ENVIRONMENTAL CLEAN TECHNOLOGIES LIMITED. — Annual Report 2003

Sep 2, 2003

ACCOMPANYING COMMENTS TO ASX APPENDIX 4E RELEASE: 3 September 2003

Overview

As previously foreshadowed to the market, Environmental Solutions International Limited today announces a net loss after tax of \$2.86 million in the year ended 30 June 2003. The loss is due to contract completion in mid 2002, delays in the award of new contracts and marketing expenses associated with commercialising the $ENERSLUDGE^{\text{TM}}$ technology.

Efforts to commercialise and market the ENERSLUDGE^TM technology cost \$1.6 million and these were fully expensed in the year.

Although disappointed with the financial result for 2002/2003, Directors are confident the coming years will benefit from recent tendering successes. The order book is currently at a record \$65 million and the company is currently in final negotiations on additional contracts. The second half of the 03/04 year should see the benefit of the tendering successes achieved in the second half of $02/03$ .

Water and Wastewater

Of significance in the water area was the construction and commissioning of three water treatment plants using ultra filtration membranes, for Douglas Shire Council, and the award of two water treatment contracts at Longford, Tasmania and Mildura, Victoria.

In July 2003, in joint venture with Tenix Alliance, the company was awarded the contract by Bega Valley Shire Council, (NSW) for the upgrading of 5 sewerage treatment plants and the construction of 5 new sewerage schemes. The overall value of the contract is \$58 million plus operations and maintenance of all plants over a 15 year period. This is an important long-term contract for ESI.

New wastewater contracts were awarded at Port Pirie (SA), Dalyellup (WA), Canungra (Qld), Bolivar (SA), Colac (Vic) and Yarra Valley (Vic).

With the current record order book and several other projects where ESI enjoys "preferred tenderer" status, ESI's water/wastewater business is in a very strong position to go forward.

ENERSLUDGE^TM

The commercialisation of ENERSLUDGE^TM technology has been slower than the company and the market anticipated. Whilst the phasing out of sludge disposal to landfills is moving ahead in the European Union (EU), the reduction in land application as fertilizer is progressing at a slower rate. However, Holland, Belgium and Switzerland have now banned the application of sludges to land. It is anticipated other Northern European countries/regions will follow shortly. No pyrolysis or gasification contracts have been awarded in the EU for processing sewage sludges in the last three years. $ENERSLUDGE^{TM}$ is the only pyrolysis technology to have been demonstrated at commercial scale anywhere in the world. It is still a leading technology in the sludge market, and hence the company remains optimistic for the future.

ESI's original strategy for commercialising ENERSLUDGE™ was developed when the market was predicted by market analysts to grow more rapidly. This strategy centred on appointing licensees in key markets and, rolling out the technology through these licensees.

The Board has decided to also pursue the option of finding a strong Joint Venture partner to participate in the final steps of the commercialisation of the technology. This will help bring greater market presence, a stronger balance sheet, and potentially funding of the ENERSLUDGE^TM business, relieving

to some degree the burden on the company. We are considering private sector companies that have direct responsibility for sludge disposal operations – companies to whom the benefits associated with the commercial use of $ENERSLUDGE^{TM}$ will translate into a substantially improved bottom line.

The Future

Despite the disappointing financial result this year the company's balance sheet remains strong with adequate cash reserves and no external debt. The current order book will increase during 03/04. This places the company in a good position to move forward. Accordingly its priorities will be:

• Return the company to profits. We expect profits from new contracts to emerge towards the second $\bullet$ half of the year.
• Recommence payment of dividends to shareholders. $\bullet$
• Pursue a joint venture partner for ENERSLUDGE^TM.
• Continue the development of new technologies to maintain the company at the forefront of the $\bullet$ industry in which it operates.

Preliminary Final Report of Environmental Solutions International Ltd for the Financial Year Ended 30 June 2003

(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 2003
Previous Corresponding Period:	Financial Year ending 30 June 2002

Revenue and Net Profit/(Loss)

		Percentage Change %	Amount \$'000
Revenue from ordinary activities	down	32	To 14,921
Profit/(loss) from ordinary activities after tax attributable to members	down	N/A	To $(2,868)$
Net profit/(loss) attributable to members	down	N/A	To $(2,868)$

