ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED. — Annual Report 2004

Aug 30, 2004

ACCOMPANYING COMMENTS TO ASX APPENDIX 4E RELEASE: 31 August 2004

The directors very much regret to report that the company has recorded an operating loss of \$6,436,000 during the financial year ended 30 June 2004. In addition the company has decided to write off the goodwill attributable to the ENERSLUDGETM technology and this has resulted in a net loss for the year of \$7,874,000.

The operating loss was essentially caused by the following:

• losses on some contracts.
• delays in the commencement, not caused by ESI, of contracts budgeted to commence this year.

The losses resulted from inadequate tracking of design changes which caused variations to contracts which were not submitted on timely basis as required by the contracts. The problem was exacerbated by shortcomings in overall project management disciplines and controls. The problems arose because our systems were not appropriately adapted to cater for the substantially increased volume of work undertaken by the company.

A lot of effort has gone into developing procedures and disciplines to ensure the problems experienced by the company are avoided or at least minimised in the future. The reality is that in the contracting business these risks cannot be completely eliminated but the Board believes that the new procedures and disciplines in place will keep these risks to a minimum. The company's procedures will be kept under constant review.

Of the contracts which have created the problems, three are substantially completed and the others should be completed by the end of November this year. The losses include provision for the estimated cost of completion.

The company currently has approximately \$58M of other work in hand. The benefits of the new procedures and disciplines are already evident in projects recently commenced. This gives the Board confidence that the application of appropriate procedures and disciplines should ensure that all new contracts will deliver profits. Future profitability will depend upon winning further work, about which the company is optimistic. The company is reviewing all operating costs and will embark on a cost reduction program where appropriate.

The company has written off the carrying value of the ENERSLUDGE ^$TM$ technology because the breakthrough of that technology is slower than we had anticipated. We had hoped that regulations forbidding the disposal of sludge in environmentally unfriendly ways e.g. dumping to landfill. spreading to land and discharge to marine environment would be promulgated more quickly than has happened particularly in Europe. ENERSLUDGE^TM is not competitive when compared with disposal methods such as landfill or ocean outfall. When these methods of disposal are forbidden, $ENERSLUDGE^{TM}$ will become very competitive. For the time being the company has reduced expenditure on ENERSLUDGE^TM marketing, although we are still pursuing a couple of specific opportunities.

Although the losses have been significant and have substantially depleted our cash reserves, your directors still believe that the company can return to profit in the current financial year.

The company remains cash positive at the date of this report and has no borrowings. The company expects to realise significant cash, in the short term, from claims recorded, and which are currently being finalised with clients.

Due to ill health the Managing Director Mr Denis Glennon has stepped down. The Board is currently interviewing potential replacements and hopes to make an appointment shortly. Director, Mr Dennis O'Neill is acting as CEO in the interim.

For more information, please contact Mr Dennis O'Neill on Tel: (08) 94733321.

Preliminary Final Report of Environmental Solutions International Ltd for the Financial Year Ended 30 June 2004

(ACN 009 120 405)

This Preliminary Final Report is provided to the Australian Stock Exchange (ASX) under ASX Listing Rule 4.3A.

Current Reporting Period:	Financial Year ending 30 June 2004
Previous Corresponding Period:	Financial Year ending 30 June 2003

Revenue and Net Profit/(Loss)

	Percentage
		Change %	Amount \$'000
Revenue from ordinary activities	Up	172%	To $40,643$
(Loss) from ordinary activities after tax attributable to members	Up	174%	To $(7, 874)$
Net (loss) attributable to members	Up	174%	To $(7, 874)$

Dividends (Distributions)

	Amount per security	Franked amount per security
Final dividend	0¢	0¢.
Interim dividend	0é	0¢
Record date for determining entitlements to the dividend:

• final dividend
• interim dividend $\bullet$

Brief Explanation of Revenue, Net Profit/(Loss) and Dividends (Distributions)

