8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): April 30, 2004

Capital Environmental Resource Inc.

(Exact name of registrant as specified in its charter)

Ontario, Canada	000-25955	Not Applicable
(State or other	(Commission	(I.R.S. Employer
jurisdiction of	File Number)	Identification No.)
incorporation)
1122 International Blvd., Suite 601
Burlington Ontario, Canada		L7L 6Z8
(Address of principal executive offices)		(Zip Code)

Registrants’ telephone number, including area code: (905) 319-1237

N/A

(Former name or former address, if changed since last report.)

TABLE OF CONTENTS

	Item 5. Other Events.
	Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
SIGNATURE
EXHIBIT INDEX
Amendment No. 2 to Preferred Subscription Agrmt
Consent of Shepard Schwartz & Harris LLP
Unaudited Pro Forma Condensed Financial Statements
Consolidated Financial Statements

Item 5. Other Events.

Acquisition of Florida Recycling Services, Inc. (“Florida Recycling”)

     In November 2003, Capital Environmental Resource Inc. (“Capital”, “we”, “us”, or “our”) through its wholly owned subsidiary, Waste Services, Inc. (“Waste Services”) entered into a definitive agreement to acquire Florida Recycling from its stockholders. On April 30, 2004, we completed this acquisition for a purchase price of $98.5 million in cash, working capital of approximately $2.2 million subject to further adjustment and the issuance of 9,250,000 common shares. Florida Recycling’s operations are based in central Florida, primarily serving the Orlando, Daytona, Fort Myers and Tampa metropolitan areas.

Acquisition of Assets from Allied Waste Industries, Inc. (“Allied”)

     As previously announced in November 2003, Waste Services entered into an agreement to acquire the assets of Allied’s northern and central Florida operations (the “Allied Assets”) for a purchase price of approximately $120.0 million subject to an adjustment for working capital. To March 31, 2004, we acquired all of the Allied Assets except for certain assets in the Jacksonville metropolitan area (the “Allied Jacksonville Assets”). On June 7, 2004, we acquired the Allied Jacksonville Assets for aggregate cash consideration of $27.3 million, subject to adjustments for working capital. The primary metropolitan areas currently served by the Allied Assets are Tampa, Sarasota and Jacksonville, Florida.

New Financing Transactions

     We financed the acquisition of Florida Recycling and repaid our previously existing senior credit facilities with a majority of the net proceeds from (i) borrowings under the new Senior Secured Credit Facilities of Waste Services; (ii) an offering of Senior Subordinated Notes of Waste Services and (iii) the private placement of common shares of Capital. Information relating to these financing transactions is more fully described on Form 8-K filed on May 10, 2004 with the Securities and Exchange Commission and the notes to the Unaudited Pro Forma Consolidated Financial Statements filed herein as Exhibit 99.1.

Amendment to Preferred Subscription Agreement with Kelso

     We entered into an amendment to the agreement pursuant to which we issued 55,000 preferred shares of Waste Services, Inc. to Kelso Investment Associates VI, L.P. and KEP VI, LLC, to extend to July 31, 2004 the date by which our migration transaction is to be completed.

Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.

     (a) Financial Statements of Businesses Acquired

     The consolidated financial statements of Florida Recycling Services, Inc. of Illinois and its subsidiary for the three months ended March 31, 2004 and 2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001, are incorporated herein by reference from Exhibit 99.2 to this Current Report.

     (b) Pro Forma Financial Information.

     The unaudited pro forma condensed consolidated financial statements of Capital as of and for the three months ended March 31, 2004 are incorporated herein by reference from Exhibit 99.1 to this Current Report.

     (c) Exhibits.

4.1	Amendment No. 2 to Preferred Subscription Agreement dated as of June 8, 2004, among Waste Services, Inc., Capital Environmental Resource Inc., Kelso Investment Associates VI, L.P. and KEP VI LLC
23.1	Consent of Florida Recycling Services, Inc.’s Auditor — Shepard, Schwartz & Harris, LLP
99.1	Unaudited pro forma condensed consolidated financial statements of Capital as of and for the three months ended March 31, 2004.
99.2	Consolidated financial statements of Florida Recycling Services, Inc. of Illinois and Subsidiary for the three months ended March 31, 2004 and 2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001.

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SIGNATURE

     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: June 9, 2004	CAPITAL ENVIRONMENTAL RESOURCE INC. (Registrant)
	By:	/s/ Ronald L. Rubin
	Name:		Ronald L. Rubin
	Title:		Executive Vice President, and Chief Financial Officer

EXHIBIT INDEX

4.1	Amendment No. 2 to Preferred Subscription Agreement dated as of June 8, 2004, among Waste Services, Inc., Capital Environmental Resource Inc., Kelso Investment Associates VI, L.P. and KEP VI LLC
23.1	Consent of Florida Recycling Services, Inc.’s Auditor — Shepard, Schwartz & Harris, LLP
99.1	Unaudited pro forma condensed consolidated financial statements of Capital as of and for the three months ended March 31, 2004.
99.2	Consolidated financial statements of Florida Recycling Services, Inc. of Illinois and Subsidiary for the three months ended March 31, 2004 and 2003 (unaudited) and for the years ended December 31, 2003, 2002 and 2001.

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EX-4.1

Exhibit 4.1

AMENDMENT NO. 2 TO THE

PREFERRED SUBSCRIPTION AGREEMENT

     AMENDMENT NO. 2 TO THE PREFERRED SUBSCRIPTION AGREEMENT, dated as of June 8, 2004 (this “Amendment”), among Waste Services, Inc., a Delaware corporation (“WSI”), Capital Environmental Resource Inc., a corporation amalgamated under the laws of the Province of Ontario, Canada (“CERI”), Kelso Investment Associates VI, L.P., a Delaware limited partnership, and KEP VI, LLC, a Delaware limited liability company.

     WHEREAS, the parties hereto entered into the Preferred Subscription Agreement, dated as of May 6, 2003 (the “Preferred Subscription Agreement”); capitalized terms used herein without definition shall have the meaning assigned to them in the Preferred Subscription Agreement; and

     WHEREAS the parties hereto desire to amend the Preferred Subscription Agreement pursuant to Section 8.4 therein.

