercised at exercise prices ranging from $0.88 to $1.10 resulting in $151,265.70 net proceeds being received by or in transit to the Company. Of the 698,531 nonemployees common stock options
outstanding, 124,531 of those options were vested with 574,000 options being nonvested.



NOTE 5- INCOME TAXES



Income taxes for the year ended March
31, 2003 and for the nine months ended December 31, 2003 differ from the amounts computed by applying the effective income tax rates to income before income taxes as a result of the following:



|                                                        |  |                |          |   |                   |          |  
|------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | -------- | -
|                                                        |  | March 31, 2003 |          |   | December 31, 2003 |         
|Computed tax expense (benefit) at the statutory rate    |  | $              | 425,800  |   |                   | 441,261  |  
|Increase (decrease) in taxes resulting from:            |  |                |          |   |                   |          |  
|Effect of permanent differences:                        |  |                |          |   |                   |          |  
|Goodwill, stock options and other permanent differences |  |                | 6,226    |   |                   | (102,427 | )
|Effect of temporary differences:                        |  |                |          |   |                   |          |  
|Accruals and allowances                                 |  |                | (17,702  | ) |                   | 32,811   |  
|Depreciation and amortization                           |  |                | (65,918  | ) |                   | (37,021  | )
|Net operating loss                                      |  |                | (348,406 | ) |                   | (247,509 | )
|Research credits                                        |  |                |         |   |                   | (17,911  | )
|                                                        |  |                |          |   |                   |          |  
|Income tax expense                                      |  | $              |         |   |                   | 69,204   |  
|                                                        |  |                |          |   |                   |          |  



8



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Temporary differences that give rise to deferred tax assets and liabilities are as follows:



|                                 |  |                |          |   |                   |   |          |  
|-------------------------------- |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                                 |  | March 31, 2003 |          |   | December 31, 2003 |  
|Deferred tax assets:             |  |                |          |   |                   |   |          |  
|Bad debts                        |  | $              | 85,000   |   |                   | $ | 63,650   |  
|Inventories                      |  |                | 6,700    |   |                   |   | 41,715   |  
|Accrued vacation                 |  |                | 19,200   |   |                   |   | 18,291   |  
|Deposits                         |  |                | 30,000   |   |                   |   | 53,937   |  
|Amortization                     |  |                |         |   |                   |   | 65,914   |  
|Net operating loss carryforwards |  |                | 264,300  |   |                   |   | 251,723  |  
|Less: valuation allowance        |  |                |         |   |                   |   |          |  
|                                 |  |                |          |   |                   |   |          |  
|                                 |  | $              | 405,200  |   |                   | $ | 495,230  |  
|                                 |  |                |          |   |                   |   |          |  
|Deferred tax liabilities:        |  |                |          |   |                   |   |          |  
|Fixed asset basis differences    |  | $              | (209,300 | ) |                   | $ | (351,225 | )
|Amortization                     |  |                | (48,000  | ) |                   |   | (12,805  | )
|                                 |  |                |          |   |                   |   |          |  
|                                 |  |                | (257,300 | ) |                   | $ | (364,030 | )
|                                 |  |                |          |   |                   |   |          |  
|Net deferred tax asset recorded  |  | $              | 147,900  |   |                   | $ | 131,200  |  
|                                 |  |                |          |   |                   |   |          |  



NOTE 6RELATED PARTY
TRANSACTIONS



Revenues: For the three months ended December 31, 2002 and
2003, manufacturing revenues of approximately $21,799 and $239,772 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 December 31, 2002 and 2003, manufacturing revenues of $8,149 and $291,598, 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 shareholder.



For the three months ended December 31, 2002 and 2003, distribution revenues of approximately $2,952 and $0 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 shareholder.



For the three months ended December 31, 2002 and 2003, pharmacy benefit management revenues of approximately $895,325 and $1,591,942 respectively, were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the
Companys board member Mr. Zappala. Our wholly-owned subsidiary, Go2PBMServices, Inc., derives 100% of its revenues from this contract.