REFER ACCOMPANYING COMMENTS

Statement of Financial Performance For the Financial Year Ended 30 June 2004

	Note	2004 \$'000	2003 \$'000
Revenue from ordinary activities
Share of joint ventures rendering of services Changes in inventories of finished goods and work in progress		40,643	14,921
Raw materials and subcontractor expenses Employee benefits expense Depreciation and amortisation expense		39,402 5,089 349	11,104 4,484 336
Borrowing costs Occupancy expenses Insurance expenses Intangible assets recoverable amount written down		4 283 377 1,438	4 251 295
Other expenses Profit!(Loss) From Ordinary Activities Before Income Tax Expensel(Benefit) Income tax expense/(benefit) relating to ordinary		1,575 (7, 874)	1,315 (2,868)
activities Profiti(Loss) From Ordinary Activities After Related Income Tax Expensel(Benefit)		(7, 874)	(2,868)
Profit/(loss) from extraordinary items after related income tax expense/(benefit)
Net Profiti(Loss)		(7, 874)	(2,868)
Total Revenue, Expense and Valuation Adjustments Attributable to Members of the Parent Entity Recognised Directly in Equity		(7, 874)	(2,868)
Total Changes In Equity Other Than Those Resulting From Transactions With Owners As Owners		(7, 874)	(2,868)

Statement of Financial Position As at 30 June 2004

	Note	2004 \$'000	2003 \$'000
Current Assets
Cash		3,463	6,210
Receivables		7,707	4,076
Inventories
Other financial assets
Current tax assets
Other - Contract Work in progress		2,672	2,618
Total Current Assets		13,842	12,904
Non-Current Assets
Receivables		154	183
Inventories
Investments accounted for using the equity method
Other financial assets
Property, plant and equipment		635	578
Intangibles		150	1,654
Deferred tax assets Other
Total Non-Current Assets		939	2,415
Total Assets		14,781	15,319
Current Liabilities
Payables		11,876	5,189
Interest-bearing liabilities		29	7
Current tax liabilities
Provisions		1,205	625
Other
Total Current Liabilities		13,110	5,821
Non-Current Liabilities
Payables
Interest-bearing liabilities		50	3
Deferred tax liabilities
Provisions
Other
Total Non-Current Liabilities		50	3
Total Liabilities		13,160	5,824
Net Assets		1,621	9,495
Equity
Contributed equity		23,254	23,254
Reserves		3,176	3,176
(Accumulated Losses)		(24, 809)	(16, 935)
Total Equity		1,621	9,495

Statement of Cash Flows For the Financial Year Ended 30 June 2004

	Note	2004 \$'000	2003 \$'000
Cash Flows From Operating Activities
Receipts from customers		42,629	20,022
Payments to suppliers and employees		(45,314)	(22,390)
Dividends received
Interest and bill discounts received		180	316
Interest and other costs of finance paid
Income tax paid
Extraordinary item [describe]
Net cash provided by/(used in) operating activities		(2,505)	(2,052)
Cash Flows From Investing Activities
Payment for investment securities
Proceeds on sale of investment securities
Proceeds from repayment of related party receivables
Amounts advanced to related parties
Payment for property, plant and equipment		(340)	(168)
Proceeds from sale of property, plant and equipment
Payment for intangible assets
Research and development costs paid
Proceeds from sale of businesses
Payment for businesses
Other
Net cash provided by/(used in) investing activities		(340)	(168)
Cash Flows From Financing Activities
Proceeds from issues of equity securities			7
Payment for share issue costs
Payment for share buy-back
Proceeds from issue of debt securities
Payment for debt issue costs
Proceeds from borrowings		69
Repayment of borrowings			(23)
Dividends paid			(231)
Other		29	35
Net cash provided by/(used in) financing activities		98	(212)
Net Increasel(Decrease) In Cash Held		(2,747)	(2, 432)
Cash At The Beginning Of The Financial Year		6,210	8,642
Effects of exchange rate changes on the balance of cash held in foreign currencies
Cash At The End Of The Financial Year		3,463	6,210

Note	Contents
1	Basis of Preparation
$\overline{2}$	Profit/(Loss) from Ordinary Activities
3	Commentary on Results
4	Fundamental Errors
5	Extraordinary Items
6	Sales of Assets
7	Retained Profits
8	Notes to the Statement of Cash Flows
9	Details relating to Dividends (Distributions)
10	Earnings Per Share
$\mathbf{1}$	Net Tangible Assets per Security
12	Details of Entities Over Which Control Has Been Gained or Lost
13	Details of Associates and Joint Venture Entities
14	Contingent Liabilities and Contingent Liabilities
15	Segment Information
16	Discontinuing Operations
17	Subsequent Events
18	Other Significant Information
19	Information on Audit or Review

1. Basis of Preparation

This preliminary final report has been prepared in accordance with ASX Listing Ruk 4.3A and the disclosure requirements of ASX Appendix 4E.