     NOW, THEREFORE, it is agreed as follows:

     1. Amendment to Section 6.7(a). Section 6.7(a) of the Preferred Subscription Agreement is hereby amended and restated in its entirety to read as follows:

“(a) Each of the US Company and the Canadian Company shall take the actions described in Exhibit C hereto and shall use their reasonable best efforts to take all actions necessary or advisable and permitted by applicable law to complete the Migration on or before July 31, 2004 (the “Migration Outside Date”) in compliance with all applicable laws and regulations. Each of the US Company and the Canadian Company shall update the Purchasers regularly on the terms and conditions of and progress made towards consummating such Migration.”

     2. Amendment to Section 6.7(b). Section 6.7(b) of the Preferred Subscription Agreement is hereby amended and restated in its entirety to read as follows:

“(b) Notwithstanding anything herein to the contrary, if the Migration does not occur on or prior to the Migration Outside Date, the Purchasers shall have the right to require the Canadian Company at any time following the expiration of the Consultation Period (as defined below) upon request by the Purchasers, to (x) exchange the Preferred Shares for preferred shares in the capital of the Canadian Company having the revised terms set forth on Exhibit F hereto and (y) exchange the Warrants (including any Warrants issued pursuant to Section 6.7(c)) for warrants to purchase common shares in the capital of the Canadian Company having the revised terms set forth on Exhibit G hereto (with appropriate adjustments for the Warrants issued under Section 6.7(c)), and in each case having economic and other rights and

preferences with respect to the Canadian Company and its Subsidiaries that are substantially identical to those applicable to the US Company and its Subsidiaries immediately prior to such exchange (any such exchange, an “Exchange Event”). If the Migration does not occur by September 6, 2005, the US Company will have the right to require that the Purchasers participate in an Exchange Event. Following any such Exchange Event, all references to any of the Securities or the Conversion Shares herein shall be deemed to refer to the new securities or conversion shares, respectively, of the Canadian Company issued in connection with the Exchange Event or thereafter. “Consultation Period” means a 60 day period following the Migration Outside Date, during which period the Companies and the Purchasers shall discuss in good faith whether there are structuring alternatives to an Exchange Event that would preserve for the Purchasers the economic and other rights associated with direct ownership of Securities and Conversion Shares issued by the Canadian Company that could be achieved without an exchange of Securities and Conversion Shares issued by the US Company, subject to the right of the Purchasers in their sole discretion to reject any such alternatives.

     3. Certificate of Designations. For the avoidance of doubt, the parties hereto hereby acknowledge and agree that the references to the “Migration Outside Date” in section 5 of the Certificate of Designations shall be deemed to refer to the Migration Outside Date as modified by this Amendment.

     4. Full Force and Effect. Except as provided in this Amendment, the Subscription Agreement shall continue in full force and effect in accordance with the provisions thereof.

     5. Miscellaneous. Pursuant to Section 8.4 of the Preferred Subscription Agreement, this Amendment shall be effective, as of the date hereof, at such time as it is executed by WSI and the Purchasers. This Amendment shall be construed in accordance with and governed by the internal law of the State of New York (without reference to its rules as to conflict of laws). The section headings herein are for convenience only and shall not affect the construction hereof. This Amendment may be executed in one of more counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument.

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     IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written.

CAPITAL ENVIRONMENTAL RESOURCE INC.

By: /s/ Ivan R. Cairns
Name: Ivan R. Cairns
Title: Executive Vice-President and
General Counsel

WASTE SERVICES, INC.

By: /s/ Ivan R. Cairns
Name: Ivan R. Cairns
Title: Executive Vice-President and
General Counsel

KELSO INVESTMENT ASSOCIATES VI, L.P.

By: Kelso GP VI, LLC,
its general partner

By: /s/ George E. Matelich
Managing Member

KEP VI, LLC

By: /s/ George E. Matelich
Managing Member

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EX-23.1

Exhibit 23.1

SHEPARD SCHWARTZ & HARRIS LLP
CERTIFIED PUBLIC ACCOUNTANTS
123 NORTH WACKER DRIVE - SUITE 1400
CHICAGO, ILLINOIS 60606-1700

TELEPHONE:	312 726 8353	IRVING W. SHEPARD (1935-1983)
FACSIMILE:	312 726 2657	MORRIS SCHWARTZ (1946-1983)
E-MAIL:	MAILBOX@SSH-CPA.COM	SAUL M. BAKRINS (1967-1990)
WEB SITE:	WWW.SSH-CPA.COM

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference of our report dated February 11, 2004 on our audits of the consolidated financial statements of Florida Recycling Services, Inc. of Illinois and Subsidiary for the years ended December 31, 2003, 2002 and 2001 included in this Current Report on Form 8-K into the previously filed registration statement on Form F-3/A (Amendment No. 2) (Registration No. 333-111085) of Capital Environmental Resource Inc.

Shepard Schwartz & Harris LLP

June 8, 2004.

EX-99.1

Exhibit 99.1

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     These unaudited pro forma condensed consolidated financial statements as of and for the three months ended March 31, 2004 have been prepared from the March 31, 2004 interim unaudited condensed consolidated financial statements of Capital Environmental Resource Inc. (the “Company”), the unaudited March 31, 2004 combined financial statements of certain assets of Allied Waste Industries, Inc. located in the Jacksonville, Florida metropolitan area (the “Allied Jacksonville Assets”) and the unaudited March 31, 2004 consolidated financial statements of Florida Recycling Services, Inc. of Illinois and its subsidiary (“Florida Recycling”).

     The unaudited pro forma condensed consolidated financial statements have been prepared on a basis to reflect the following events as if each event occurred as of January 1, 2004 for the statement of operations and as of March 31, 2004 for the balance sheet:

• acquisition of the Allied Jacksonville Assets;

• acquisition of Florida Recycling;

• entering into the new Senior Secured Credit Facility;

• issuance of the 9½% Senior Subordinated Notes;

• issuance and registration of 13,400,000 Common Shares of the Company and warrants to purchase 1,340,000 Common Shares of the Company; and

• tax effects of the foregoing events.