Revenues: For the nine months ended December 31, 2002 and 2003, manufacturing revenues of approximately $69,723 and $410,809 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 nine months ended December 31, 2002 and 2003, manufacturing
revenues of $3,176 and $41,393, respectively, were recorded from sales by the 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 nine
months ended December 31, 2002 and 2003, manufacturing revenues of $102,965 and $716,653, 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 shareholder.



For the nine months ended December 31,
2002 and 2003, distribution revenues of approximately $8,541 and $3,464 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
shareholder.



For the nine months ended December 31, 2002 and 2003, pharmacy
benefit management revenues of approximately $2,301,087 and $4,038,070 respectively, were recorded from sales by the Company to CarePlus Health Plan, an affiliate of the Companys board member Mr. 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.



9



---

As of March 31, and December 31, 2003, for the manufacturing segment, $18,297 and $221,732 was due from subsidiaries of
Dynamic Health Products. $57,700 and $57,700, respectively, was due to DrugMax., $28,982 and $252,174 was due from VerticalHealth,Inc.



As of March 31, and December 31, 2003, for the pharmacy benefit management segment, $391,743 and $594,396 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 December 31, 2002
and 2003, $26,848 and $13,500 of accrued preferred dividends were paid with the nine months ended December 31, 2002 and 2003, $93,961 and $65,640 of accrued preferred dividends were paid to JB Capital Corp. As of December 31, 2003, the holders of
the preferred stock have redeemed 105,000 shares, or $1,050,000 with the balance of 45,000 preferred shares, or $450,000, representing the remaining preferred shares to be redeemed as included within current liabilities within due to
affiliates based on the Company attaining certain positive net income as defined by the redeemable preferred stock agreement.



NOTE 7-SUBSEQUENT EVENTS



On January 30, 2004 the Company received $4.8 million of loan proceeds based on closing a three-year, 6% $5 million convertible note, through a private placement with
Laurus Master Fund, Ltd. due January 29, 2007 together with warrants to purchase 150,000 shares of common stock. 75,000 warrants are priced at $7.34, 50,000 warrants are priced at $7.98 and 25,000 warrants are priced at $8.62; all warrants are
exercisable until January 29, 2011.



On January 30, 2004, the Company paid off
the lines of credit and the 5-year term note outstanding with First Community Bank of America for a total amount paid of $1,206,756.



On February 3, 2004, the Company paid the holders of the redeemable Series A, 10%, preferred stock $466,000 which represented $450,000 in order to redeem the remaining
45,000 shares outstanding of the Series A preferred stock in addition to the $16,000 of dividends accrued and outstanding to date.



On February 9, 2004, the Company, through its newly formed wholly-owned subsidiary Belcher Capital Corporation, a Delaware corporation, received $4.8 million by issuing 5
million shares of Series A, 6% convertible, preferred stock together with warrants to purchase 150,000 shares of common stock. Dividends are payable quarterly commencing on March 1, 2004. 75,000 warrants are priced at $7.25, 50,000 warrants are
priced at $7.88 and 25,000 warrants are priced at $8.51; all warrants are exercisable until February 10, 2011. The Company is required to retain the proceeds from the sale of the Series A, 6% convertible preferred stock in a restricted bank account
until such stock is converted to common stock.



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, Innovative Health and Belcher. Through our wholly-owned subsidiary, Breakthrough Engineered Nutrition, Inc.
(Breakthrough), we market the Companys product lines, Carbslim, Lean Protein and Thermo 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.



10



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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, Carbslim, Lean Protein and Thermo 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 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.