The accounting policies adopted in the preparation of the preliminary final report are consistent with those adopted and disclosed in the 2003 annual financial report.

The consolidated entity has incurred a loss in the current year of \$7,874,000. The net asset position has decreased to \$1.62M as of 30 June 2004. Despite this the directors believe that based on the company continuing to win its usual share of water and wastewater contracts. accounting on a "going concern" basis is still appropriate because:

• the company remains cash positive at the date of this report and has no borrowings $\bullet$
• it is proposed to cut the company's operating costs ٠
• the directors believe the company will return to profitability in the current financial year ٠ based on budget forecasts
• steps have been taken and are continuing to be taken to implement appropriate procedures and contract management disciplines to avoid a repeat of the problems experienced in the past year
• the company expects to realise significant cash, in the short term, from claims recorded, which are currently being finalised with clients.

Details of changes in accounting policies:

$\overline{2}$ .

None
		2004 \$'000	2003 \$'000
	Profit/(Loss) From Ordinary Activities
	Profit/(loss) from ordinary activities before income tax includes the following items of revenue and expense:
(a)	Revenue
	Sales Revenne
	Rendering of services	38,640	14,605
	Share of Joint Venture Rendering of Services	1,820
		40,460	14,605
	Interest Revenue
	Other Entities	183	316
	Total Revenue from ordinary activities	40,643	14,921
(b)	Expenses
	Depreciation of non-current assets	283	271
	Amortisation of non-current assets	66	66
	Intangible asset recoverable amount written down	1,438

2. Profit/(Loss) From Ordinary Activities (continued)

Revision of Accounting Estimates $(c)$

Details of the nature and amount of revisions of accounting estimates:

None

3. Commentary on Results

REFER TO ACCOMPANYING REPORT

4. Fundamental Errors

NONE

		2004 \$'000	2003 \$'000
5. Extraordinary Items
Profits
Applicable income tax
Losses
Applicable income tax
	Total Extraordinary Items
Applicable income tax	Extraordinary items before tax
		NIL	NIL

6. Sales of Assets

Sales of assets in the ordinary course of business have given rise to the following profits and losses:

Net Profits

Receivables Investments Property, plant and equipment Intangibles

	NIL.	NIL
Net Losses
Receivables Investments Property, plant and equipment Intangibles
	NIL.	NIL
7. Accumulated Losses
Balance at beginning of financial year Net profit/(loss)	(16, 935) (7,874)	(14,067) (2,868)

Final Dividend provided $\overline{a}$ $\overline{a}$ Interim Dividend paid $\overline{a}$ $\overline{a}$ $(16,935)$ Balance at end of financial year $(24,809)$

		2004 \$'000	2003 \$'000
8.	Notes to the Statement of Cash Flows
	(a) Reconciliation of Cash
	For the purposes of the statement of cash flows, cash includes cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows:
	Cash on hand and at bank	3,463	6,210
		3,463	6,210
	(b) Businesses Acquired
	During the financial year, no businesses were acquired.
	Consideration
	Cash Ordinary Shares
	Fair Value of Net Assets Acquired
	Current assets:
	Non-current assets:
	Current liabilities:
	Non-current liabilities:
	Net assets acquired
	Goodwill on acquisition
	Net Cash Outflow on Acquisition
	Cash consideration
	Less cash balances acquired

1. Notes to the Statement of Cash Flows (continued)

(c) Non-Cash Financing and Investing Activities

NONE
	2004 \$'000	2003 \$'000
(d) Financing Facilities
Unsecured bank overdraft facility, reviewed annually and payable at call: Amount used Amount unused
	NIL	NIL.
Unsecured bill acceptance facility, reviewed annually: Amount used Amount unused
	NIL	NIL
Secured bank guarantee facility:
Amount used Amount unused	13,469	8,111 2,889
	13,469	11,000

(e) Cash Balances Not Available for Use

Cash includes \$676,000 being ESI's 50% share of the ESI Tenix Joint Venture cash balance at 30 June 2004, and \$387,000 being funds on deposit as security for the issue of a bank guarantee. These funds are not available for the use of the company.