     You should read these unaudited pro forma condensed consolidated financial statements in conjunction with the Company’s consolidated financial statements as of and for the year ended December 31, 2003, the interim unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2004, and the unaudited pro forma condensed consolidated financial statements as of December 31, 2003 as filed with the Securities and Exchange Commission on Forms 10-K, 10-Q and 8-K as filed on May 10, 2004, respectively.

     The pro forma adjustments are based on preliminary estimates, available information and certain assumptions that management believes are reasonable, and may be revised as additional information becomes available. The pro forma adjustments are more fully described in the notes to the unaudited pro forma condensed consolidated financial statements.

     The unaudited pro forma condensed consolidated financial statements should not be considered indicative of actual results that would have been achieved had the acquisitions and the other transactions and events described been completed as of the dates or as of the beginning of the period indicated and do not purport to project the financial condition or results of operations and cash flows for any future date or period.

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(In thousands, except per share data)

				Allied
				Jacksonville			Florida
	Actual			Assets			Recycling		Adjustments					Pro Forma
Revenue	$	50,317		$	7,782		$	22,987	$	—				$	81,086
Operating expenses:
Cost of operations		34,171			6,701			16,671		(149	)	(1	)		57,394
Selling, general and administrative		10,559			620			3,710		(666	)	(2	)		14,223
Depreciation, depletion and amortization		5,472			385			1,713		1,077		(3	)		8,702
										55		(1	)
Foreign exchange gain and other		(90	)		—			—		—					(90	)
Income (loss) from operations		205			76			893		(317	)				857
Interest income		—			(557	)		—		557		(4	)		—
Interest expense		6,316			—			496		5,168		(5	)		5,374
										(6,110	)	(5	)
										(496	)	(4	)
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs		4,019			—			—		—					4,019
Income (loss) before income taxes		(10,130	)		633			397		564					(8,536	)
Income tax provision (benefit)		829			253			17		(270	)	(6	)		829
Net income (loss) attributable to common shareholders before cumulative effect of change in accounting principle	$	(10,959	)	$	380		$	380	$	834				$	(9,365	)
Basic and diluted loss per share before cumulative effect of change in accounting principle	$	(0.15	)											$	(0.10	)
Weighted average common shares outstanding — basic and diluted		70,583			—			—		21,650		(7	)		92,233

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

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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2004

(In thousands)

						Allied
				Allied		Jacksonville								Florida
				Jacksonville		Assets					Florida			Recycling					Financing
	Actual			Assets		Adjustment					Recycling			Adjustment					Adjustment					Pro Forma
Assets
Cash and cash equivalents	$	5,817		$	—	$	(27,289	)	(8	)	$	955		$	(97,950	)	(8	)	$	119,678		(11	)	$	1,211
Restricted cash		999			—		—					—			—					(999	)	(11	)		—
Accounts receivable		26,387			3,169		—					11,582			—					—					41,138
Prepaid expenses and other current assets		29,553			320		—					2,862			(875	)	(9	)		—					31,860
Total current assets		62,756			3,489		(27,289	)				15,399			(98,825	)				118,679					74,209
Property and equipment, net		81,070			7,763		1,640		(9	)		23,425			—					—					113,898
Landfill sites, net		152,076			—		—					—			—					—					152,076
Deferred income taxes		2,507			—		—					584			(584	)	(9	)		—					2,507
Goodwill and other intangible assets		184,220			—		11,968		(10	)		609			(609	)	(9	)		—					326,660
							5,918		(10	)					27,156		(10	)
															97,398		(10	)
Due from affiliate		—			19,063		(19,063	)	(9	)		—			—					—					—
Other assets		24,063			—		—					18			(9,957	)	(8	)		8,090		(11	)		22,214
Total assets	$	506,692		$	30,315	$	(26,826	)			$	40,035		$	14,579				$	126,769				$	691,564
Liabilities and Shareholders’ Equity
Accounts payable	$	13,309		$	2,167	$	(2,167	)	(9	)	$	4,711		$	1,437		(10	)	$	—				$	19,457
Accrued expenses and other current liabilities		26,145			1,617		(612	)	(9	)		2,794			—					—					32,428
							2,484		(10	)
Current portion of long-term debt and short-term financing		6,158			—		—					36,773			(36,773	)	(9	)		(1,000	)	(11	)		6,158
																				1,000		(11	)
Total current liabilities		45,612			3,784		(295	)				44,278			(35,336	)				—					58,043
Long-term debt		186,215			—		—					—			—					(183,125	)	(11	)		262,090
																				259,000		(11	)
Accrued closure, post-closure and other obligations		6,075			—		—					—			—					—					6,075
Cumulative mandatorily redeemable shares of preferred stock of Waste Services		52,039			—		—					—			—					—					52,039
Total liabilities		289,941			3,784		(295	)				44,278			(35,336	)				75,875					378,247
Common stock		245,133			—		—					100			45,672		(8	)		48,360		(11	)		339,165
															(100	)	(8	)
Other additional paid-in-capital		—			—		—					11,670			(11,670	)	(8	)		—					—
Investment by parent		—			26,531		(26,531	)	(8	)		—			—					—					—
Options, warrants and deferred stock-based compensation		24,624			—		—					—			—					2,534		(11	)		27,158
Accumulated other comprehensive income		13,786			—		—					—			—					—					13,786
Accumulated deficit		(66,792	)		—		—					(16,013	)		16,013		(8	)		—					(66,792	)
Total shareholders’ equity		216,751			26,531		(26,531	)				(4,243	)		49,915					50,894					313,317
Total liabilities and shareholders’ equity	$	506,692		$	30,315	$	(26,826	)			$	40,035		$	14,579				$	126,769				$	691,564

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

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Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements

     The following notes are a summary of the pro forma adjustments reflected in, and form an integral part of, the unaudited pro forma condensed consolidated financial statements.