Three Months Ended December 31, 2002 Compared To Three Months Ended
December 31, 2003



Revenues. Total revenues increased approximately
$2,641,000, or 80.5%, to approximately $5,921,000 for the three months ended December 31, 2003, as compared to approximately $3,280,000 for the three months ended December 31, 2002. Pharmacy benefit management revenues increased approximately
$697,000, or 77.8%, to approximately $1,592,000 for the three months ended December 31, 2003, as compared to $895,000 for the three months ended December 31, 2002. Pharmacy benefit management revenues increased for the three months ended December
31, 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 increased approximately
$412,000, or 153.5%, to approximately $681,000 for the three months ended December 31, 2003, as compared to $269,000 for the three months ended December 31, 2002. For the three months ended December 31, 2003, revenues were derived primarily from
three product lines, CarbSlim, Lean Protein Bites and Thermo ZXE as compared to only two products lines, Lean Protein Bites and Thermo ZXE, for the corresponding period in 2002. The CarbSlim product line was introduced during July 2003. Distribution
revenues increased overall due to new product line introductions and the related increased sales volumes and increased customer base attributable to marketing efforts and related product line expansion. Manufacturing revenues increased approximately
$1.5 million or 72.4%, to approximately $3,648,000 for the three months ended December 31, 2003, as compared to approximately $2,116,000 for the corresponding period. Increases in manufacturing segment revenues were primarily caused by the increased
number of customers in addition to increases in the 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 December 31, 2002.



Gross profit. Total gross profit increased approximately $892,000, or
111.1%, to approximately $1,696,000 for the three months ended December 31, 2003, as compared to approximately $804,000 for the three months ended December 31, 2002. Total gross margins increased from 24.5% for the three months ended December 31,
2002, to 28.7% for the three months ended December 31, 2003. Pharmacy benefit management gross profits decreased approximately $12,000, or 13.4%, to approximately $77,000 for the three months ended December 31, 2003, as compared to $89,000 for the
three months ended December 31, 2002. Pharmacy benefit management gross margin decreased to 4.8% for the three months ended December 31, 2003 as compared to 9.9% for the three months ended December 31, 2002. Gross profit dollars and gross margins
decreased although sales revenues and HMO members increased 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 $168,000, to approximately $248,000 for the three months ended December 31, 2003, as compared to $80,000 for the three months ended December 31, 2002. Distribution
gross margins increased to 36.4% for the three months ended December 31, 2003 as compared to 29.6% in the corresponding period in 2002. Manufacturing gross profit increased approximately $736,000, or 115.8%, to approximately $1,372,000 for the three
months ended December 31, 2003, as compared to approximately $636,000 in the corresponding three-month period in 2002. For the three months ended December 31, 2003, manufacturing gross margins increased to 37.6%, from 30% in the corresponding
three-month period in 2002. The increases in gross profit dollars and gross margins are primarily attributable to a current change in our private-label and OTC contract manufacturing sales portfolio that is yielding a higher gross margin.



11



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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, rents,
insurance; and depreciation and leasehold amortization expense. Selling, general and administrative expenses increased approximately $250,000, or 28.2%, to approximately $1,136,000 for the three months ended December 31, 2003, as compared to
approximately $886,000 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 decreased to 19.2% for the three
months ended December 31, 2003 from 27% in the corresponding three-month period in 2002.



Interest income (expense), net. Interest expense, net of interest income, decreased approximately $2,000 to approximately $(20,000) for the three months ended December 31, 2003, from approximately $(22,000) for
the three months ended December 31, 2002. The decrease in net interest expense is primarily attributable to the overall declining balances in total debt outstanding as compared to the three-month corresponding period in 2002.



Income taxes. At December 31, 2003, the Company has $131,200 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. For the three months ended December 31, 2003, the Company has recorded a total of $69,204 of income tax expense which is comprised of approximately $53,000 of current income tax expense and $16,000 of deferred income tax expense.



