UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended March 31, 2004

Commission File Number 1-10367

Advanced Environmental Recycling Technologies, Inc.

(479) 756-7400
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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. YES: (X) NO: (  )

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes (  ) No (X)

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 13, 2004, the number of shares outstanding of the Registrant’s Class A common stock, which is the class registered under the Securities Exchange Act of 1934, was 30,155,169 and the number of shares outstanding of the Registrant’s Class B Common Stock was 1,465,530.

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

Form 10-Q Index

PART I - FINANCIAL INFORMATION

ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

Balance Sheet

ASSETS

The accompanying notes are an integral part of these financial statements.

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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

Balance Sheet

LIABILITIES AND STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of these financial statements.

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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENT OF OPERATIONS (UNAUDITED)

The accompanying notes are an integral part of these financial statements.

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ADVANCED ENVIRONMENTAL RECYCLING TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS (UNAUDITED)

The accompanying notes are an integral part of these financial statements.

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NOTES TO FINANCIAL STATEMENTS

Note 1: Unaudited Information

     Advanced Environmental Recycling Technologies, Inc. (the Company or AERT) has prepared the financial statements included herein without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). However, all adjustments have been made to the accompanying financial statements which are, in the opinion of the Company’s management, of a normal recurring nature and necessary for a fair presentation of the Company’s operating results. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented herein not misleading. It is recommended that these financial statements be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K. The Company has reclassified certain prior period amounts to conform to the current period presentation.

Note 2: Description of the Company

     Advanced Environmental Recycling Technologies, Inc. develops, manufactures and markets composite building materials that are used in place of traditional wood products for exterior applications in building and remodeling homes. Since inception in 1989, the Company has sold in excess of $218 million of products into the North American marketplace. The Company’s products are made from approximately equal amounts of waste wood fiber and reclaimed polyethylene plastics, have been extensively tested, and are sold by leading national companies such as the Weyerhaeuser Company (Weyerhaeuser), Lowe’s Companies, Inc. (Lowe’s) and Therma-Tru Corporation. The Company’s composite building materials are marketed as a substitute for wood and plastic filler materials for standard door components, windowsills, brick mould, fascia board, and heavy industrial flooring under the trade names LifeCycle®, MoistureShield®, MoistureShield® CornerLoc™ and a variety of composite decking products under the trade name Weyerhaeuser ChoiceDek®. The Company operates four manufacturing facilities, which are located in Junction, Texas, Springdale and Lowell, Arkansas and Alexandria, Louisiana. The Company’s customers primarily consist of a number of regional and national door and window manufacturers, industrial flooring companies and Weyerhaeuser, the Company’s primary decking customer.

Note 3: Current Operations

     On March 28, 2003, there was an accidental fire at the Junction, Texas plant. The Company began demolition and partial rebuilding on April 16, 2003. The initial restoration project, completed on May 20, 2003, included the rebuilding of one extrusion line that had been partially damaged, electrical system replacement, and roof replacement. The second extrusion line recommenced operations during the first week of May 2004. The Company expects complete restoration, including replacement of the raw material system, to be finished by September 30, 2004. Although work is still ongoing, there is no assurance as to the timing of the completion of the remaining portion of the plant, which is dependent upon the availability of additional funds. The Junction plant was, and is, fully insured for fire damage and business interruption. Through March 31, 2004, the Company had received $6.0 million in insurance proceeds related to this incident, including amounts for lost income reimbursement, and had invested approximately $4.9 million in reconstructing the Junction facility. At March 31, 2004, approximately $864,000 was included in accounts receivable for expected insurance reimbursements. Insurance proceeds received to reimburse costs incurred to reconstruct the facility resulted in a gain of $1,037,577 for the three months ended March 31, 2004. Since the Junction facility has reached the production level at which it operated prior to the fire, the Company will not receive business interruption insurance proceeds for lost income reimbursement for periods subsequent to March 31, 2004.

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Note 4: Statements of Cash Flows

     In order to determine net cash provided by operating activities, net income has been adjusted by, among other things, changes in current assets and current liabilities, excluding changes in cash and cash equivalents, current maturities of long-term debt and current notes payable. Those changes, shown as an (increase) decrease in current assets and an increase (decrease) in current liabilities, are as follows:

Supplemental Disclosures of Non-Cash Investing and Financing Activities:

Note 5: Significant Accounting Policies

  Revenue Recognition Policy

     The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin Topic 13, Revenue Recognition. Revenue is recognized when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable and collectibility is reasonably assured. The Company typically recognizes revenue at time of shipment. Sales are recorded net of discounts, rebates and returns.