(1)	Reflects the removal of rent expense from cost of operations for trucks and containers leased from other subsidiaries of Allied Waste Industries, Inc. (“Allied”). These trucks and containers were acquired as part of the acquisition of the Allied Jacksonville Assets. Rent expense being removed for the Allied Jacksonville Assets was $0.1 million for the three months ended March 31, 2004. Depreciation relating to the assets being acquired was $0.1 million for the three months ended March 31, 2004.
(2)	Reflects the elimination of Florida Recycling management fees related to agreements not being assumed approximating $0.8 million for the three months ended March 31, 2004, offset by new employment and consulting agreements approximating $0.1 million.
(3)	Reflects the amortization of intangible assets, based on an estimate of intangible asset values. These intangible assets include customer relationships and contracts and covenants not-to-compete and are amortized over the expected life of the benefit to be received by such intangibles, which ranges from 3 to 20 years. The estimated amortizable intangibles for the Allied Jacksonville Assets and Florida Recycling acquisitions approximates $33.1 million resulting in amortization of approximately $1.1 million for the three months ended March 31, 2004.
(4)	Reflects the elimination of interest income of $0.6 million received on balances due from affiliates not being acquired as part of the Allied Jacksonville Assets acquisition as well as the elimination of Florida Recycling interest expense of $0.5 million for the three months ended March 31, 2004, related to debt not assumed.
(5)	Reflects interest expense of approximately $1.3 million related to the $100.0 million term loan portion of our new Senior Secured Credit Facilities and $3.9 million related to $160.0 million of the 91/2% Senior Subordinated Notes. Also reflected is the removal of $6.1 million of interest expense on our previous credit facility that would have been avoided had the financing described above been in place as of January 1, 2004.
	Separately, as of December 31, 2003, the Company entered into a $220.0 million credit facility, the proceeds of which were used to finance the initial acquisition of certain assets of Allied and to repay the Company’s previous senior credit facility. Excluded from the pro forma adjustments is approximately $5.9 million of estimated fees and expenses related to the $220.0 million credit facility that will fully amortize upon the refinancing.
(6)	Reflects the elimination of U.S. income taxes otherwise payable as a result of the pro forma adjustments previously described. The Company has not assumed any additional benefit of the tax losses attributed to the pro forma adjustments because it does not expect to benefit from such losses at this time.
(7)	Reflects the dilutive effect of the 9,250,000 Common Shares issued to the sellers of Florida Recycling in connection with the Florida Recycling acquisition less the effect of the original 1,000,000 Common Shares previously deposited and the private placement of 13,400,000 Common Shares.
(8)	Reflects the payment of $27.3 million of cash purchase price as well as the elimination of the investment by the former owner of the Allied Jacksonville Assets of $26.5 million. Additionally reflected is the payment of cash purchase price for Florida Recycling of approximately $97.95 million, ($98.5 million purchase price less $3.75 million of advances previously made plus $1.0 million of transaction related fees and $2.2 million for a working capital adjustment), the issuance of 9,250,000 Common Shares of the Company, net of 1,000,000 Common Shares previously deposited, at a fair market value of $5.54 per share, the elimination of previous cash, warrants and Common Share deposits of approximately $10.0 million and the elimination of predecessor equity components.
(9)	Reflects the elimination of assets not acquired and liabilities not assumed as part of the acquisitions. The assets not being acquired primarily relate to predecessor entity goodwill and certain tax assets. The liabilities

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	not assumed primarily relate to indebtedness of Florida Recycling and accounts payable and accrued expenses of the Allied Jacksonville Assets. Additionally, we are acquiring certain trucks and containers from other Allied entities. Also, refer to Note (10) for further details concerning the allocation of purchase price.
(10)	Reflects the preliminary allocation of purchase price based upon a preliminary estimate of the fair value of assets being acquired and liabilities being assumed by us as follows:

	Allied			Florida
	Jacksonville Assets			Recycling			Total
Purchase price:
Cash	$	27,289		$	100,666		$	127,955
Common shares issued		—			51,256			51,256
Warrants issued		—			148			148
Transaction fees and other		—			1,509			1,509
Total purchase price		27,289			153,579			180,868
Allocated as follows:
Net book value of assets acquired/(liabilities) assumed		26,531			(4,243	)		22,288
Adjustments to net book value:
Trucks and containers acquired		1,640			—			1,640
Accounts payable and accrued expenses not assumed		2,779			—			2,779
Indebtedness not assumed		—			36,773			36,773
Due to affiliate not assumed		(19,063	)		—			(19,063	)
Historical goodwill and intangible assets		—			(609	)		(609	)
Additional liability assumed		(2,484	)		(1,437	)		(3,921	)
Other assets not acquired		—			(875	)		(875	)
Deferred income tax asset not acquired		—			(584	)		(584	)
Adjusted net book value of assets/(liabilities)		9,403			29,025			38,428
Excess purchase price to be allocated	$	17,886		$	124,554		$	142,440
Allocated as follows:
Goodwill	$	11,968		$	97,398		$	109,366
Customer relationships and contracts and covenants not to compete		5,918			27,156			33,074
Total allocated	$	17,886		$	124,554		$	142,440

	The allocation of purchase price is considered preliminary until the Company has acquired all necessary information to finalize the allocation of purchase price. Although the time required to obtain the necessary information will vary with the circumstances specific to an individual acquisition, the “allocation period” for finalizing purchase price allocations generally does not exceed one year from the date of consummation of an acquisition. Adjustments to the allocation of purchase price may decrease those amounts allocated to goodwill and, as such, may increase those amounts allocated to other tangible or intangible assets, which may result in higher depreciation or amortization expense in future periods.
(11)	Reflects the issuance of $160.0 million of 91/2% Senior Subordinated Notes and $100.0 million of our new Senior Secured Credit Facilities term loan. In connection with these issuances, we incurred approximately $8.1 million of debt issue costs. Also reflected is the issuance and registration of 13,400,000 Common Shares of the Company and warrants to purchase 1,340,000 Common Shares of the Company at $4.00 per share; the gross proceeds of which approximated $53.6 million. The net proceeds of the Common Shares and warrants issuance were allocated based on the relative fair values of the Common Shares and warrants, resulting in an allocation of the net proceeds of $48.4 million to the Common Shares and $2.5 million to the warrants. Furthermore, the Company repaid its previously outstanding senior credit facility.
	The Company entered into an agreement with the investors under the equity placement in which it agreed to file a registration statement with respect to the Common Shares and the Common Shares issuable upon exercise of the warrants and have that registration statement declared effective within 120 days from the date of original issuance of the Common Shares. If the Company does not comply with these registration

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requirements, it will be required to pay liquidated damages equal to 1.0% of the value, as defined in the agreement, of the unregistered Common Shares for each month until the Common Shares are registered. Because these damages would be payable in cash, until the Common Shares are registered, the proceeds from the financing will be classified outside of shareholders’ equity.