Nine Months Ended December 31, 2002 Compared To Nine Months Ended December
31, 2003



Revenues. Total revenues increased approximately
$5,155,000, or 47.0%, to approximately $16,125,000 for the nine months ended December 31, 2003, as compared to approximately $10,970,000 for the nine months ended December 31, 2002. Pharmacy benefit management revenues increased approximately
$1,737,000, or 75.5%, to approximately $4,038,000 for the nine months ended December 31, 2003, as compared to $2,301,000 for the nine months ended December 31, 2002. Pharmacy benefit management revenues increased for the nine months ended December
31, 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 increased approximately
$932,000, or 92.1%, to approximately $1,943,000 for the nine months ended December 31, 2003, as compared to $1,011,000 for the nine months ended December 31, 2002. For the nine months ended December 31, 2003, revenues were derived primarily from
three product lines, CarbSlim, Lean Protein Bites and Thermo ZXE as compared to only two product lines, Lean Protein Bites and Thermo ZXE, for the corresponding period in 2002. The CarbSlim product line was introduced during July 2003. Distribution
revenues increased overall due to new product line introductions and the related increased sales volumes and increased customer base attributable to marketing efforts and related product line expansion. Manufacturing revenues increased approximately
$2,486,000 or 32.5%, to approximately $10,144,000 for the nine months ended December 31, 2003, as compared to approximately $7,658,000 for the corresponding period. Increases in manufacturing segment revenues was primarily caused by the increase in
the Companys customer base in addition to increased sizes of customer orders and shipments of private label and OTC manufacturing segment sales in the current nine month period as compared to the previous nine month period ended December 31,
2002.



Gross profit. Total gross profit increased approximately
$1,432,000, or 46.9%, to approximately $4,482,000 for the nine months ended December 31, 2003, as compared to approximately $3,050,000 for the nine months ended December 31, 2002. Total gross margins were consistent at 27.8% for the nine months
ended December 31, 2003 and 2002. Pharmacy benefit management gross profits decreased approximately $50,000, or 17.5%, to approximately $235,000 for the nine months ended December 31, 2003, as compared to $285,000 for the nine months ended December
31, 2002. Pharmacy benefit management gross margin decreased to 5.8% for the nine months ended December 31, 2003 as compared to 12.4% for the nine months ended December 31, 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 nine-month period.
Distribution gross profit increased approximately $475,000, to approximately $822,000 for the nine months ended December 31, 2003, as compared to $347,000 for the nine months ended December 31, 2002. Distribution gross margins increased to 42.3% for
the nine months ended December 31, 2003 as compared to 34.3% in the corresponding period in 2002. Sales revenues, gross profit dollars and gross margins increased due to the change in the mix of sales in the current nine month period due to new
product line introductions as partially offset by the initial introduction costs of the new product line which includes costs associated with mass, distributor, convenience store, and retail-level promotional product mailings and sampling and other
demo programs that were employed during the current 2003 period. Manufacturing gross profit increased approximately $1,007,000, or 41.7%, to approximately $3,424,000 for the nine months ended December 31, 2003, as compared to approximately
$2,417,000 in the corresponding nine-month period in 2002. For the nine months ended December 31, 2003,



12



---

manufacturing gross margins increased to 33.8%, from 31.6% in the corresponding nine-month period in 2002. The changes in
gross profit dollars and gross margins are primarily attributable to a current change in our private-label and OTC contract manufacturing sales portfolio, as partially offset by costs associated with 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, rents, insurance; and depreciation and leasehold
amortization expense. Selling, general and administrative expenses increased approximately $647,000, or 24.9%, to approximately $3,244,000 for the nine months ended December 31, 2003, as compared to approximately $2,597,000 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 decreased to 20.1% for the nine months ended December 31, 2003 from 23.7% in
the corresponding nine-month period in 2002.



Interest income (expense),
net. Interest expense, net of interest income, decreased approximately $3,000 to approximately $(57,000) for the nine months ended December 31, 2003, from approximately $(60,000) for the nine months ended December 31, 2002. The increase in net
interest expense is primarily attributable to the decrease total debt outstanding in the current period as compared to the corresponding period in 2002.



Income taxes. At December 31, 2003, the Company has $131,200 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. For the three months ended December 31, 2003, the Company has recorded a
total of $69,204 of income tax expense which is comprised of approximately $53,000 of current income tax expense and $16,000 of deferred income tax expense.



