ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED. — Interim / Quarterly Report 2004

Feb 16, 2004

ENVIRONMENTAL SOLUTIONS INTERNATIONAL LTD $(A.C.N. 009 120 405)$

FINANCIAL REPORT

FOR THE HALF-YEAR ENDED

31 DECEMBER 2003

ENVIRONMENTAL SOLUTIONS INTERNATIONAL LTD A.C.N. 009 120 405

FINANCIAL REPORT

FOR THE HALF-YEAR ENDED

31 DECEMBER 2003

CONTENTS

Directors' Report	4
Independent Review Report	6
Directors' Declaration	7
Statement of Financial Performance	8
Statement of Financial Position	9
Statement of Cashflows	10
Notes to the Financial Statements	Н

CORPORATE PROFILE

Directors

T.E. O'CONNOR QC - Chairman D.P. GLENNON AO, BA (Hons), MSc, FAICD - Managing Director D.H. O'NEILL BSc (Hons) - Mech Eng J.B.H. CHEAK B Econ (UWA)

Company Secretary

P.A. Hopps C.A., A.S.I.A.

Registered Office

21 Teddington Road PO Box 116 BURSWOOD WA 6100 Telephone: 08-9470 4004 Facsimile: 08-9355 0998

Auditors

Deloitte Touche Tohmatsu Level 16, Central Park 152 - 158 St Georges Terrace PERTH WA 6000

Solicitors

Fearis Salter Power Shervington 52 Ord Street WEST PERTH WA 6005

Share Registry

Security Transfer Registrars Pty Ltd 770 Canning Highway, P O Box 535 APPLECROSS WA 6153 Telephone: 08-9315 0933 Facs imile: 08-9315 2233

Bankers

Commonwealth Bank of Australia 150 St Georges Terrace PERTH WA 6000

Stock Exchange

The Company's Home Exchange Australian Stock Exchange Limited 2 The Esplanade PERTH WA 6000

ENVIRONMENTAL SOLUTIONS INTERNATIONAL LTD (A.C.N. 009 120 405)

DIRECTORS' REPORT

The Directors submit herewith the financial report for the half year ended 31 December 2003. In order to comply with the provisions of the Corporations Act 2001, the Directors report as follows:

Directors

The names and particulars of the Directors of the company in office during or since the end of the half year are:

Terence Edward O'Connor OC Denis Patrick Glennon, AOB.A. (Hons), M.Sc., FAICD Dennis Hamilton O'Neill, B.Sc. (Hons) - Mech. Eng John Boon Heng Cheak, B. Econ. (UWA)

Review of Operations

Environmental Solutions International Limited (ESI) recorded a disappointing loss of \$1.8M in the half year ended 31 December 2003.

The company has experienced significant recent growth which has meant several major wastewater and potable water treatment contracts were commenced almost simultaneously across Australia. This growth has come at the same time as a significant tightening in the market for engineers and other technical people particularly with water and wastewater treatment skills. The inability to recruit sufficiently experienced personnel placed major strains on our existing staff, resulting in difficulties in some areas of project delivery and consequent cost overruns.

A thorough review of all major contracts has been undertaken at the half-year and all known and anticipated cost overruns have been brought to account in the above result.

The company has recruited and continues to recruit new staff and believes that the current and projected workload can now be delivered satisfactorily and profitably.

On the upside the half-yearly result does not include a number of variation claims which are currently being pursued with clients. The second half is projected to recover some of the losses but at this stage we do not believe the recovery will be sufficient for the year as a whole to be profitable.

Importantly, the company is finalising the delivery of two potable treatment plants which, although they presented their own set of technical and project delivery difficulties are now essentially delivered to the satisfaction of the clients concerned and are operating to contractual specifications. The company believes that there are significant opportunities for it to develop in the potable water business.

$Enersludge^{IM}$

As previously advised, the Board is pursuing the option of finding a Strategic Partner to participate in the final steps of the commercialisation of the technology. ESI and its UK-based consultants have identified several companies who meet the criteria set by ESI.