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 NOTES

Statement of Financial Performance For the Financial Year Ended 30 June 2003

	Note	2003 \$'000	2002 \$'000
Revenue from ordinary activities
		14,921	21,738
Share of joint ventures rendering of services			146
Changes in inventories of finished goods and work in progress
Raw materials and subcontractor expenses		11,104	14,871
Employee benefits expense		4.484	3,660
Depreciation and amortisation expense		336	263
Borrowing costs		4	3
Occupancy expenses		251	202
Insurance expenses		295	143
Other expenses		1,315	1,428
Profit/(Loss) From Ordinary Activities Before Income Tax Expensel(Benefit)	2	(2.868)	1,314
Income tax expense/(benefit) relating to ordinary activities
Profiti(Loss) From Ordinary Activities After Related Income Tax Expensel(Benefit)		(2,868)	1,314
Profit/(loss) from extraordinary items after related income tax expense/(benefit)	5
Net Profit/(Loss)		(2,868)	1,314
Total Revenue, Expense and Valuation Adjustments Attributable to Members of the Parent Entity Recognised Directly in Equity		(2,868)	1,314
Total Changes in Equity Other Than Those Resulting From Transactions With Owners As Owners		(2.868)	1,314

Statement of Financial Position As at 30 June 2003

	Note	2003 \$'000	2002 \$'000
Current Assets
Cash		6,210	8,642
Receivables		4,076	8,206
Inventories
Other financial assets
Current tax assets
Other		2,618	137
Total Current Assets		12,904	16,985
Non-Current Assets
Receivables		183	218
Inventories
Investments accounted for using the equity method
Other financial assets
Property, plant and equipment Intangibles		578 1,654	681 1,720
Deferred tax assets
Other
Total Non-Current Assets		2,415	2,619
Total Assets		15,319	19,604
Current Liabilities
Payables		5,189	6,590
Interest-bearing liabilities		7	26
Current tax liabilities		w
Provisions		625	625
Other
Total Current Liabilities		5,821	7,241
Non-Current Liabilities
Payables
Interest-bearing liabilities Deferred tax liabilities		3	7
Provisions
Other
Total Non-Current Liabilities		3	7
Total Liabilities		5,824	7,248
Net Assets		9,495	12,356
Equity
Contributed equity		23,254	23,247
Reserves		3,176	3,176
(Accumulated Losses)	7	(16, 935)	(14,067)
Total Equity		9,495	12,356

Statement of Cash Flows For the Financial Year Ended 30 June 2003

	Note	2003 \$'000	2002 \$'000
Cash Flows From Operating Activities
Receipts from customers		20,022	16,660
Payments to suppliers and employees		(22,390)	(18,982)
Dividends received
Interest and bill discounts received		316	365
Interest and other costs of finance paid
Income tax paid
Extraordinary item [describe]
Net cash provided by/(used in) operating activities	8(f)	(2,052)	(1,957)
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		(168)	(420)
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	8(b)		(60)
Other
Net cash provided by/(used in) investing activities		(168)	(480)
Cash Flows From Financing Activities
Proceeds from issues of equity securities		7	381
Payment for share issue costs
Payment for share buy-back
Proceeds from issue of debt securities
Payment for debt issue costs
Proceeds from borrowings
Repayment of borrowings		(23)	(22)
Dividends paid		(231)	(609)
Other		35	(78)
Net cash provided by/(used in) financing activities		(212)	(328)
Net Increasel(Decrease) In Cash Held		(2, 432)	(2,765)
Cash At The Beginning Of The Financial Year		8,642	11,407
Effects of exchange rate changes on the balance of cash held in foreign currencies
Cash At The End Of The Financial Year	8(a)	6,210	8,642

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 Rule 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 2002 annual financial report.

Details of changes in accounting policies:

None

			2003 \$'000	2002 \$'000
2.		Profit/(Loss) From Ordinary Activities
		Profit/(loss) from ordinary activities before income tax includes the following items of revenue and expense:
	(a)	Revenue
		Net increments arising from the revaluation of non-current assets: Investments
		Property, plant and equipment
		Intangibles
	(b)	Expenses
		Cost of sales
		Net bad and doubtful debts
		Net decrements arising from the revaluation of non-current assets:
		Investments
		Property, plant and equipment Intangibles
		Depreciation of non-current assets	271	197
		Amortisation of non-current assets	66	66
		Impairment of non-current asset

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

	2003 \$'000	2002 \$'000
5. Extraordinary Items
Profits
Applicable income tax
Losses
Applicable income tax
Total Extraordinary Items
Extraordinary items before tax Applicable income 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	(14.067)	(14.920)

Balance at beginning of financial year	(14.067)	(14,920)
Net $profit/(\text{loss})$	(2.868)	1.314
Final Dividend provided	$\blacksquare$	(231)
Interim Dividend paid	۰	(230)
Balance at end of financial year	(16, 935)	(14.067)