			2004 \$'000	2003 \$'000
8.		Notes to the Statement of Cash Flows (continued)
		(f) Reconciliation of Profit(Loss) From Ordinary Activities After Related Income Tax to Net Cash Flows From Operating Activities
	income tax	Profit (Loss) from ordinary activities after related (Profit)/loss on sale of non-current assets Depreciation and amortisation of non-current	(7,874)	(2,868)
	assets		349.	336.
		Recoverable amount written down Changes in net assets and liabilities: (Increase)/decrease in assets:	1,438
		Current receivables	(2,998)	4,130
		Current inventories	(54)
		Other current assets Increase/(decrease) in liabilities:		(2,481)
		Current trade payables	6,054	(1,400)
		Other current liabilities	580	231
		Net cash from operating activities	(2,505)	(2.052)

9. Details Relating to Dividends (Distributions)

		Date dividend paid	Amount per security	Amount per security of foreign sourced dividend
Final dividend	2004
	2003			۰
Interim dividend	2004			۰
	2003
Total	2004
	2003

Total dividend (distribution) per security (interim plus final)

	2004 c	2003
Ordinary securities (each class separately)
Preference securities (each class separately)
Other equity instruments (each class separately)

Interim and final dividend (distribution) on all securities

	2004 Cents	2003 Cents
Ordinary securities (each class separately)	$\overline{\phantom{0}}$
Preference securities (each class separately)
Other equity instruments (each class separately)	۰
Total	-

Any other disclosures in relation to dividends (distributions).

$N/A$

1. Details Relating to Dividends/(Distributions) (continued)

Dividend Reinvestment Plans

The dividend or distribution plans shown below are in operation.

NONE

					The last date(s) for receipt of election notices for the dividend
	or distribution plans

N/A

10. Earnings Per Share

	2004 ¢ per share	2003 $¢$ per share
Basic EPS	(10.21)	(3.72)
Diluted EPS	(10.21)	(3.72)

Basic Earnings per Share

The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:

	2004 \$'000	2003 \$'000
Earnings (a)	(7,874)	(2,868)
	2004 No.	2003 No.
Weighted average number of ordinary shares (b)	77,097,512	77,093,128

10. Earnings Per Share (continued)

(a) Earnings used in the calculation of basic earnings per share reconciles to net profit in the statement of financial performance as follows:

	2004 \$'000	2003 \$'000
Net profit/ $(\text{loss})$	(7,874)	(2,868)
Preference share dividends provided for or paid
Restatement of net profit used in the calculation of basic EPS for the effects of:
Changes in accounting policy adjusted directly against opening retained earnings in accordance with the transitional provisions of Accounting Standards and UIG Consensus Views:
Fundamental errors (note 4)
Earnings used in the calculation of basic EPS	(7.874)	(2.868)

(b) Unlisted employee and ordinary options are considered to be potential ordinary shares and are therefore excluded from the weighted average number of ordinary shares used in the calculation of basic earnings per share. Where dilutive, potential ordinary shares are included in the calculation of diluted earnings per share (refer below).