Preliminary discussions have commenced and negotiations will be advanced during meetings in Europe in the next 3 months.

Outlook

Whilst Directors are very disappointed with the first half results they believe that the above mentioned issues have been addressed. They are encouraged by the company's still strong order book which currently stands at approximately \$70M with an additional \$7M being at "preferred tenderer" stage. The company remains debt free and continues to win new work.

Rounding off of Amounts

The company is a company of the kind referred to in ASIC class Order 98/0100, dated 10 July 1998, and in accordance with that Class Order amounts in the financial report have been rounded off to the nearest thousand dollars.

Signed in accordance with a resolution of the directors.

On behalf of the Board

D P Glennon AO Managing Director

Perth 16 February 2004

INDEPENDENT REVIEW REPORT TO THE MEMBERS OF ENVIRONMENTAL SOLUTIONS INTERNATIONAL LTD

Scope

We have reviewed the financial report of Environmental Solutions International Ltd for the half-year ended 31 December 2003 as set out on pages 7 to 11. The financial report includes the consolidated financial statements of the consolidated entity comprising the disclosing entity and the entities it controlled at the end of the half-year or from time to time during the half year. The disclosing entity's directors are responsible for the financial report. We have performed an independent review of the financial report in order to state whether, on the basis of the procedures described, anything has come to our attention that would indicate that the financial report is not presented fairly in accordance with Accounting Standard AASB 1029 "Interim Financial Reporting" and other mandatory professional reporting requirements in Australia and statutory requirements, so as to present a view which is consistent with our understanding of the consolidated ent4ity's financial position, and performance as represented by the results of its operations an dits cash flows, and in order for the disclosing entity to lodge the financial report with the Australian Securities and Investments Commission.

Our review has been conducted in accordance with Australian Auditing Standards applicable to review engagements. A review is limited primarily to inquiries of the entity's personnel and analytical procedures applied to the financial data. These procedures do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

Statement

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the halfyear financial report of Environmental Solutions International Ltd is not in accordance with:

• $(a)$ the Corporations Act 2001, including:
• giving a true and fair view of the consolidated entity's financial position as at 31 December 2003 and of i. its performance for the half-year ended on that date; and
• ii. complying with Accounting Standard AASB 1029 "Interim Financial Reporting" and the Corporations Regulations 2001; and
• $(b)$ other mandatory professional reporting requirements in Australia.

DELOITTE TOUCHE TOHMATSU

P Melver $p_{\alpha rtnor}$ Chartered Accountants Perth, 16 February 2004

The liability of Deloitte Touche Tohmatsu is limited by, and to the extent of, the Accountants' Scheme under the Professional Standards Act 1994 (NSW).

DIRECTORS' DECLARATION FOR THE HALF YEAR ENDED 31 DECEMBER 2003

The Directors declare that:

• The attached financial statements and notes thereto comply with Accounting Standards; $(a)$
• The attached financial statements and notes thereto give a true and fair view of the financial position and $(b)$ performance of the consolidated entity;
• $(c)$ In the Directors' opinion the attached financial statements and notes thereto are in accordance with the Corporations Act 2001; and
• $(d)$ In the Directors' opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.

Signed in accordance with a resolution of the Directors made pursuant to section 303(5) of the Corporations Act 2001.