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EX-99.2

Exhibit 99.2

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS
AND SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

AND AS OF AND FOR THE THREE MONTHS

ENDED MARCH 31, 2004 AND 2003

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY

TABLE OF CONTENTS

Independent Auditor’s Report
Consolidated Balance Sheets	Exhibit A
Consolidated Statements of Operations	Exhibit B
Consolidated Statements of Shareholder’s Equity (Deficit)	Exhibit C
Consolidated Statements of Cash Flows	Exhibit D
Notes to Consolidated Financial Statements

INDEPENDENT AUDITOR’S REPORT

To the Shareholders
Florida Recycling Services, Inc. of Illinois
Chicago, Illinois

     We have audited the accompanying consolidated balance sheets of Florida Recycling Services, Inc. of Illinois and Subsidiary as of December 31, 2003, 2002 and 2001, and the related consolidated statements of operations, cash flows and shareholder’s equity (deficit) for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Florida Recycling Services, Inc. of Illinois and Subsidiary as of December 31, 2003, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Shepard Schwartz & Harris LLP

February 11, 2004

EXHIBIT A

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

	Three Months Ended March 31,						Years Ended December 31,
	2004			2003			2003			2002			2001
	(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	955,374		$	183,943		$	669,735		$	69,192		$	897,341
Receivables
Trade		11,582,265			12,996,103			16,156,222			10,691,735			12,256,134
Other		532			8,426			2,506			11,424			45,347
Prepaid expenses		1,035,687			831,337			1,643,739			492,026			370,707
Advances to related parties		875,000			510,000			855,000			510,000			—
Supplies and materials		950,632			682,803			963,480			487,520			432,939
Total current assets		15,399,490			15,212,612			20,290,682			12,261,897			14,002,468
PROPERTY AND EQUIPMENT
Building		607,636			583,628			607,636			699,721			1,451,221
Machinery and equipment		62,924,505			53,080,935			57,645,604			50,661,524			45,253,426
		63,532,141			53,664,563			58,253,240			51,361,245			46,704,647
Less - accumulated depreciation		40,206,036			36,223,605			40,312,888			33,828,548			24,966,942
		23,326,105			17,440,958			17,940,352			17,532,697			21,737,705
Land		98,197			98,197			98,197			413,198			476,226
		23,424,302			17,539,155			18,038,549			17,945,895			22,213,931
OTHER ASSETS
Deposits		17,962			18,435			17,962			18,435			2,878
Contract acquisition rights (net of accumulated amortization of $97,721 in 2003 and $21,667 in 2002)		434,670			387,968			453,601			363,566			—
Goodwill (net of accumulated amortization of $68,611 in 2001)		174,489			174,489			174,489			174,489			581,389
Deferred income taxes		584,100			617,000			601,100			636,000			636,000
		1,211,221			1,197,892			1,247,152			1,192,490			1,220,267
	$	40,035,013		$	33,949,659		$	39,576,383		$	31,400,282		$	37,436,666
LIABILITIES AND SHAREHOLDER’S DEFICIT
CURRENT LIABILITIES
Checks issued in excess of bank balance	$	—		$	—		$	—		$	—		$	2,170,476
Note payable - bank		9,610,000			5,700,000			10,000,000			4,500,000			—
Current maturities of long-term debt		27,162,569			8,344,231			12,928,121			8,198,916			10,687,496
Accounts payable		4,710,541			5,876,187			6,555,149			5,369,645			3,775,630
Accrued expenses		2,794,266			2,248,798			2,655,732			2,697,802			4,168,021
Total current liabilities		44,277,376			22,169,216			32,139,002			20,766,363			20,801,623
LONG-TERM DEBT - net of current maturities		—			15,850,553			12,060,243			15,051,757			25,457,100
SHAREHOLDER’S DEFICIT
Common stock - $1,000 par value, 1,000 shares authorized, 100 shares issued and outstanding		100,000			100,000			100,000			100,000			100,000
Additional paid-in capital		11,670,550			11,670,550			11,670,550			11,670,550			6,716,512
Accumulated deficit		(16,012,913	)		(15,840,660	)		(16,393,412	)		(16,188,388	)		(15,638,569	)
Total shareholder’s deficit		(4,242,363	)		(4,070,110	)		(4,622,862	)		(4,417,838	)		(8,822,057	)
	$	40,035,013		$	33,949,659		$	39,576,383		$	31,400,282		$	37,436,666

The accompanying notes are an integral part of these statements.

EXHIBIT B

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,				Years Ended December 31,
	2004		2003		2003			2002			2001
	(unaudited)
Sales	$	22,987,134	$	22,177,116	$	90,519,364		$	84,783,830		$	81,722,405
Cost of sales
Direct labor		5,750,775		5,160,218		23,844,185			22,268,603			23,188,341
Dumping and hauling		7,500,418		7,178,248		30,349,486			28,516,654			30,123,083
Depreciation and amortization		1,693,779		2,137,251		8,632,711			9,172,228			10,645,485
Amortization of contract rights		18,931		18,931		75,727			43,334			—
Other		3,419,767		2,880,815		10,051,118			9,561,909			9,938,131
		18,383,670		17,375,463		72,953,227			69,562,728			73,895,040
Gross profit		4,603,464		4,801,653		17,566,137			15,221,102			7,827,365
Operating expenses		3,710,422		3,741,739		14,910,255			13,666,493			12,497,884
Operating income (loss)		893,042		1,059,914		2,655,882			1,554,609			(4,670,519	)
Other (income) expense
(Gain) loss on sale of assets		—		—		(40,947	)		11,466			38,470
Interest expense		495,543		540,252		1,931,303			2,092,962			2,626,756
		495,543		540,252		1,890,356			2,104,428			2,665,226
Income (loss) before income tax expense (benefit)		397,499		519,662		765,526			(549,819	)		(7,335,745	)
Income tax expense (benefit) - deferred		17,000		19,000		34,900			—			(150,000	)
Net income (loss)	$	380,499	$	500,662	$	730,626		$	(549,819	)	$	(7,185,745	)
Earnings per share	$	3,804.99	$	5,006.62	$	7,306.26		$	(5,498.19	)	$	(71,857.45	)

The accompanying notes are an integral part of these statements.