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  Inventories

     Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consisted of the following:

  Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

  Research and Development

     Expenditures relating to the development of new products and processes, including significant improvements to existing products, are expensed as incurred.

  Stock-Based Compensation

     The Company adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS

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123 to stock-based employee compensation for the following:

Recent Accounting Pronouncements

     In December 2003, the FASB issued Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements (FIN 46R) which replaced FIN 46. FIN 46 clarifies the application of Accounting Research Bulletin No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The Company is required to adopt the provisions of FIN 46R by the beginning of the first annual period beginning after December 15, 2004. The adoption of FIN 46R is not expected to have a material effect on the Company’s consolidated financial statements.

     In March 2004, the FASB issued an exposure draft entitled Share-Based Payment-an amendment of Statements No. 123 and 95 (Proposed Statement of Financial Accounting Standards). The proposed Statement would eliminate the ability to account for share-based compensation transactions using APB Opinion No. 25 and generally require instead that such transactions be accounted for using a fair-value-based method. This accounting, if approved, could result in significant compensation expense charges to our future results of operations. The exposure draft, if adopted as presently drafted, would be applied to public entities prospectively for fiscal years beginning after December 15, 2004, as if all share-based compensation awards granted, modified, or settled after December 15, 1994, had been accounted for using the fair-value method of accounting. Retrospective application of the proposed Statement is not permitted.

Note 6: Income Taxes

     No income tax provision was recorded for the three months ended March 31, 2004, due to the realization of previously unrecognized net operating loss carryforwards.

Note 7: Segment Information

     SFAS No. 131 Disclosures About Segments of an Enterprise and Related Information (SFAS 131), establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. SFAS 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Reportable operating segments are defined as a component of an enterprise:

•

That engages in business activities from which it may earn revenues and expenses,

•

Whose operating results are regularly reviewed by the enterprise’s chief operating decision maker, and

•

For which discrete financial information is available.

     As of March 31, 2004, the Company does not have available discrete financial information to disclose gross margin by product line. All operating expenses are allocated primarily on capacity. Corporate overhead

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is not allocated by product line and neither are selected assets. Net sales segregated by product line and gross margin by plant location are as follows:

Note 8: Earnings Per Share

     The Company calculates and discloses earnings per share (EPS) in accordance with SFAS No. 128, Earnings Per Share (SFAS 128). SFAS 128 replaces the presentation of Primary EPS with Basic EPS and requires dual presentation of Basic and Diluted EPS on the face of the statements of operations and requires a reconciliation of the numerator and denominator of the Basic EPS computation to the numerator and denominator of the Diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Diluted EPS is computed similarly to Fully Diluted EPS pursuant to Accounting Principles Board Opinion No. 15, Earnings Per Share.

     In computing Diluted EPS, only potential common shares that are dilutive—those that reduce earnings per share or increase loss per share—are included. Exercise of options and warrants or conversion of convertible securities is not assumed if the result would be antidilutive, such as when a loss from continuing operations is reported. The “control number” for determining whether including potential common shares in the diluted EPS computation would be antidilutive is income from continuing operations. As a result, if there were a loss from continuing operations, Diluted EPS would be computed in the same manner as Basic EPS is computed, even if an entity has net income after adjusting for discontinued operations, an extraordinary item or the cumulative

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effect of an accounting change.

     The Company has additional options and warrants that were not included in the calculation of diluted earnings per share for the quarters ended March 31, 2004 and 2003. Those options (4,892,630 and 1,471,000) and warrants (16,580,722 and 2,333,933) were either antidilutive and/or not exercisable at March 31, 2004 and 2003, respectively. Although the above financial instruments were not included due to being antidilutive and/or not exercisable, such financial instruments may become dilutive and would then need to be included in future calculations of Diluted EPS.

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

General

     Advanced Environmental Recycling Technologies, Inc. develops, manufactures and markets composite building materials that are used in place of traditional wood products for exterior applications in building and remodeling homes. Since inception in 1989, we have sold in excess of $218 million of products into the North American marketplace. Our products are made from approximately equal amounts of waste wood fiber and reclaimed polyethylene plastics, have been extensively tested, and are sold by leading national companies such as the Weyerhaeuser Company (Weyerhaeuser), Lowe’s Companies, Inc. (Lowe’s) and Therma-Tru Corporation. Our composite building materials are marketed as a substitute for wood and plastic filler materials for standard door components, windowsills, brick mould, fascia board, decking and heavy industrial flooring under the trade names LifeCycle®, MoistureShield®, MoistureShield® CornerLoc™ and Weyerhaeuser ChoiceDek® brands. We operate manufacturing facilities in Junction, Texas, Springdale and Lowell, Arkansas and Alexandria, Louisiana. Our customers are primarily regional and national door and window manufacturers, industrial flooring companies and Weyerhaeuser, our primary decking customer.