On behalf of the Board

D P Glennon AO Managing Director

Perth 16 February 2004

CONSOLIDATED STATEMENT OF FINANCIAL PERFORMANCE FOR THE HALF-YEAR ENDED 31 DECEMBER 2003

	Note		Consolidated
		Half-year ended 31 Dec 2003 $$*000$	Half-year ended 31 Dec 2002 \$'000
Revenue from ordinary activities		17,701	7,794
Material and Subcontractor expenses		(15,804)	(5,922)
Employee benefits expense		(2,396)	(2,125)
Depreciation and amortisation expense		(169)	(170)
Borrowing costs		(2)	(2)
Occupancy expense		(142)	(122)
Insurance expense		(194)	(144)
Other expenses from ordinary activities		(800)	(481)
Profit/(Loss) From Ordinary Activities Before Income Tax Expense		(1,806)	(1,172)
Income tax expense relating to ordinary activities
Profit/(Loss) From Ordinary Activities After Related Income Tax Expense Total Revenue, Expense and Valuation Adjustments		(1,806)	(1,172)
Attributable to Members of the Parent Entity Recognised Directly in Equity		(1,806)	(1,172)
Total Changes in Equity Other than those Resulting from Transactions with Owners as Owners		(1,806)	(1,172)
Earnings Per Share – Basic (cents per share)		(2.34e)	(1.52¢)
- Diluted (cents per share)		(2.34e)	(1.52¢)

Notes to the financial statements are included on page 11.

CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 31 December 2003

Current Assets Cash Assets Receivables	31 Dec 2003 \$'000 4,841 5,806 2,426 13,073	30 June 2003 \$7000 6,210 4,076
Other		2,618
Total Current Assets		12,904
Non-Current Assets
Receivables	170	183
Property, Plant and Equipment	625	578
Intangible Assets	1,620	1,654
Total Non-Current Assets	2,415	2,415
Total Assets	15,488	15,319
Current Liabilities
Payables	7,083	5,189
Interest Bearing Liabilities	19	$\boldsymbol{\tau}$
Provisions	660	625
Total Current Liabilities	7,762	5,821
Non-Current Liabilities
Interest Bearing Liabilities	37	3
Total Non-Current Liabilities	37	3
Total Liabilities	7,799	5,824
Net Assets	7,689	9,495
Equity
Contributed Equity	23,254	23,254
Reserves	3,176	3,176
Accumulated Losses	(18, 741)	(16,935)
Total Equity	7,689	9,495

Notes to the financial statements are included on page 11.

CONSOLIDATED STATEMENT OF CASH FLOWS For the half year ended 31 December 2003

	Consolidated
	Inflow (Outflow)
	Half-year	Half-year
	ended	ended
	31 Dec 2003	31 Dec2002
	$$*000$	\$'000
Cash Flows From (Used In) Operating Activities
Receipts from customers	16,418	12,466
Payments to suppliers and employees	(17,760)	(14,055)
Interest Received	99	176
Interest Paid	(2)	(2)
Net Cash Flow From (Used In) Operating Activities	(1,245)	(1,415)
Cash Flows from (Used in) Investing Activities
Payments for property, plant and equipment	(183)	(102)
Net Cash (Used In) Investing Activities	(183)	(102)
Cash Flows from Financing Activities
Proceeds from issue of equity securities		7
Proceeds (Repayment) from borrowings	46	(12)
Employee Share Plan Loans (advanced) repaid	13	35
Net Cash from (Used in) Financing Activities	59.
		30
Net Increase (Decrease) in Cash Held	(1,369)	(1,487)
Cash held at the beginning of the half year	6,210	8,642
Cash at the End of the Half Year	4.841	7,155

Notes to the financial statements are included on page 11.

NOTES TO THE FINANCIAL STATEMENTS

1. Basis of Preparation

This half year financial report is a general purpose financial report which has been prepared in accordance with the Corporations Act 2001, and AASB 1029 "Interim Financial Reporting". The half year financial report does not include notes of the type normally included in the annual financial report and should be read in conjunction with the 2003 annual financial report.

Significant Accounting Policies

Accounting policies are selected and applied in a manner which ensures that the resulting financial information satisfies the concepts of relevance and reliability, thereby ensuring that the substance of the underlying transactions or other events is reported.

The accounting policies adopted in the preparation of the half-year financial report are consistent with those adopted and disclosed in the 30 June 2003 annual financial report.

2 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 \$10,270,871. These guarantees have been issued to secure the company's obligations under various contracts entered into by the company in the normal course of its business.

3 Subsequent Events

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

4 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.