EXHIBIT C

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’S EQUITY (DEFICIT)

					Additional
	Shares		Par		Paid-in		Accumulated
	Issued		Value		Capital		Deficit			Total
Balance - January 1, 2001		100	$	100,000	$	6,687,112	$	(8,452,824	)	$	(1,665,712	)
Net loss		—		0		0		(7,185,745	)		(7,185,745	)
Shareholder’s contribution		—		0		29,400		0			29,400
Balance - December 31, 2001		100		100,000		6,716,512		(15,638,569	)		(8,822,057	)
Net loss		—		0		0		(549,819	)		(549,819	)
Shareholder’s contribution		—		0		4,954,038		0			4,954,038
Balance - December 31, 2002		100		100,000		11,670,550		(16,188,388	)		(4,417,838	)
Net income		—		0		0		730,626			730,626
Shareholder’s distribution		—		0		0		(935,650	)		(935,650	)
Balance - December 31, 2003		100		100,000		11,670,550		(16,393,412	)		(4,622,862	)
Net income (unaudited)		—		—		—		380,499			380,499
Balance - March 31, 2004 (unaudited)		100	$	100,000	$	11,670,550	$	(16,012,913	)	$	(4,242,363	)

The accompanying notes are an integral part of these statements.

EXHIBIT D

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended March 31,						Years Ended December 31,
	2004			2003			2003			2002			2001
	(unaudited)
Cash flows from operating activities
Cash received from customers	$	27,561,089		$	19,872,747		$	85,054,877		$	86,348,229		$	81,572,652
Cash paid for goods and operating expenses		(21,539,330	)		(19,226,334	)		(79,728,995	)		(76,284,274	)		(78,757,105	)
Interest paid		(420,793	)		(491,272	)		(1,832,673	)		(2,011,004	)		(2,450,343	)
Net cash provided by operating activities		5,600,966			155,141			3,493,209			8,052,951			365,204
Cash flows from investing activities
Advances to related parties		(20,000	)		—			(345,000	)		(510,000	)		—
Deposits paid (returned)		—			—			472			(15,557	)		443,019
Cash received from sale of property and equipment		(7,079,532	)		(1,988,317	)		73,718			117,221			1,578,756
Purchase of property and equipment		—			—			(9,185,157	)		(5,821,311	)		(5,670,297	)
Payment for contract acquisition rights		—			(43,333	)		(165,762	)		—			—
Net cash used for investing activities		(7,099,532	)		(2,031,650	)		(9,621,729	)		(6,229,647	)		(3,648,522	)
Cash flows from financing activities
Proceeds from note payable - bank		—			1,200,000			5,500,000			1,300,000			—
Proceeds of long-term debt		4,256,644			3,000,000			10,699,978			1,590,216			11,282,538
Payments of long-term debt		(2,472,439	)		(2,055,896	)		(8,962,288	)		(7,641,669	)		(7,955,236	)
Contribution from shareholder		—			—			—			2,100,000			—
Distributions to shareholder		—			(152,844	)		(508,627	)		—			—
Net cash provided by (used for) financing activities		1,784,205			1,991,260			6,729,063			(2,651,453	)		3,327,302
Net increase (decrease) in cash and cash equivalents		285,639			114,751			600,543			(828,149	)		43,984
Cash and cash equivalents - beginning		669,735			69,192			69,192			897,341			853,357
Cash and cash equivalents - ending	$	955,374		$	183,943		$	669,735		$	69,192		$	897,341
Reconciliation of net income (loss) to net cash provided by operating activities
Net income (loss)	$	380,499		$	500,662		$	730,626		$	(549,819	)	$	(7,185,745	)
Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities
Depreciation and amortization		1,712,710			2,156,182			8,708,438			9,215,562			10,645,485
(Gain) loss on sale of property and equipment		—			—			(40,947	)		11,466			38,470
(Increase) decrease in
Receivables - trade		4,573,955			(2,304,369	)		(5,464,487	)		1,564,399			(149,753	)
Other receivables		1,974			3,088			8,918			33,923			(6,735	)
Supplies and materials		12,848			(195,283	)		(475,961	)		(54,580	)		(118,929	)
Prepaid expenses		608,052			(339,311	)		(1,151,712	)		(121,320	)		(4,052	)
Deferred income taxes		17,000			19,000			34,900			—			(150,000	)
Increase (decrease) in
Checks issued in excess of bank balance		—			—			—			(2,170,476	)		623,321
Accounts payable		(1,844,606	)		506,542			1,185,504			1,594,015			(3,681,907	)
Accrued expenses		138,534			(191,370	)		(42,070	)		(1,470,219	)		355,049
		5,220,467			(345,521	)		2,762,583			8,602,770			7,550,949
Net cash provided by operating activities	$	5,600,966		$	155,141		$	3,493,209		$	8,052,951		$	365,204

The accompanying notes are an integral part of these statements.

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note A - Nature of Operations

Florida Recycling Services, Inc. of Illinois (FRS of Illinois) and its subsidiary Florida Recycling Services, Inc. of Delaware (FRS of Delaware) operate waste disposal and recycling services in central Florida.

Note B - Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of FRS of Illinois and its subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.

Unaudited Interim Financial Statements

In the opinion of management, the unaudited consolidated financial statements contain all adjustments necessary to present fairly the consolidated financial position of the Company at March 31, 2004 and 2003 and the consolidated results of operations and cash flows for the three months ended March 31, 2004 and 2003.