Products

     Using the same basic material, we manufacture product lines as:

•

Commercial and residential decking planks and accessories such as balusters and handrails (Weyerhaeuser ChoiceDek), and

•

Exterior door, window and housing trim components and industrial flooring (MoistureShield)

     The wood fiber content of our products gives them many properties similar to all-wood products, but we believe the plastic content makes our products superior to either all-wood or all-plastic alternatives because:

•

Beginning January 1, 2004, the wood industry no longer sells chromated copper arsenic (CCA) treated lumber for residential and construction applications. The primary replacement chemical treatment for lumber is alkaline copper quat (ACQ), and this treated lumber is approximately 20% higher in price than CCA treated lumber and also requires additional handling and fastening techniques. Unlike wood, our products do not require preservatives or treatment with toxic chemicals such as CCA or ACQ, nor do they require yearly water sealing or staining.

•

They are less subject to thermal contraction or expansion and have greater dimensional stability than competing all-plastic products.

•

They are engineered for superior moisture-resistance and will not swell or expand like wood.

•

They can be designed and extruded through dies to a desired shape in accordance with customer specifications, which helps the customer to minimize waste.

•

They are less subject to rotting, cracking, warping, splintering, insect infestation and water absorption than conventional wood materials.

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•

When combined with our unique tie coat primer, the life of exterior paint can be greatly enhanced, thus creating a low-maintenance non-wood trim and fascia system designed to enhance and complement fiber cement siding.

     Our composites manufacturing process involves proprietary technologies, certain of which are patented. We also use manufacturing equipment that has been custom-built or modified to our specifications. Our composite building material became a patented product in June 1998 under U.S. Patent No. 5,759,680.

     Beginning in 2004, we introduced a line of fade-resistant colored decking products, some of which also have an embossed wood-grain texture. We are also introducing a new matching handrail system for the colored decking in the second quarter of 2004.

     Due to our extensive product testing and successful extended field history of over a decade, we offer a limited lifetime replacement warranty on our products against rot and fungal decay, and termite and insect damage.

Manufacturing

     We operate the following manufacturing and recycling facilities:

•

Our Junction, Texas facility manufactures primarily decking. There was a fire in March 2003 at the Junction plant which caused substantial damage and temporarily shut down plant operations. One rebuilt extrusion line recommenced operations in May 2003, and the second line recommenced operations in May 2004. The material transfer system is scheduled to be fully operational by the end of the third quarter of 2004.

•

Our door, window and housing trim and OEM components (MoistureShield) are manufactured at our Springdale, Arkansas facility. The Springdale facility also manufactures the LifeCycle and Weyerhaeuser ChoiceDek brands including new colored lines of decking products. Springdale currently has four extrusion lines with a plastic recycling facility. Additional automation, including downstream handling and packaging equipment was recently installed during the first quarter of 2004.

•

During the first quarter of 2004, the Company relocated and expanded its paint system and some finishing and packaging operations to an additional 70,000 square foot facility near Tonitown, Arkansas. This was done in order to allow for additional extrusion production increases and to maximize efficiencies at the existing Springdale facility. The Company believes this will also streamline, simplify and focus manufacturing operations and allow for further production increases in the future at the existing Springdale facility.

•

In late 2003, we started a second plastics processing facility in Northwest Arkansas. We have been adding plastic recycling equipment and capacity to that plant and plan to have it fully built by mid 2004. The finished facility will be used for plastic recycling, blending and storage, a railroad loading/unloading spur, a truck scale and receiving station, and finished goods storage.

•

The Company leases plastic recycling equipment and factory space in Alexandria, Louisiana and commenced operations in June 2003. We have made improvements and installed additional equipment to increase the facility’s throughput. The upgrades provide flexibility to economically process different types of scrap plastic and to provide plastic feedstock of a quality and consistency required in order to more efficiently operate our extrusion facilities.

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     During the first quarter of 2003, we began road and bridge infrastructure work on an 18.8-acre tract that adjoins the existing Springdale, Arkansas facility. In the second quarter of 2004, we plan to complete a portion of the infrastructure site work and roadwork at that location for a second composite manufacturing facility in Springdale. We then plan to have the building and initial portion of the manufacturing facility completed and operational in the second quarter of 2005. The existing site work completed is currently providing storage space for inventory.