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 $3,300,000 at December 31, 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 increase in working capital is primarily attributable to net increases in cash, inventory and receivables due to increased customer base and increasing sales dollar volumes as
partially offset by increases in trade payables and in amounts due to affiliates. All of which is in line with the Companys business plans.



Net cash provided by operating activities was approximately $888,000 for the nine months ended December 31, 2003, as compared to net cash provided by operating activities
of approximately $273,000 for the nine months ended December 31, 2002. Cash provided is primarily attributable to net income of approximately $1.2 million, increases in accrued expenses of approximately $56,000, depreciation of approximately
$319,000, increases in trade accounts payable of approximately $1.1 million due to increased purchasing for the manufacturing and distribution segments in order to meet open manufacturing and distribution customer orders, a decrease in accounts
receivable-other of approximately $354,000 primarily based on collections received from our insurance company as related to our August 27, 2002 fire insurance claim, and increases in current and deferred income tax expense of approximately $69,000
all of which is partially offset by an approximate $535,000 increase in trade accounts receivable representing increases in credit sales, a net increase in inventory of approximately $1.0 million primarily due to customary purchasing cycles to meet
open distribution and manufacturing segment customer orders and an approximate $583,000 increase in due from affiliates, net based on trade credit sales and the reclassification of $450,000, or 45,000 shares, of redeemable preferred stock, and
increases in prepaid expenses of approximately $40,000.



Net cash used in
investing activities of approximately ($554,000) for the nine months ended December 31, 2003 as compared to ($65,000) net cash used in investing activities for the corresponding period in 2002. The amounts were used primarily to purchase
manufacturing machinery and 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 provided by financing
activities was approximately $112,000 for the nine months ended December 31, 2003, as compared to net cash used in financing activities of approximately $(324,000) for the nine months ended December 31, 2002. Net cash provided primarily represents
liquidation of a $294,000 certificate of deposit that funded investing activities as described above, $100,000 of proceeds from lines of credit, $214,000 of proceeds received from issuance of insurance premium financing, approximately $226,000



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received by the Company from vested stock options exercised, all of which was partially offset by payments on long-term
obligations of approximately $382,000, purchase of treasury shares of $5,000, redemption of 27,000 shares of preferred stock for $270,000 and preferred stock dividend payments of approximately $65,000. The stock redemption and the related dividend
payments are a related party activity.



Subsequent to December 31, 2003, the
Company received $9.6 million, net, of a combination of debt and preferred stock funding proceeds. The Company used approximately $1.2 million of the debt proceeds to pay-off lines of credit and a term note with a bank. Approximately $4.8 million of
the preferred stock proceeds were placed in a restricted bank account and pledged as collateral against the portion of the preferred stock that has not been converted. The remaining funds will be used for corporate and working capital purposes.



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 launched 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 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.



Item 5. OTHER INFORMATION.



Not applicable.



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



(a)Exhibits.



|             |  |                                                 
|------------ |  | ------------------------------------------------
|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



(b) Reports on Form 8-K.



The Company filed an 8-K on November 17, 2003 as related to the September 30,
2003 fiscal quarter and six-month ended financial results.



The Company filed
an 8-K on February 11, 2004 as related to the December 31, 2003 fiscal quarter and nine-month ended financial results.



The Company filed an 8-K on February 13, 2004 as related to the $5 million 6%, convertible debt and $5 million 6%, convertible Series A preferred stock funding with
Laurus Master Fund.



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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: February 17, 2004 |  | By:                        |  | /s/ Mihir K. Taneja                            
|                        |  |                            |  | Mihir K. Taneja                                
|                        |  |                            |  | Chief Executive Officer, Secretary and Director
|                        |  |                           
|Date: February 17, 2004 |  | By:                        |  | /s/ Carol Dore-Falcone                         
|                        |  |                            |  | Carol Dore-Falcone                             
|                        |  |                            |  | Vice President and Chief Financial Officer     



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