Financial statement disclosures required by generally accepted accounting principles have not been included for the unaudited interim consolidated financial information where those disclosures are not significantly different than disclosures presented with the audited consolidated financial statements for the years ended December 31, 2003, 2002 and 2001.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Accounts Receivable

Trade receivables are uncollateralized customer obligations due 30 days from the invoice date.

Trade receivables are stated at the amount billed to the customer. The carrying amount of trade receivables is reduced by an allowance for doubtful accounts that reflects management’s estimate of the amounts that will not be collected. Management reviews individual receivable balances and the Company’s average write offs to estimate the allowance for doubtful accounts. At December 31, 2003, 2002 and 2001, an allowance of $260,179, $379,120 and $363,332, respectively was considered necessary.

Property and Equipment

Property and equipment is stated at cost. Expenditures for maintenance, repairs and minor renewals are charged to expense as incurred. Expenditures for improvements, replacements and major renewals are capitalized.

Depreciation is provided principally by accelerated methods over estimated useful lives of 5 to 39 years.

In January 2003, the Company outsourced the refurbishing of its containers to a related party. Costs associated with the betterments totaling $1,000,000 have been capitalized

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

to machinery and equipment. In prior years, the repair and refurbishing was done internally. No amounts were capitalized in previous years since there was no objective basis to measure the betterments.

Note B - Summary of Significant Accounting Policies (Cont’d)

Goodwill and Other Intangible Assets

Goodwill, representing the aggregate excess cost of companies acquired over the fair value of their net assets at dates of acquisition, was being amortized by the straight-line method over a period of 15 years for the year ended December 31, 2001.

In June 2001, Statement of Financial Accounting Standards (SFAS) No. 142 was issued to address the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but rather be tested at least annually for impairment. The Company adopted SFAS No. 142 as of January 1, 2002. Upon adoption of SFAS 142, the Company assigned approximately $407,000 of previously reported goodwill to contract acquisition costs.

Contract acquisition costs are being amortized over their estimated remaining useful lives of approximately 8 years. Estimated amortization expense for each year is $84,014 through December 31, 2007 and $59,151 for 2008.

On January 1, 2002, goodwill amounting to $174,489 was not subject to further amortization as a result of SFAS No. 142. The Company conducted its initial impairment test in 2002, with no reduction of recorded goodwill resulting from the test. A reconciliation adjusting comparative net earnings and earnings per share for the year ended December 31, 2001, to show the effect of amortizing the contract acquisition costs and no longer amortizing goodwill, follows:

	2001
Reported net loss	$	(7,185,745	)
Adjustments:
Goodwill amortization		43,334
Contract acquisition costs amortization		(30,334	)
Adjusted net loss	$	(7,172,745	)
Basic earnings per share:
Reported net earnings	$	(71,857.45	)
Effect of amortization changes		130.00
Adjusted net loss per share	$	(71,727.45	)

Note B - Summary of Significant Accounting Policies (Cont’d)

Impairment of Long-Lived Assets

In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, property and equipment and amortizable intangibles are reviewed for

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable from estimated future undiscounted cash flows, excluding interest charges. Impairment losses are measured as the amount by which the carrying amount of the assets exceed their fair value.

Fair Value of Financial Instruments

SFAS No. 107 requires disclosures about the fair value for all financial instruments, whether or not recognized, for financial statement purposes. Disclosures about fair value of financial instruments are based on pertinent information available to management as of December 31, 2003, 2002 and 2001. Accordingly, the estimates presented in these statements are not necessarily indicative of the amounts that could be realized on disposition of the financial instruments.

Management estimates the fair value of (i) receivables, advances to related parties, accounts payable, accrued expenses and notes payable to approximate carrying value due to short maturity of these instruments; and (ii) borrowings under the long-term debt approximates carrying value because the most significant portion of these borrowings accrues interest at a floating interest rate based on the market.

The Company’s remaining assets and liabilities, which are not considered financial instruments, have not been valued differently than customary with historical cost accounting.

Per Share Data

Net earnings per share (EPS) are computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. Weighted average shares outstanding amounted to 100 shares in the years ended December 31, 2003, 2002 and 2001.

Income Taxes

FRS of Illinois, with the consent of its shareholder, has elected to be taxed as an S corporation for Federal and state income tax purposes. The shareholder of an S corporation includes his share of the company’s income or loss on his individual income tax returns. Therefore, no provision or liability for federal or state income taxes has been made in the 2003, 2002 and 2001 financial statements for FRS of Illinois net income / (loss) of approximately $673,000, $(480,000) and $(6,966,000), respectively.

FRS of Delaware provides for federal and state taxes currently due plus deferred taxes, if any, arising from temporary differences between income for financial reporting and income tax purposes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income.

Note B - Summary of Significant Accounting Policies (Cont’d)

Advertising

Advertising costs are expensed when incurred. Advertising expense for the years ended December 31, 2003, 2002 and 2001 was $79,000, $73,300 and $65,046, respectively.

Estimates and Assumptions

The presentation 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note C - Note Payable - Bank

The Company has a $12,000,000 commitment of which $9,610,000 (unaudited), $10,000,000, $5,700,000 (unaudited), and $4,500,000 is drawn at March 31, 2004, December 31, 2003, March 31, 2003, and December 31, 2002, respectively. The note, which is due June 2004, bears interest at the banks prime rate (effective rate of 4% in 2004 (unaudited), 3.8% in 2003 and 5% in 2002). Interest is payable monthly. The note is collateralized by a personal guarantee of the Company’s shareholder.