     In the first quarter of 2004, the Company invested $2.1 million in plant, property and equipment, which includes approximately $1.0 million for the rebuilding of the Junction, Texas facility. Our expansion plans currently are prioritized around increasing plastic recycling capacity and lowering raw material costs, in conjunction with further automating our production processes to improve efficiencies and increase margins. Due to strong demand for AERT composite products, these projects will be followed by the construction of a second warehouse and manufacturing facility in Springdale, Arkansas and additional composite extrusion capacity. New capital projects are currently being paid for from cash flow, and there is no assurance as to when additional funds will be available or as to when the projects will be completed.

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  Results of Operations

     The following table sets forth selected information from the Company’s statements of operations.

  Quarterly Comparison

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  Net Sales

     The Company’s net sales for the three months ended March 31, 2004 and 2003 are summarized as follows:

  Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003

     Net sales for the quarter ended March 31, 2004, increased due to increases in production efficiency coupled with continued strong demand for our products. Net sales at the Junction facility decreased due to the major fire in March 2003 that temporarily shut down plant operations. The facility resumed operations with one extrusion line in May 2003, and we re-commenced the second extrusion line on April 29, 2004. We are now rebuilding and finalizing the material transfer system. We plan to have Junction fully rebuilt by the end of the third quarter of 2004.

  Cost of Goods Sold

     Our cost of goods sold, as a percent of sales, increased for the quarter ended March 31, 2004 compared to the same period of 2003 primarily due to the rising cost of acquiring recyclable plastics. To help offset rising material costs, we added a plastic recycling facility in Alexandria, Louisiana, are expanding our plastic processing capacity at the second Northwest Arkansas facility and are seeking new sources of waste plastic materials. We are also working to improve material handling techniques and efficiencies in order to further reduce costs and improve margins.

  Income

     Earnings before the extraordinary gain decreased for the quarter ended March 31, 2004 as compared to the same period of 2003 primarily because we had to pay more for raw materials, and overall sales increases were not sufficiently attained as Junction sales fell due to the fire, which significantly reduced decking production. We had to significantly demolish and rebuild a major portion of our Junction, Texas facility. We also experienced delays in further completing and automating portions of our production process in conjunction with starting up two additional plastic recycling facilities.

  Extraordinary Item

     The extraordinary gain in the first quarter of 2004 is due to the major fire at the Junction facility in March 2003. The Junction facility was, and is, fully insured. Insurance proceeds received to reimburse costs incurred to reconstruct the facility resulted in a gain of $1,037,577 for the quarter ended March 31, 2004; in addition we recognized a gain of approximately $2.96 million in 2003 attributable to such insurance proceeds as the facility and equipment damaged had been nearly fully depreciated. At March 31, 2004, approximately $864,000 was included in accounts receivable for expected insurance reimbursements.

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  Liquidity and Capital Resources

     At March 31, 2004, we had a working capital deficit of $2.1 million compared to a working capital deficit of $1.9 million at December 31, 2003. Excluding the $1.0 million spent to reconstruct the Junction facility, we spent approximately $1.1 million on capital expansion during the first quarter of 2004. Expenditures were primarily for increasing our plastic processing capacity at our Lowell and Alexandria facilities in order to reduce raw material costs and for automation related equipment needed to improve the production of our new decking products. As of March 31, 2004, the working capital deficit of approximately $2.1 million involved total current liabilities of approximately $12.7 million, of which $2.2 million was for miscellaneous accrued liabilities, $8.9 million was in payables and $1.6 million was a combination of short-term notes payable and the current portion of long-term debt. The $2.1 million working capital deficit reflects management’s decision to enter into short-term debt financing to build and improve production and sales capacities to increase cash flows from operations. Our plan continues to focus on the use of short-term debt, which can be refinanced in the future, rather than more expensive and dilutive equity financing.

     Cash increased $923,407 to $2,432,531 at March 31, 2004 from December 31, 2003. Significant components of that increase were: (i) cash provided by operating activities of $443,396, which consisted of the net income for the period of $574,264 increased by depreciation and amortization of $1,021,426 and decreased by other uses of cash of $1,152,294; (ii) cash used in investing activities of $398,239, and (iii) cash provided by financing activities of $878,250. Payments on notes during the period were $773,103, and proceeds from the issuances of notes amounted to $800,000. At March 31, 2004, we had bonds and notes payable in the amount of $18,194,014, of which $1,637,696 was current notes payable and the current portion of long-term debt.