		2003 \$'000	2002 \$'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	6,210	8,642
		6,210	8.642
	(b) Businesses Acquired
	During the financial year, no businesses were acquired.
	Consideration
	Cash Ordinary Shares		60 50
			110
	Fair Value of Net Assets Acquired
	Current assets:
	Non-current assets:
	Current liabilities:
	Non-current liabilities:
	Net assets acquired
	Goodwill on acquisition		110
	Net Cash Outflow on Acquisition
	Cash consideration		60
	Less cash balances acquired		60

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

(c) Non-Cash Financing and Investing Activities

NONE
	2003 \$'000	2002 \$'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	8,111 2,889	4,325 6,675
	11,000	11,000
(e) Cash Balances Not Available for Use

NONE

		2003 \$'000	2002 \$'000
8.	Notes to the Statement of Cash Flows (continued)
	Reconciliation of Profit(Loss) From Ordinary (f) Activities After Related Income Tax to Net Cash Flows From Operating Activities
	Profit (Loss) from ordinary activities after related income tax (Profit)/loss on sale of non-current assets Depreciation and amortisation of non-current	(2,868)	1,314 4
	assets Changes in net assets and liabilities: (Increase)/decrease in assets:	336	263
	Current receivables Current inventories	4,130	(4, 859)
	Other current assets Increase/(decrease) in liabilities:	(2,481)	129
	Current trade payables Other current liabilities	(1,400) 231	1,170 22
	Net cash from operating activities	(2,052)	(1,957)

9. Details Relating to Dividends (Distributions)

		Date dividend paid	Amount per security	Amount per security of foreign sourced dividend
Final dividend	2003
	2002	31/10/2002	0.3
Interim dividend	2003
	2002	3/4/2002	0.3	-
Total	2003
	2002		0.6

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

	2003 c	2002
Ordinary securities (each class separately)	$\blacksquare$	0.6
Preference securities (each class separately)	-
Other equity instruments (each class separately)

Interim and final dividend (distribution) on all securities

	2003 Cents	2002 Cents
Ordinary securities (each class separately)	$\blacksquare$	0.6
Preference securities (each class separately)	۰	$\blacksquare$
Other equity instruments (each class separately)	۰
Total	-	0.6

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 $\vert$ N/A
or distribution plans

$\overline{a}$

10. Earnings Per Share

	2003 $¢$ per share	2002 $¢$ per share
Basic EPS	(3.72)	1.72
Diluted EPS	(3.72)	1.68

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:

	2003 \$'000	2002 \$'000
Earnings (a)	(2, 868)	1,314
	2003 No.	2002 No.
Weighted average number of ordinary shares (b)	77,093,128	76,498,620

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:

	2003 \$'000	2002 \$'000
Net $profit/(\text{loss})$	(2,868)	1,314
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	(2.868)	1.314

(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:

	2003 \$'000	2002 \$'000
Earnings (a)	(2,868)	1.314
	2003 No.	2002 No.
Weighted average number of ordinary shares and potential ordinary shares $(b)$ , $(c)$	77,093,128	78,329,894

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:

	2003 \$'000	2002 \$'000
Net $profit/(\text{loss})$	(2, 868)	1.314
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):
	(2, 868)	1,314

(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:

	2003 No.	2002 No.
Weighted average number of ordinary shares used in the calculation of basic EPS	77,093,128	76,498,620
Unlisted and employee options		1,831,274
Weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted EPS	77.093.128	78,329,894

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:

	2003 No.	2002 No.
Unlisted and employee options	7,060,312	2,595,000
	7,060,312	2,595,000

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

	2003 No.	2002 No.
Options to purchase shares pursuant to the employee share scheme	$\blacksquare$	109.580
	$\overline{\phantom{a}}$	109.580

11. Net Tangible Assets Per Security

	2003	2002
Net tangible assets per security	10	14

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

Control gained over entities

Name of entity (or group of entities)	NONE
Date control gained	NONE
		2003 \$'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.
		2002 \$'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

NONE Name of entity (or group of entities) Date control lost NONE 2003 \$'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. 2002 \$'000 Contribution of the controlled entity (or group of entities) to profit/(loss) from ordinary activities for the whole of the previous corresponding period.

13. Details of Associates and Joint Venture Entities

	2003	Ownership Interest 2002	2003	Contribution to net profit 2002
Name of Entity	%	℅	\$'000	\$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 \$8,111,294. 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