Note D - Long-Term Debt

     Long-term debt consists of the following:

	March 31, (unaudited)				December 31,
	2004		2003		2003		2002		2001
The Company has a $3,000,000 commitment that bears interest at the bank’s prime rate (effective rate of 4% in 2004 and 2003). The note is payable in monthly installments of $50,000 plus interest through January 2009 and is collateralized by a personal guarantee of the Company’s shareholder.	$	2,950,000	$	3,000,000	$	3,000,000	$	—	$	—
Property note - payable in monthly installments of $5,065 including interest at 8%, due February 2015. Collateralized by land and building with a cost of $835,000.		—		—		—		—		490,280
Equipment notes - payable in monthly installments aggregating $869,000 and $795,000 as of March 31,2004 and 2003 (unaudited), respectively, and $869,540, $777,591 and $803,579 as of December 31 2003, 2002 and 2001, respectively, including interest at rates ranging LIBOR plus 2% to 9.78% (effective rate of 5.9% and 5.7% for the three months ended March 31, 2004 and 2003 (unaudited), respectively, and 5.68%, 6.7% and 7.62% in 2003, 2002 and 2001, respectively) due at various dates through 2008. Collateralized by equipment with a cost of approximately $38,000,000 and $35,000,000 as of March 31, 2004 and 2003 (unaudited), respectively, and $37,719,523, $34,723,265 and $28,695,553 as of December 31, 2003, 2002 and 2001, respectively and personal guarantees of the Company’s shareholder.		17,555,925		19,794,784		19,588,364		21,850,673		27,891,166

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

	March 31, (unaudited)				December 31,
	2004		2003		2003		2002		2001
Equipment note - due March 2004. Interest is payable monthly at 4%. The note is collateralized by a personal guarantee of the Company’s shareholder. The Company is presently negotiating the extension of this loan.		1,000,000		—		1,000,000		—		—
Unsecured note payable to shareholder, interest payable monthly at 8%.		—		—		—		—		3,163,150
Note payable - interest payable monthly at 8.0%, due April 2004. The note is collateralized by a personal guarantee of the Company’s shareholder.		4,256,644		—		1,400,000		1,400,000		1,400,000
Note payable - interest payable monthly at 5.75%, due on demand. The note is collateralized by a personal guarantee of the Company’s shareholder.		1,400,000		1,400,000		—		—		3,200,000
		27,162,569		24,194,784		24,988,364		23,250,673		36,144,596
Less - current maturities		27,162,569		8,344,231		12,928,121		8,198,916		10,687,496
	$	—	$	15,850,553	$	12,060,243	$	15,051,757	$	25,457,100

Maturities of long-term debt in the five years subsequent to 2003 are:

Year	Amount
2004	$	12,928,121
2005		6,192,013
2006		3,239,708
2007		1,472,491
2008		1,106,031
Thereafter		50,000
	$	24,988,364

Note E - Retirement Plan

The Company has a qualified cash or deferred compensation plan under Section 401(k) of the Internal Revenue Code. Under the plan, employees who meet minimum eligibility requirements may elect to defer portions of their salary, subject to Internal Revenue

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Service limits. Employer contributions are discretionary. There was no profit sharing expense during 2003, 2002 and 2001.

Note F - Leases

FRS of Illinois leases a recycling facility and warehouses under the terms of operating leases. The leases, which expire in September 2006 provide for minimum monthly rentals aggregating approximately $7,420 plus operating expenses. In addition, the Company rents office space for approximately $7,800 per month under a month-to-month lease. Minimum future rents under these leases are:

Year	Amount
2004	$	89,040
2005		89,040
2006		80,560
Total	$	258,640

Rent expense for the years ended December 31, 2003, 2002 and 2001 was $169,543, $268,108 and $311,422, respectively.

Note G - Income Taxes

Income tax expense (benefit) is comprised of the following:

	Years Ended December 31,
	2003		2002		2001
Current federal income tax	$	—	$	—	$	—
Deferred federal income tax		34,900		—		(150,000	)
Income tax expense (benefit)	$	34,900	$	—	$	(150,000	)

Income tax expense (benefit), as a percentage of pretax earnings, is as follows:

	As a Percent of Pretax Earnings
	2003			2002			2001
Combined statutory federal income tax rate		39.0	%		39.0	%		39.0	%

At December 31, 2003, FRS of Delaware has available net operating loss carryforwards that may be used to reduce future taxable income amounting to $1,580,000. The carryforwards expire in the years 2013 - 2017. A deferred tax asset, amounting to $601,100, $636,000 and $636,000 at December 31 2003, 2002 and 2001, respectively, was recorded relating to the future tax benefit of the net operating loss carryforwards. The Company has determined that it is more likely than not that the future tax benefit will be fully utilized; therefore no valuation allowance has been established related to the deferred tax asset.

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note H - Related Party Transactions

The Company has transactions with related parties as follows:

	2003		2002		2001
Management fee expense	$	3,062,000	$	2,720,000	$	2,972,500
Insurance expense		852,000		2,233,600		2,041,000
Capitalized container refurbishing		1,000,000		—		—
Container repair expense		323,000		—		—
Truck and truck parts		980,600		1,064,400		505,000

Balances due to and from related parties at December 31, were as follows:

	2003		2002		2001
Accounts payable and accrued expenses	$	1,911,600	$	556,000	$	949,500
Other receivables		38,800		241,700		—

Note I - Concentrations of Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company places its cash with high credit quality financial institutions. Concentrations of credit risk with respect to accounts receivable are limited due to the Company’s large number of customers.

Note J - Cash Flow Information

Non-cash investing and financing activities:

During 2003, the Company distributed land and building to the Company’s shareholders with a book value of $427,023.

During 2002, the Company distributed land and building subject to the related debt to its sole shareholder as partial payment on the note payable to the shareholder. The Company’s shareholder contributed the remaining balance on the note payable to additional paid-in capital. No additional shares were issued to the shareholder for the capital contribution. The additional paid-in capital contributed by the shareholder is as follows:

Loan payable to shareholder				$	3,163,150
Less - property distributions
Net building	$	704,932
Land		83,500
Debt assumed		(479,320	)		(309,112	)
Loan contributed to additional paid-in capital					2,854,038
Cash contributions					2,100,000
Total				$	4,954,038

FLORIDA RECYCLING SERVICES, INC. OF ILLINOIS AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In 2001, the shareholder contributed equipment (containers) valued at $29,400 to additional paid-in capital.

     Note K - Subsequent Event (unaudited)

In April 2004, the Company signed and closed a stock sale purchase agreement under which all of the Company’s outstanding shares were sold. The agreement provides that the Company’s outstanding debt is paid by the sales proceeds. The Company will become a wholly owned subsidiary of the purchaser.