Diluted Earnings per Share

The earnings and weighted average number of ordinary and potential ordinary shares used in the calculation of diluted earnings per share are as follows:

	2004 \$'000	2003 \$'000
Earnings (a)	(7,874)	(2,868)
	2004 No.	2003 No.
Weighted average number of ordinary shares and potential ordinary shares $(b)$ , $(c)$	77,097,512	77,093,128

10. Earnings Per Share (continued)

(a) Earnings used in the calculation of diluted earnings per share reconciles to net profit in the statement of financial performance as follows:

	2004 \$'000	2003 \$'000
Net $profit/(\text{loss})$	(7, 874)	(2,868)
Restatement of net profit used in the calculation of diluted EPS for the effects of:
Changes in accounting policy adjusted directly against opening retained earnings in accordance with the transitional provisions of Accounting Standards and UIG Consensus Views (note 1):
	(7,874)	(2.868)

(b) Weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share reconciles to the weighted average number of ordinary shares used in the calculation of basic earnings per share as follows:

	2004 No.	2003 No.
Weighted average number of ordinary shares used in the calculation of basic EPS	77,097,512	77,093,128
Unlisted and employee options
Weighted average number of ordinary shares and potential ordinary shares used in the calculation of
diluted EPS	77,097,512	77,093,128

10. Earnings Per Share (continued)

(c) The following potential ordinary shares are not dilutive and are therefore excluded from the weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share:

	2004 No.	2003 No.
Unlisted and employee options	6,374,106	7,060,312
	6,374,106	7,060,312

(d) Weighted average number of converted, lapsed, or cancelled potential ordinary shares used in the calculation of diluted earnings per share:

	2004 No.	2003 No.
Options to purchase shares pursuant to the employee share scheme	$\overline{\phantom{0}}$
	$\sim$

11. Net Tangible Assets Per Security

2004	2003 c т
ക ഔ	0.10

12. Details of Entities Over Which Control Has Been Gained or Lost

Control gained over entities

Net tangible assets per security

Name of entity (or group of entities)	NONE
Date control gained	NONE
		2004 \$'000
Contribution of the controlled entity (or group of entities) to profit/(loss) from ordinary activities during the period, from the date of gaining control.
		2003 \$'000
Net profit/(loss) of the controlled entity (or group of entities) for the whole of the previous corresponding period.

1. Details of Entities Over Which Control Has Been Gained or Lost (continued)

Loss of control of entities

Name of entity (or group of entities) NONE

Date control lost

NONE

	2004 \$'000
Contribution of the controlled entity (or group of entities) to profit/(loss) from ordinary activities during the period, to the date of losing control.
	2003 \$'000
Contribution of the controlled entity (or group of entities) to profit/(loss) from

commonion of the commonent entity (or group or entities) to profit (to
ordinary activities for the whole of the previous corresponding period.

13. Details of Associates and Joint Venture Entities

		Ownership Interest		Contribution to net profit
Name of Entity	2004 %	2003 ℅	2004 \$3000	2003 \$000
Associates
Joint Venture Entities
Aggregate Share of Profits/ (Losses)

14. Contingent Liabilities and Contingent Assets

Contingent liabilities

The Company and its subsidiaries have no contingent liability for termination benefits under service agreements with Directors or persons who take part in the management of the Company.

The Company has issued bank guarantees to customers to the value of \$13,469,480. These guarantees have been issued to secure the company's obligations under various contracts entered into by the company in the normal course of the business.

Contingent assets

NONE.

15. Segment Information

The consolidated entity operates predominantly in Australia and in the Water and Wastewater industry. The nature of this activity comprises the design, construction, commissioning and operation of Water and Wastewater Treatment Plants. These activities are generally undertaken in accordance with contracts awarded to the entity by its customers.

16. Discontinuing Operations

NONE.

17. Subsequent Events

There have not been any matters or circumstances that have arisen since the end of the financial year that have significantly affected, or may significantly affect the operations of the economic entity, the results of these operations, or the state of affairs of the economic entity in financial years subsequent to this financial period.

18. Other Significant Information

NONE

19. Information on Audit or Review

This preliminary final report is based on accounts to which one of the following applies.

• $\Box$ The accounts have been audited. $\Box$ The accounts have been subject to review. $\overline{\boxtimes}$
• The accounts are in the process of being $\Box$ audited or subject to review.

The accounts have not vet been audited or reviewed.

Description of likely dispute or qualification if the accounts have not yet been audited or subject to review or are in the process of being audited or subjected to review.

NONE

Description of dispute or qualification if the accounts have been audited or subjected to review.

NONE