  Uncertainties, Issues and Risks

     There are many factors that could adversely affect AERT’s business and results of operations. These factors include, but are not limited to, general economic conditions, decline in demand for our products, business or industry changes, critical accounting policies, government rules and regulations, environmental concerns, litigation, new products / product transition, product obsolescence, competition, acts of war, terrorism, public health issues, concentration of customer base, loss of a significant customer, availability of raw material (plastic) at a reasonable price, management’s failure to execute effectively, inability to obtain adequate financing (i.e. working capital), equipment breakdowns, low stock price, and fluctuations in quarterly performance.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

     The Company has no material exposures relating to its long-term debt, due to virtually all of the Company’s long-term debt bearing interest at fixed rates. The Company depends on the market for favorable long-term mortgage rates to help generate sales of its product to its customers for use in the residential construction industry. Should mortgage rates increase substantially, the Company could be impacted by a reduction in the residential construction industry. Important raw materials purchased by the Company are recycled plastic and wood fiber, which are subject to price fluctuations. The Company attempts to limit the impact of price increases on these materials by negotiating with each of its suppliers on a term basis, and by internally recycling a majority of its plastic raw materials.

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Forward-Looking Information

     The foregoing discussion contains certain estimates, predictions, projections and other forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) that involve various risks and uncertainties. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, or other future performance suggested herein. Some important factors (but not necessarily all factors) that could affect our sales volumes, growth strategies, future profitability and operating results, or that otherwise could cause actual results to differ materially from those expressed in any forward-looking statement include the following: market, political or other forces affecting the pricing and availability of plastics and other raw materials; accidents or other unscheduled shutdowns affecting us, our suppliers’ or our customers’ plants, machinery, or equipment; competition from products and services offered by other enterprises; state and federal environmental, economic, safety and other policies and regulations, any changes therein, and any legal or regulatory delays or other factors beyond our control; execution of planned capital projects; weather conditions affecting our operations or the areas in which our products are marketed; and adverse rulings, judgments, or settlements in litigation or other legal matters. We undertake no obligation to publicly release the result of any revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

     An investment in our securities involves a high degree of risk. Prior to making an investment, prospective investors should carefully consider the following factors, among others, and seek professional advice in analyzing us. In addition, this Form 10-Q contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements, which are often identified by words such as “believes,” “anticipates,” “expects”, “estimates,” “should,” “may,” “will” and similar expressions, represent our expectations or beliefs concerning future events. Numerous assumptions, risks and uncertainties, could cause actual results to differ materially from the results discussed in the forward-looking statements. Prospective purchasers of our securities should carefully consider the information contained herein or in the documents incorporated herein by reference.

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Item 4. Controls and Procedures.

     Each of our Co-Chief Executive Officers, Joe G. Brooks and Stephen W. Brooks, and our Chief Financial Officer, Edward J. Lysen, have reviewed and evaluated the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) that we have in place with respect to, among other things, the timely accumulation and communication of information to management and the recording, processing, summarizing and reporting thereof for the purpose of preparing and filing this quarterly report on Form 10-Q. Such review was conducted as of the end of the period covered by this Form 10-Q. Based upon their review, these executive officers have concluded that we have an effective system of disclosure controls and procedures and an effective means for timely communication of information required to be disclosed in this Report. Subsequent to this evaluation, there have been no significant changes in our internal controls or in other factors that could significantly affect such controls.

PART II. OTHER INFORMATION

Item 2. Changes in Securities

Recent Sales of Unregistered Securities

     On January 16, 2004, we sold an aggregate of 225,000 shares of our Class A common stock to ten middle manager employees and one of our officers upon the exercise of stock options at an exercise price of $0.469 per share. We believe, due to the nature of the relationship of these persons to us and the isolated nature of the transactions, that each issuance and sale of the shares of Class A common stock underlying such options was exempt from registration under the Securities Act of 1933, as amended, as a private placement pursuant to Section 4(2) of that Act.

     On March 31, 2004, Marjorie Brooks, our major shareholder and one of our current directors, exercised options to purchase 400,000 shares of our Class A common stock at an exercise price of $1.00 per share, and received restricted stock. We believe, due to her position as a director of our company and the isolated nature of the transaction, that the issuance and sale of the shares of Class A common stock underlying such options was exempt from registration under the Securities Act of 1933, as amended, as a private placement pursuant to Section 4(2) of that Act.

Item 6. Exhibits and Reports on Form 8-K

(a)

Exhibits. The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.

(b)

Reports on Form 8-K.

Not applicable.

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SIGNATURES

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

Date: May 14, 2004

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Index to Exhibits

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